Payday: Santa Fe Railroad Pays Bondholders, 114 Years Later

Article excerpt

It's been 114 years in coming, but there is good news for those who lent money to the Santa Fe railroad in 1881. They are being paid back. Checks for part of the loan went out Saturday. Lenders will have to be patient a little while longer, though, until October, to get the rest.

The seemingly endless Santa Fe story illustrates almost everything that can go wrong for a lender, short of a complete failure to pay.

Those who lent the money - or perhaps their great-grandchildren - are about to get dollars that are each worth less than seven 1881 cents. Along the way, the lenders have suffered through corporate reorganizations, fraudulent accounting and foolish business plans.

They have been buffeted by volatile interest rates and by worries over credit quality. They even lost their protection against inflation when Congress and the Supreme Court jettisoned the gold standard in the 1930s.

In short, the tale is a cautionary one for anyone thinking of lending money for the really long haul, as some modern-day investors did not long ago when they bought 100-year bonds from Walt Disney Co.

But it is also an affirmation of the longevity and stability of the American financial system that payment was made, even in watered-down form, so many years after a promise was given.

The money being paid back is for a debt dating to 1881 that ultimately was turned into two issues of 100-year bonds during the railway's 1895 reorganization.

The bonds maturing Saturday were intended to be of lower quality, and the history of the prices they have fetched - ranging from $285 to more than $1,300 for bonds with a face value of $1,000 - provides a graphic description of the financial history of the last century.

As it happens, the bonds are maturing after the company, now known as Santa Fe Pacific Corp., has agreed to be acquired by Burlington Northern Inc.t

In 1881, it looked as if the bad days were behind Atchison, Topeka & Santa Fe Railroad Co. It had seen some trying times in building its system in the sparsely settled Southwest, what with train robbers and gun battles between crews from the Santa Fe and a rival line. tr

The Boston investment houses pushing Santa Fe's 6 percent, 30-year bonds, recommended them as a "first-class investment."

But in only a few years, the Western railroad business looked very different. Building new lines cost more, and they brought in less new business than had been expected. As more roads were built, competition sometimes became ruinous.

The average rate for hauling freight on the Santa Fe fell 48 percent between 1880 and 1888. Passenger fares fell even further. A fare war in 1886 cut the cost of a ticket from Kansas City to San Francisco to $1, from $21.

In 1889 came the first reorganization, converting a 30-year bond paying 6 percent interest into a 100-year bond, due in 1990, paying 4 percent. But that fix would not last. When depression came in 1893, the Santa Fe went into receivership, and quickly into scandal.

Committees of bondholders in New York, Boston, London and Amsterdam S hired an accountant to figure out what happened. …