The magnitude of convertible issues in the decades of railroad growth is exemplified by the 1874 issuance by the Rome , Watertown & Ogdensburgh Rail Road in New York of a $ 10 million 7 % convertible bond — equal to about $ 275 million in 2024 adjusted for the Consumer Price Index ( CPI ). The bond was convertible for only five years .
Convertible issuance by railroads almost disappeared after 1880 but resumed in 1902 with issues from the Baltimore & Ohio Railroad , the first railroad in North America in 1827 ; and the Union Pacific Railroad ( UP ), the second largest US railroad in 2024 . The downside protection of the UP convertible was demonstrated during the Panic of 1907 when UP shares plunged 75 % below the conversion price , but the convertible bottomed at 78¼ . Railroad Age Gazette reported in 1908 that convertible bonds were coming into more use for railroad finance .
In an era when common dividends represented a high payout of earnings , dividends were insecure . Convertible bonds often were issued at yields that approximated the yields on the underlying stocks , so the convertible provided guaranteed income if the dividend was cut , and a rise in the common dividend might represent an increase in income for convertible holders if they converted into the stock .
The conversion premium at issuance often was zero , i . e ., a convertible issued at $ 1,000 par was convertible into $ 1,000 worth of common stock ; so from the perspective of investors , choosing a newly issued convertible rather than the underlying stock was a way to lock in the current dividend income of the stock and , thereby , protect against the risk that the common dividend might be cut — while retaining the option to capture 100 % of the dividend increases and appreciation of the underlying stock by converting the bonds . The issuing companies sometimes defended against the prospect of conversions that would require paying more in cash dividends than the interest on the convertibles by including a provision that delayed conversion for 10 years or more after issuance .
The face value of railroad convertibles outstanding in 1910 was “ the rather startling total of over $ 1.5 billion ,” according to a Chronology published by the Association of American Railroads in 2018 ( which equates to about $ 50 billion in 2024 adjusted for the CPI ). It seems convertible securities have always provided equitylike returns with less risk than common stock , by dint of downside protection combined with upside participation in equity appreciation .
Although US rail mileage had peaked in 1916 , railroads continued to issue convertibles until the Great Depression in the 1930s . But railroad convertibles offered less potential for total returns beyond the interest income .
In the post – World War II period , competition from motor vehicles and airlines led to a decline in US railroad traffic , and profits weakened despite huge cost savings from the replacement of steam locomotives with the newer diesel technology . US railroading sank to a nadir in 1970 with the largest bankruptcy in US history , that of Penn Central Transportation , the largest US railroad at the time . The industry began to recover after the 1976 government-funded consolidation of Penn Central ( PC ) and other northeastern roads that had followed the PC into bankruptcy .
Issuance of railroad convertibles briefly resumed in the 1990s . The Canadian National Railway and Union Pacific Corporation each floated convertible preferred shares during the dot-com boom , when the concept of investing in an old industry like railroads inspired ridicule . Yet the two railroad convertibles provided high yields and rewarding total returns through the dot-com bust , as the Canadian National and the UP enjoyed rising cash flow . A century after railroad expansion essentially ceased in North America , new railroads were being built in China , and the China Railway Construction Corporation issued a $ 500 million convertible bond in 2016 .
Industrial Convertibles in the 20th Century : Technology Again
Issuance of convertibles by industrial companies has persisted since the early 20th century . In 1920 , investing author Montgomery Rollins discussed convertible bonds issued by various industrial companies , including American Telephone & Telegraph Company ( AT & T ), which was a technology company at the time — in keeping with the seemingly endless tendency of convertible bonds to fund new technologies . In 2015 , Beat Thoma , CIO of Fisch Asset Management in Zurich , cited several household names that had convertible bonds outstanding in the early
1900s , including General Electric , International Paper , Western Union and Westinghouse — of which three of the four were essentially technology companies .
Convertible issuance resurged after World War II . In keeping with the convertible tradition of funding innovation and growth , convertibles were issued by aerospace companies , airlines and some of the faster-growing industrial companies .
Convertible bonds were of lower quality in the post – World War II period . In 1965 , economist Otto H . Poensgen wrote that the conversion feature was necessary to make low-quality bonds “ acceptable to the investor .” He observed that “ subordinated bonds are usually convertible ,” while almost all public offerings of non-convertible corporate bonds were investment grade . In 1970 – 1976 , just 27 sub-investment-grade straight bonds were issued , per Martin Fridson ( a trustee of the Museum of American Finance who is known as the “ dean of high yield debt ”). Poensgen also asserted that “ corporations issuing convertible bonds had a significantly better growth record ,” which is consistent with the observation that the convertible market has always tilted toward growth .
The 1960s were a period of strong convertible issuance , with retail investors able to participate through listed convertible preferreds issued in exchange for common shares in acquisitions . In 1960 – 1967 , 85 % of convertible preferreds were issued in conjunction with mergers . There were 315 “ actively trading ” preferreds among a total of “ above 850 ” convertibles in 1968 , per Sidney Fried in Investing and Speculating with Convertibles . Fried ’ s book lists a dozen convertible issuers that were among the “ Nifty Fifty ” growth companies with “ One Decision ” stocks , akin to the nickname “ Magnificent Seven ” that was coined in 2023 for seven companies with top-performing stocks , five of which had issued one or more convertible bonds .
The target companies of acquisitions in the 1960s sometimes had common stocks that yielded more than the shares of the acquiring companies , so higher-yielding convertible preferreds were attractive to the target shareholders . Acquisitive companies minimized dilution of share earnings by issuing convertibles , rather than common shares , because the convertibles were convertible into the shares of the acquirers at a premium above the current stock price . The passing of the merger
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