THE nation's largest railroad succumbed last week to a lethal combination of politics, tight money, mismanagement and fumbled Government rescue efforts. A federal court ordered the tottering Penn Central Transportation Co. into a bankruptcy reorganization. The order prevents creditors from collecting a mountainous debt, while permitting trains to run as usual. Its impact was felt far beyond the railroad. The Penn Central's financial collapse, largest in U.S. corporate history, spread anxiety among businessmen and Government officials about the fortunes of several other large corporations—to say nothing of other railroads.
There have been widespread, but so far unconfirmed, rumors that some conglomerates, airlines and other fast-expanding companies are in money trouble. In Philadelphia, Dolly Madison Industries, an overbuilt conglomerate, last week petitioned for a bankruptcy reorganization. So did Four Seasons Nursing Centers, a large Oklahoma-based chain.
Both the Penn Central debacle and the general corporate cash bind raised concern about the precarious condition of the commercial-paper market (see following story). Like Penn Central, many companies have been using short-term borrowings in that market to finance long-term projects, a classic formula for disaster. Now corporations with anything less than top credit ratings will find increasing difficulty in selling their own notes and bonds, even to refinance existing debts.
Potential for Mischief. It was the Penn Central's liquidity crisis that forced the railroad to declare insolvency. In his petition to the court, Chairman Paul Gorman said that the line was "virtually without cash, unable to meet its debts, [and] has no means of borrowing." The petition declared only that the company could not repay $9,795,000 in commercial notes and $21,900,000 in debt and rental charges on its equipment, all due by July 1. But that is a minuscule part of the railroad's financial woes.
The transportation company lost $182 million last year, and by Government estimate is highballing toward a $150 million deficit this year. Though the railroad's parent holding company, Penn Central Co., has assets of nearly $7 billion, the bulk of its salable holdings of real estate, securities and other non-rail property is already pledged to secure some $2.6 billion of debt, including $700 million falling due this year.
Three weeks ago the Nixon Administration agreed to help the railroad by letting the Defense Department underwrite $200 million in bank loans. But that plan ran into such severe political fire from key Democrats in Congress that the Administration withdrew its offer. The critics threatened to make an election issue out of the loan by portraying it as a bailout for the Administration's friends in big business and banking. "The potential for political mischief really scared people," says a top Administration official.