Contractual Obligation

Sunray Oil Corp. is a small but profitable producer of crude oil and natural gas in Oklahoma, Texas, Kansas and California. Last year it had a neat net of $905,849.89 on a total gross operating income of $5,743,420.37. It now wants to expand, at the same time retire some bank loans. But, like many another gun-shy firm today, it distrusts the standard form of bond issue, which can cause such a crisis as that now afflicting the B. & O. railroad by maturing during depressed times (see p, 62). So last week Sunray Oil filed with SEC registration for what it believed to be a new type of security-- "a corporate contractual obligation of indebtedness without fixed maturity."

Devised by the Wall Street house of John J. Bergen & Co., Ltd., the new issue is composed of $4,000,000 in 5% debenture shares to be sold at $25 each. Convertible into stock at fixed intervals, the debentures carry no lien but Sunray Oil covenants not to create any mortgage, pledge or lien upon its shares unless the new debenture shares are equally secured. In having no fixed maturity, the new issue is like a consol or certain British "debenture shares." Where the new issue is unique is in Sunray's contract to set aside a sinking fund of 10% of its monthly gross sales. With this sinking fund the company's trustee each month must buy debenture shares in the open market at any price up to $26.25. If debenture shares cannot be bought thus, the trustee must then call them by lot at $26.25. In short, when business is good, Sunray can easily retire its obligation; in bad times there will be no heavy maturity to upset the oil cart.

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