What is a Consolidated Mortgage Bond
A consolidated mortgage bond is a bond that consolidates the debts of multiple properties into one bond issue. If the properties covered by the consolidated mortgage bond are already mortgaged, the bond acts as a new mortgage. If the properties do not have outstanding mortgages then the bond is considered the first lien. It can be used as a way to refinance the mortgages on the individual properties, and the bond can be backed by real estate or other physical capital.
BREAKING DOWN Consolidated Mortgage Bond
Consolidated mortgage bonds are typically issued by large companies, with large real estate portfolio or other assets, that are seeking to refinance their debt, pledging those assets as collateral. A company may want to issue a consolidated mortgage bond in order to simplify their corporate financing by combining many debts into one, or if it is seeking to extinguish past debt by issuing new debt at lower interest rates.
Consolidated mortgage bonds were a popular instrument used by railroad companies to finance their operations during the early part of the 20th century. One example comes to us from the famed investment analyst John Moody, who wrote about consolidated mortgage bonds in the third volume of his famous Moody's Manual of Investments: American and Foreign. Moody gives the historical example of consolidated bonds issued by the Southern Railway Company at five percent interest. The Southern Railway Company was formed as a vehicle for the consolidation of several different railway companies operating in the Southeastern United States at the turn of the century. To finance the formation of the company, it needed to issue consolidated mortgage bonds, backed by the assets of the combined companies.
Pros and Cons of Consolidated Mortgage Bonds
Consolidated mortgage bonds are very useful in industries that are both immature and capital intensive, like the United States’ railway industry was at the beginning of the twentieth century. Few such industries exist in America today, however. New American industries that are still growing and ripe for consolidation are typically not capital intensive and tend not to use debt financing. Instruments like consolidated mortgage bonds, however, are more common in industrial finance in the emerging world. Commercial real estate firms, on the other hand, may still make use of instruments similar to consolidated mortgage bonds in order to expand their holdings in one market, or in order to expand their geographical footprint by entering new markets.