We’re hearing rumblings about something we’ve discussed before: the parlous financial state of the privately held, and hedge-fund-looted, firearms manufacturer, Colt.
Colt’s hedgies (several generations of them, currently Sciens Capital) have taken it through multiple unnecessary reorganizations, each time stripping as much cash out of the company as possible, pocketing as much as they can get away with, and leaving it saddled with unsustainable debt. The company has hundreds of millions in debt that it has no reasonable chance of repaying. Now, faced with inability to pay a $10.9 million interest payment owed this month, the company’s managers seek to stave off default with hedge-fund chutzpah: offering investors the “opportunity” to take a 70% haircut on $250M of their bonds, or, alternatively, the company will bang out bankrupt — in a prepackaged bankruptcy modeled on that of the Government Motors rip-off and using the same obscure section of the bankruptcy code. Like the Chrysler and GM bankruptcies, this plan will preserve the equity of favored creditors — the hedge fund managers — while ruining, or at least haircutting, disfavored creditors — like the bond holders.
The Colt Official Police, the cop gun of most of the 20th Century (along with its Smith & Wesson competitor). This one’s a little pimped-out for a cop. But Colt can’t count on half the market any more.
Colt bonds have had a very high effective rate, reflecting their high risk, for a long time. In 2012, two or three fits of borrowing ago, it was already 19%, deep in “junk bond” territory. (The $250M they’re trying to replace is 8.75% due in two years, but it’s trading at a deep discount. The new bonds are nominally 10% due in 2023 — as if managers can keep kicking the can down the road another eight years — and they will also trade at a deep discount, if they’re ever issued).
So it’s not as if bondholders didn’t know that theirs was a speculative gamble. But now, Colt is saying, essentially, “give us 2/3 of your investment, or we’ll take it all.” But their move, described in a press release that was slipped onto the Colt site last month, is extremely risky: if they can’t get the bondholders to accept the 70-30 haircut or the prepackaged bankruptcy (“prepack”), bondholders can and probably will sue, plunging the 1858-vintage company into Chapter 11 bankruptcy or even Chapter 7 liquidation.
They’re gambling that the bondholders’ fear of being left holding a bag containing much less than 30% of the company’s capitalization, divided among the holders of $330 or so million in secured and unsecured debt, will be stronger than their indignation at being 70% expropriated so the managers and hedges can be made whole.
Colt All American 2000. Like many flops (Edsel? Anthony dollar? R51?) it’s ugly as a mud wallow. The polymer frame version is uglier yet.
All the borrowing has not been reinvested in products, where Colt lags the market, or production efficiency. While Colt has a proud heritage and many desirable models, they capitalize on the advantages poorly, and, because of management-induced chaos and labor-induced uncompetitive costs, they saw markets they created, like the enormous 1911 pistol and AR-15 rifle, slip away from them.
A couple of years ago, when they thought they could always find a greater fool to flip the junk debt to, the company’s managers bamboozled the State of Florida and Osceola County into putting up hundreds of thousands in benefits to draw a plant to Kissimmee, Florida, but never took possession of the plant. Colt’s now shaking the county down for another $150k to get the deadbeat firm out of the plant it never installed a single machine in, or hired a single Florida worker for.
Moody’s rates the restructuring proposals credit negative, but doesn’t change Colt’s already low, low, low ratings:
Colt Defense’s Caa3 corporate family rating (CFR) and Caa3-PD probability of default rating (PDR), with a negative ratings outlook remains unchanged. However, on execution of the restructuring transaction, we would consider either the exchange offer or prepackaged plan of bankruptcy, if the company pursues that option, as a default per Moody’s definitions.
Standard & Poors last changed its ratings for Colt in February, downgrading from CCC/Developing/– to CCC-/Negative/–). S&P Capital IQ/LCD’s Restructuring Watchlist welcomed Colt as long ago as September, 2014.
For more information on Colt’s financial state:
ITEM 27 APR 15: “Colt teeters on edge of bankrupcty” a somewhat inflamed analysis by Rich Duprey on The Motley Fool. He also has Colt entering the market for 1911s in 2010, off by a century, with the R1 (a Remington product. Colt of course entered the market for 1911s in 1911 and has never left it).
ITEM 17 APR 15: The New York Times’s Steven J. Lubbin tries to analyze the bond haircut/prepack offer, and concludes it’s “one of the strangest… ever.” His analysis is a lot less breathless and overheated than Duprey’s.
ITEM 15 APR 15: Restoring one’s faith in reporters who actually watch their lanes and do their jobs, the Wall Street Journal’s Stephanie Gleason analyzes the offer, the very day Colt issued it.
If you’re paywalled out, this Google link should get you in:
ITEM 15 APR 15: Colt’s official bond-exchange offer and bankruptcy threat (they call it “reorganization,” but it’s bankruptcy):
ITEM (periodically updated): Colt’s Press Release archive:
ITEM 12 FEB 15: Colt Secures Another Loan, but May Still Miss Bond Payment
ITEM 15 DEC 14: National Defense (NDIA magazine)’s Guest Commentary:Firearms Maker Colt a Cautionary Tale for Defense Contractors.
ITEM 29 MAY 14: Bloomberg flunky Paul Barrett navigates the hedge-fund guys’ financial maklertum with the assistance of a cast of anti-gun characters, including fellow astroturf anti Richard Feldman and his bogus “Independent Firearms Owners Association.”
ITEM 26 DEC 12: Colt’s 19% Junk Bonds (by an extremely anti-gun writer)