The news stories about Colt’s have been piling up recently. I admit I am not as well-versed in financial-ese as I could be, which has made me hesitant to cover the subject. It’s a good thing, then, that Hognose of WeaponsMan has covered the ongoing saga of financial flailings better than I could have:
We’re hearing rumblings about something we’ve discussed before: the perilous 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.
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.
I highly recommend our readers click through and read the whole thing.
In this light, Colt’s looks like more a victim of financial malfeasance than a poor product lineup (which is not to say the latter isn’t true).