Colt Holdings wins financing agreement

September 2015 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

In June, storied gun manufacturer Colt Holding Company LLC filed for Chapter 11 bankruptcy protection, citing a significant drop off in rifle sales. However, in early July the company won court approval for a new financing package that would empower its bond holders at the expense of its private equity owner.

According to the judgement, Colt will be permitted to borrow up to $75m, though $55m of that facility will be used to refinance existing loans. The company will have access to the remaining $20m in cash.

The company hopes to find a buyer before the beginning of August, when Colt’s money may well run out. Indeed, the company filed for Chapter 11 protection in June without enough money to meet its payroll obligation. To illustrate the urgency of the company’s situation, Colt’s attorney Peter Friedman said: “Here are the undisputed facts. First, Colt really needs the money. Second, Colt really needs the money.”

Colt’s bankruptcy filing in mid-June cited debts of around $355m. Accordingly, the group filed for Chapter 11 bankruptcy and entered into a court-supervised auction of its business, in order to generate proceeds to repay some of its lenders. The company has spent much of the last 18 months trying to secure financing and better terms from creditors to restructure its increasingly onerous debt, to little avail.

Sales of Colt’s rifles and handguns have fallen markedly in recent years. 2014 alone saw sales fall 30 percent. The 179 year old gun manufacturer has supplied weapons to the US and other foreign militaries; however, delays in sales overseas have seriously impacted the firm. Equally, the loss of the US government contract in 2013 has had serious consequences over the last two years. To that end, the company was forced to take out a $70m rescue loan from Morgan Stanley in order to make an interest payment.

“While entering Chapter 11 protection in the absence of a consensual agreement with our noteholders was not our preference and we do not take it lightly, we are confident it is the best path going forward and will enable us to continue to gain traction on a challenging but achievable turnaround in our business performance and competitive positioning in the international, US government and consumer marketplace,” said Keith Maib, Colt’s chief restructuring officer, in a statement.

Judge Laurie Selber Silverstein approved the terms of the company’s loan package at a hearing in the US Bankruptcy Court in Wilmington, Delaware despite the objection of Sciens Capital Management, the troubled company’s majority owner. As a result, $4m was made immediately available to the company. “I realise full peace may not have broken out yet, but this a good start,” said Judge Silverstein.

Colt and Sciens have been involved in a bitter struggle for over a month regarding the financing required to see Colt through the Chapter 11 process. Colt’s bankruptcy plan is to pay off more than $50m in loan debt with nearly four times the original debtor-in-possession financing that the firm sought in June. Sciens originally bought Colt out of bankruptcy protection in the 1990s, and the terms of the Chapter 11 filing lodged by Colt in June indicated that the company would sell itself to Sciens once again. But Colt appears to have reneged on this agreement.

The Chapter 11 process itself may still necessitate a sale as a result of the piecemeal manner in which the company’s paper-thin cash situation has deteriorated. The terms of the sale would have seen Sciens acquire Colt, and all of its obligations, except for $250m in bonds.

Colt’s bondholders have taken a dim view of the possibility of selling the company to Sciens. Indeed, according to bondholders Sciens has exploited its control of Colt to the firm’s detriment and has drained the company of much-needed cash, pushing Colt to the brink. Furthermore, Colt’s bondholders have expressed a fear that no other parties will be inclined to bid for the company due to the fact that Colt has not produced audited financial results since 2013 and may not be able to renew its lease on its main West Hartford, Connecticut facilities.

Richard Summerfield