On June 14, the maker of the historic Colt gun filed for bankruptcy protection, announcing that it was interested in closing a quick deal of selling the company in order to survive financially.
Colt Defense LLC, one of the world’s largest firearms producers, was formed 13 years ago after a deep restructuring of Colt’s Manufacturing Company. But to insiders filing for bankruptcy protection was the next logical step after failed negotiations with bondholders to help the company reshape a huge debt.
According to court papers, the company’s debts and assets are around $100 million to $500 million. Debts include $100 million in secured debt and $250 million in bond debt. Colt currently hopes to obtain a favorable buyout offer from its private equity backer Sciens Capital Management at the auction in early August.
The company told court that a lengthy legal battle may become very expensive, so it may have to go for liquidation if the lawsuit against bondholders takes too much time. Though the company’s ability of providing firearms to its major customers remains “fragile,” the U.S. government pressured Colt not to halt production.
On the other hand, the gun maker disclosed that it had $20 million available to carry forward operations while in bankruptcy. It also said that it planned to stay in business after the restructuring.
The company has been producing firearms since the 19th century, when it created “the gun that won the West.” In the 1990s and 2000s, its main business partner was the U.S. military which had purchased M4 line of firearms for its infantry units.
But Colt’s financial situation become increasingly frail in the last five year due to a slowdown in sales and the refusal of U.S. military to renew the contract for the sale of the M4s. So, in the last couple of years, the company halted investment and sought financial aid and better restructuring terms from bondholders.
It had even tried to persuade creditors to support a “prepackaged bankruptcy” filing that it would have greatly eased the company’s journey through Chapter 11 bankruptcy. But bondholders declined to agree with the new terms because they would have lost some cash the company owed them.
As of June 1, only 5.9 percent of creditors agreed with Colt’s proposal.
The company owes $70 million to Morgan Stanley since last year, when it needed the money to pay interest on bonds. But four months ago, the company announced that it may not have enough money for a new interest payment by June 15. Plus, it failed to properly negotiate with bondholders new terms of the payment by this month’s deadline thus clearing the path to a default.
Image Source: Colt Autos