Colt Files for Bankruptcy, Will Auction Business

Colt Files for Bankruptcy, Will Auction Business
The Colt Defense factory in Hartford, Conn. where M4 carbines and M16 rifles are produced for the U.S. military.photo from bloomberg.com

If you don't keep up on financial news, it may come as a surprise that Colt Defense, the parent company of Colt Manufacturing, isn't doing so well.

The legendary gunmaker announced Sunday that it's filing for Chapter 11 bankruptcy and that it's $355 million in debt, according to this story posted by The Wall Street Journal.

But this doesn't mean Colt is going out of business. The West Hartford, Connecticut, company has secured $20 million in financing from existing senior lenders so that it can continue operating while in bankruptcy. Company leaders said they expect Colt to remain in business after it's restructuring.

How could a company such as Colt find itself in such dire financial straits?

Colt did well in the 1990s and early 2000s, in part, because of a lucrative U.S. military contract for M4 carbines, used by every branch of the armed forces. In 2013, Colt lost the M4 contract with the Army. This—combined with supply-chain and working-capital issues, a slowdown of rifle sales, and accounting and creditor problems—led to the company's current predicament.

Colt tried several financial maneuvers over the past year to alleviate the strain, borrowing $70 million from Morgan Stanley to pay interest on its bonds and striking a $33 million refinancing deal with hedge-fund Marblegate Asset Management, but to little avail.

In the end, these efforts failed to turn the company's performance around or help negotiate a deal with its creditors before Monday's payment deadline..

Colt plans to reduce its debt via a court-supervised auction of its business, the proceeds from which will be used to repay some of its lenders, according to the story.

This is a somewhat unusual auction, with an opening proposal coming from the company's current owner, according to BusinessInsider.com. According to the story, an affiliate of the private equity firm Sciens Capital Management has proposed buying Colt Defense by assuming certain obligations, including as much as $105 million in outstanding loans and as much as $20 million in new loans.

The bid, called a stalking-horse bid, does not involve any cash and sheds $250 million in bonds. Colt would basically look as it does now, just without the bonds.

Keith Maib, Colt's chief restructuring officer, said in court documents that the sale was the only way to avoid a shutdown of the company, which would disrupt critical weapon deliveries to law enforcement, eliminate 800 jobs, and put retiree benefits at risk.

Sciens' bid is just the start. The auction has been proposed for Aug. 3.

Colt went through bankruptcy once before, emerging in 1994. The company was founded by Samuel Colt, with his first plant in Paterson, N.J., in 1836.

For more on the history of Colt, go here.