Colt Bites the Bullet, Files for Chapter 11 Protection

NEW YORK (The Deal) -- Privately held firearms maker Colt Defense has filed for bankruptcy after failing to reach an out-of-court restructuring deal with its senior noteholders.

The West Hartford, Conn., company and nine affiliates on Sunday submitted Chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware in Wilmington. The companies have requested joint administration of the cases, with Colt Holding Co. to serve as lead debtor.

Colt, which is majority-owned by New York private equity firm Sciens Capital Management Group, looks to support a sale process through $20 million in new-money debtor-in-possession financing from its existing secured lenders.

According to a Monday DIP motion, the financing would consist of a $6.67 million term loan from pre-petition senior lenders and a $13.33 million term loan from pre-petition term lenders. Cortland Capital Market Services and Wilmington Savings Fund Society would serve as DIP agents on the respective loans, court papers show.

Both loans would be priced at 12.5% and would mature on the earliest of 120 days after the loan closing dates, the completion of a sale of all the company's assets or confirmation of a Chapter 11 plan. Judge Laurie Selber Silverstein is set to consider joint administration and interim DIP approval at a Tuesday first-day hearing.

Sciens, meanwhile, has agreed to serve as stalking-horse bidder for Colt's assets. The PE firm has agreed to assume a $35 million senior loan, a $72.6 million term loan, the DIP facilities, executory contracts and unexpired leases.

Under proposed bidding procedures, interested parties would have until July 20 to make offers that topped the value of Sciens' bid by at least $1 million. If Colt received a rival bid, an auction would take place on Aug. 3, at which bids would have to increase in increments of at least $1 million. A sale hearing would follow on Aug. 7.

There was no mention of a breakup fee in the bidding procedures motion.

Colt's bankruptcy filing comes after the company failed to reach a consensual out-of-court restructuring agreement with its noteholders, owed $250 million.

In a Sunday statement, Colt's chief restructuring officer, Keith Maib of Mackinac Partners, said: "The plan we are announcing and have filed [Sunday] will allow Colt to restructure its balance sheet while meeting all of its obligations to customers, vendors, suppliers and employees and providing for maximum continuity in the company's current and future business operations.

"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, U.S. government and consumer marketplaces."

Earlier this month, the debtor announced that it had entered into a restructuring support agreement with its term lenders. Colt had been soliciting votes for a prepackaged Chapter 11 reorganization as well as consents for an exchange offer of its $250 million in 8.75% senior unsecured notes due Nov. 15, 2017.

Under the company's June 1 amended exchange offer, Colt Defense offered noteholders the ability to exchange their securities for 10% junior-priority senior secured notes due 2021. Every $1,000 of unsecured notes would have been exchanged for $450 in new secured notes.

If all of the old notes had been exchanged, the company would have had $112.5 million of the new 10% notes outstanding. The new notes would have matured in six years, and for the first four years, the interest on the notes would have been paid in kind if the company had met a certain secured leverage ratio. After that, interest would have been paid either in cash or in kind.

The exchange offer expired on Friday, which also was the deadline for creditors to vote on the prepackaged plan. According to a Monday declaration, about 94.9% of the senior noteholders opted to reject the exchange offer.

"The debtors' current liquidity issues are the result of business trends impacting our recent historical, current and forecasted revenues and cash flows," Maib said in the declaration. "These trends include a decline in modern sporting rifle sales from 2013 peak levels as well as declines in aggregate handgun demand, and delays in anticipated timing of U.S. government sales, which includes foreign military sales through the U.S. government and certain international sales. These trends are expected to continue to put pressure on our liquidity for the foreseeable future."

Maib said it is critical the company emerge from bankruptcy quickly. He said the company's liquidity constraints already have "done damage to its supply chain" over the past nine months.

The company is obligated to the U.S. government to deliver product at ramped-up rates by the end of the year, which require the company to obtain parts from its suppliers without delay or interruption.

Colt designs, develops and manufactures firearms. The company, over 175 years old, supplies civilian, military and law enforcement customers with products. The company's founder, Samuel Colt, patented the first successful revolving cylinder firearm in 1836.

On March 18, 1992, Colt Manufacturing, Colt Holding Co.'s principal operating subsidiary, filed a Chapter 11 petition in Connecticut. That filing was due to excessive debt and a loss of important military and police orders. In 1994, an investment from financial groupZilkha & Co.allowed the company to confirm a plan and exit bankruptcy.

Colt reported $100 million to $500 million in assets and liabilities in its petition.

The company has a $35 million term loan from lenders led by administrative agent Cortland Capital. Marblegate Special Opportunities Master Fund and P Marblegate Ltd. are also among the lenders. The loan is priced at 10% and matures on Aug. 15, 2018. The loan was previously $33 million.

The firearms maker also has a $72.6 million term loan from Morgan Stanley Senior Funding. Wilmington Savings Fund Society is the administrative agent on this term loan, also priced at 10%, with 8% paid in cash and 2% paid in kind. The debt matures on Aug. 15, 2018. The loan previously was $70 million.

Colt's largest unsecured creditors include Magpul Industries (owed $981,538), Microbest ($755,173), Wilson Arms Co. ($628,531), PricewaterhouseCoopers ($551,653) and Schmid Tool & Engineering ($478,067).

Debtor counsel John J. Rapisardi at O'Melveny & Myers could not be reached for comment Monday. A call to financial adviser Perella Weinberg Partners was not returned.

In its Monday statement, Colt said its management team, led since October 2013 by President and CEO Dennis Veilleux, will stay in place. Securities and Exchange Commission filings show Scott B. Flaherty is CFO.

--Jamie Mason contributed to this report.

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