Industry Watching/Wall Street's Waiting

Jun 15, 2015
According to financial observers, today will likely be a big day in the financial future of one of the firearms industry's oldest and most respected names. Looking at the history of the Colt brand, it becomes obvious that this company, with all its storied products, legendary innovation and longstanding respect, has had more than its share of watershed financial challenges.

If the dreary predictions of financial groups like Debt Wire are accurate, Colt Defense, in accordance with its restructuring support agreement (RSA) with Marblegate Special Opportunities Master Fund, LP and Morgan Stanley Senior Funding, Inc, must either provide the near-unanimous consent of bondholders to exchange their debt -at a significant loss - or Colt must file for Chapter 11 bankruptcy in Delaware.

Should that happen, it must be accompanied by a motion for the bankruptcy court to approve a sale that Colt's lenders will, as expected, want completed in an expedited manner. That expedited manner, however, must be a fair process for the strategic and financial bidders who wish to participate.

That "fair process" however, may cause the entire process to bog down as it is likely that equity sponsor Sciens Management will be selected as the stalking horse bidder. Since Sciens is the owner who refuses to dilute its equity while expecting bondholders to take a basic-training length "haircut" the court will likely take a longer look at the speedy process portion of the transaction.

It's important to note that should this happen, Colt wouldn't be out of business. In fact, a Debtor in Possession (DIP) arrangement might actually work in the company's favor. Freed from the debtor pressures, Colt management can continue to operate the company, although they would be constrained to having access to only the limited DIP funding -designed to preserve Colt's present value rather than allowing that value to deteriorated. That will likely mean very tight sales milestones, constraint on any expenditures, and a move toward positioning the company for that speedy sale process.

In many cases, the bankruptcy court won't actually dictate specific rules, but this case may be different in that Sciens Management is, essentially, in the favored purchaser (stalking horse) and insider positions. That means the court may exercise exceptional oversight to make certain the highest price possible is wrung out of Colt's assets-and to guarantee the sale is free of any insider collusion.

It will dictate, essentially, that in order for Sciens to be the best choice, it will have to have won the bidding competition as a result of good faith negotiations, an arm's length transaction and there's no hint of collusion. As Debt Wire's legal analysts put it, it must be the result of "robust marketing process to both strategic and special purchasers" that truly selected the best bid.

Regardless, Colt, if liquidated, would be required to prove there's a sound business purpose for the sale, a fair price was negotiated -inside a reasonable timeframe and that all parties to the transaction have acted in good faith.

That might be a difficult row to hoe.

The last few months have been characterized by intractable positions by owners and adamant rejection of those positions by bondholders. Because of that rancor, the bankruptcy court may instead propose its own debtor in possession terms and sales milestones. If that happens, the court could open the door for other financing propositions -and cause another series of fights between Colt's lenders and unsecured bondholders.

If an expeditious process is the goal, Colt will need to convince the court that it will operate transparently going forward and identify any potential "issues" to the court before they become problems. One possible solution would be Colt's board offering a special independent committee with the sole duty of ensuring the highest and best possible price for Colt's assets. Another possible solution would be Colt's requesting a third party trustee or examiner to conduct a sale on Colt's behalf. That would open the door for third-party buyers to compete on the figurative level playing field - free from the competition disadvantage of an interested insider.

All that, of course, is predicated on what happens sometime today.

We'll keep you posted.

--Jim Shepherd