**UPDATE – Colt has filed for Chapter 11 Bankruptcy as of 6/15/2015.
The New York Times reported last week that legendary firearms manufacturer, Colt, is undergoing something that looks a lot like bankruptcy.
Colt is considering two options to avoid running out of operating capital – a bond exchange and a prepacked bankruptcy.
Existing bonds would be exchanged for new bonds with longer maturities and higher interest rates. Bondholders would also enjoy a rather severe haircut – the new bonds would have a face amount that was 70 percent lower. Ouch.
But because Colt has also announced that the exchange offer is conditional on receiving nearly full bondholder participation, I’m going to assume that won’t happen and move along to Plan B.
Plan B is a “prepack,” or a prepackaged bankruptcy case. An American prepack – the term has a different meaning in Britain – involves solicitation of votes on a bankruptcy plan before the bankruptcy is actually filed. Once the case is filed, the debtor can move quickly to court approval of the plan.
That’s a ton of econo-speak for most, but the lay of the land is straight-forward – Colt is not showing its hand, hoping to bluff bond holders into a debt roll-over (bond exchange) or somewhat less-favorable prepackaged bankruptcy.
The first, debt roll-over is where debt that is soon due, is replaced by longer term debt. Kind of like having a ten year mortgage you can’t make the payment on and you offer the bank a swap for a 30 year mortgage to avoid a default (also known as a re-finance.) The benefit to this approach is that bond holders will be offered secured bonds in trade for their currently unsecured paper. That means that should Colt declare bankruptcy in the future, they would have claim to the assets of the company – right now, they do not.
The second option is a strategic re-organization. Prepack or prepackaged bankruptcy plans allow the debtor to arrange the term of their debt re-organization and solicit debtor votes on the plan before declaring bankruptcy. In essence, there is little threat of debtor opposition and the arrangement can go through quickly.
It would appear that Colt didn’t really bother talking to their creditors. That makes a prepack harder and really complicates a debt roll-over.
The problem for Colt is what happens if bond holders reject both ideas? Colt enters a contentious, ugly, nasty, no good Chapter 11 bankruptcy.
– or Freedom Group (a.k.a. Remington) buys them.
Which one is worse?