Colt’s last-ditch effort before bankruptcy

The ailing Colt Defense is trying to dig itself out of a deep hole, and while the gun company is charted for bankruptcy, it’s trying to make the process as painless as possible.

Colt started last week by offering investors an opportunity to exchange old bonds for new, less lucrative ones, which are due to payout at a later date as a means to restructure debt. The new notes will mature in 2023 instead of 2017 and at a higher interest rate. Unlike the old notes, they will allow the company to keep its assets if things fall apart. In other words, debtors won’t be able to liquify the iconic American gun company.

But success for the exchange offer is dependent on current bondholders. The company needs to recover a very ambitious 98 percent of the old notes otherwise the company will likely set a course for bankruptcy.

If bankruptcy is the future, Colt will follow a prepackaged plan of reorganization, however, the plan needs approval by current bondholders.

Part of the prepackaged plan includes canceling the old notes plus the accrued and unpaid interest, and replacing them with a proportionate share of new notes.

A prepackaged bankruptcy plan allows a company to coordinate with its creditors before officially declaring bankruptcy. It’s a way to save money on legal and accounting fees, and also can result in a quicker recovery.

Colt has not made any affirmative decision to proceed with any bankruptcy filing at this time, but if it does, the decision will likely come after May 11, the deadline for current bondholders to exchange notes.

The Connecticut arms maker has been heading in this direction most notably since November 2014, when it almost missed a semi-annual payment to bondholders. It has since been swapping debt for debt in order to make necessary payments.

Earlier this month Colt failed to deliver annual financial statements, which are required per terms of a loan agreement by the issuer. The company waived the rule, citing miscalculations with employee retirement pensions.

In March, Colt hired financial restructuring firm to review the company’s financial results, projections and operational data. The month before, Colt secured a $33 million loan but said it would likely miss May’s semi-annual $10.9 million senior notes interest payment — something it will probably still miss.

In 2014’s third quarter, Colt reported a net loss of $7.8 million, down from $11.3 million profit in 2013. Net losses nine months into 2014 come at $28.4 million, down from a $20.4 million profit in the same timeframe the year before.