NEW YORK — Colt Defense’s bondholders are finding little solace in the 178-year-old weapons maker’s reprieve on loan restrictions as a 50 percent drop in sales of rifles indicates a worsening outlook.
Since receiving a waiver Aug. 6 from meeting most of its loan covenants for the rest of the year, the company whose pistols have been brandished by General George Patton and gunslinger Doc Holliday has seen its bonds drop an average 13.4 percent. That’s the most in the Bank of America Merrill Lynch U.S. High Yield Small Cap Distressed Issuers index.
The armsmaker is struggling to service $306.8 million of loans and bonds as rifle sales tumble amid dissipating concern the U.S. government will limit the ownership of firearms. Consumers had rushed to buy weapons after shootings in Newtown, Connecticut, and Aurora, Colorado, fueled speculation that federal restrictions would increase.
“The big concern was registration restrictions that came down from the Obama administration, as that went away, so did gun sales,” said Brian Ruttenbur, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. Ruttenbur said Colt might need to extend the waivers, putting further pressure on its bonds.
Sheri Miller, a spokeswoman for Colt, didn’t respond to requests for comment.
Colt’s revenue fell 22 percent in the first six months to $99.7 million as the federal restrictions failed to materialize and the company lost military contracts.
The company’s $246 million of senior unsecured 8.75 percent bonds due in November 2017 are “vulnerable” to a missed coupon payment next month because of “poor earnings and cash flow,” according to a Sept. 19 report by Standard &Poor’s analysts led by Chris Mooney in New York. S&P lowered its rating one level to CCC that day, and Moody’s Investors Service cut it to an equivalent Caa2 on Sept. 29.
The bonds have dropped 26.6 cents this year to 59.8 cents on the dollar to yield 29 percent, or more than four times the yield on the Bloomberg High Yield Corporate Bond Index.
The loan waivers eliminated restrictions for the third quarter and modified terms for the last three months of the year, according to S&P. Colt may be unable to avoid breaching its covenants when they return next year. One mandate includes maintaining at least $42.5 million in earnings before interest, taxes, depreciation and amortization. In the first half of 2014, Colt reported Ebitda of $6 million, down from 25 million in the similar 2013 period.
“It’s going to be a huge challenge for them to meet their covenants in 2015,” S&P’s Mooney said.
Colt, which traces its roots to an 1836 patent for a revolving cylinder handgun, has been a supplier of small arms to the U.S. military since 1847, Colt has made weapons that, according to the Autry National Center in Los Angeles, once belonged to Holliday, the gunslinger who fought alongside Wyatt Earp in the 1881 shootout at the O.K. Corral in Tombstone, Arizona. Patton, who helped lead the American invasions of Africa and Europe during World War II, had the gunmaker manufacture his Colt .45 with an ivory grip engraved with his initials and an eagle.
The company was split between its military and consumer divisions in 2003, according to its website. The two arms were reunited last year, when Colt Defense, the military contractor, bought Colt’s Manufacturing, which sold firearms to civilian sportsmen and hunters. The combined business is 87.2 percent owned by Sciens Management and affiliates, according to a Sept. 15 regulatory filing.
Colt’s competitors are also being pressured by the pullback in consumer gun sales. Smith &Wesson Holding Corp. shares have lost 32.5 percent this year after gaining about 60 percent in 2013. Sturm Ruger &Co. is down 35.9 percent following a similar gain last year. Colt isn’t publicly traded.
Gun sales may start to pick up based on data from the Federal Bureau of Investigation, according to CRT’s Ruttenbur. The number of background checks, which are required to sell a firearm, fell 1 percent in September from a year earlier, after certain adjustments. That’s an improvement over the 46 percent drop in January, according to the Adjusted National Instant Criminal Background Check System.
Without that improvement, Colt may be forced to seek a debt restructuring, S&P’s Mooney said.
“The company is really having a difficult time generating enough cash to sustain its business at this point.”
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