Colt Defense LLC’s debt rating has been cut to the lowest level possible after the hand-gun maker skipped an interest payment and extended its deadline for creditors to approve either a debt exchange or a prepackaged bankruptcy.
Standard & Poor’s reduced Colt’s rating two grades to D from CC, according to a statement Tuesday from the credit grader. The new rating means S&P considers the company “in default or in breach of an imputed promise” and that it has ruled out the possibility the manufacturer will make good on a missed interest payment during a 30-day grace period.
The weapons maker didn’t pay the $10.9 million due May 15 to holders of its $249.4 million of 8.75 percent unsecured notes due November 2017, according to S&P. Colt had warned in November it was “probable” it wouldn’t have the cash to make the payment if it didn’t meet internal sales forecasts.
Colt has asked creditors three times to choose between the debt-for-debt exchange that S&P called “deeply distressed” or bankruptcy since April 14. Six months after getting a rescue loan of $70 million from a unit of Morgan Stanley, fewer than 6 percent of bondholders have agreed to exchange their current holdings into new debt, according to a company statement on Monday. The West Hartford, Connecticut-based company is relying on the exchange to help “improve its performance” and maintain its status as a so-called going concern, according to an April 14 company statement.
Under the debt exchange, bondholders would swap the notes for new ones paying 10 percent and giving them what the company says is a stronger claim on its assets. The new secured notes, which would mature in 2023, would only go through if 98 percent of holders agreed to take what amounts to a 65 percent cut to the old notes’ face value.
In a bankruptcy scenario, not much would be left for holders of the 8.75 percent junior notes, according to S&P. Since the $102 million of collateral available to Colt’s secured lenders is just shy of the $103 million they’re owed, S&P estimates holders of senior unsecured debt would recover between zero and 10 percent of their investment.
The junior notes traded in odd-sized lots at 27.75 cents on the dollar at 4:37 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The maker of M4 carbines and M16 rifles for the U.S. and other armed forces struggled to make the previous $10.9 million payment owed to those noteholders in November. It avoided default by paying what was due from cash taken from the Morgan Stanley loan.