Colt Insider’s Bid for Control Sets Up Bankruptcy Court Showdown

Colt: Inside a 179-Year-Old Gunmaker's Bankruptcy

Bankruptcies can be a crapshoot for investors. Managers and insiders sometimes maneuver to keep control of the business while leaving other creditors scrambling for pennies.

That may be the case with Colt Defense LLC, whose owner took steps this week to hold onto the faltering company while sloughing off enough debt to give the maker of M4 carbines and M16 rifles a fighting chance at survival.

The plan Colt set out in Delaware bankruptcy court would give owner Sciens Capital Management LLC first bid in an auction that might be held too soon for rivals to do the research they need to make an offer. Bids are due July 30, ahead of a planned Aug. 3 auction.

If its plan works, the owner would avoid getting wiped out while completing a rout of bondholders who are already facing big losses.

Sciens can’t guarantee the 179-year-old West Hartford, Connecticut-based pistol pioneer a future, but it can insulate it somewhat from falling handgun demand and delayed sales of weapons to the U.S. and foreign militaries.

Just one thing stands between Sciens and its goal: a bankruptcy judge.

‘Rival Gunmaker’

“It looks as if Sciens wants to keep a rival gunmaker from winning Colt in a bid,” said Kevin Starke, an analyst at CRT Capital Group LLC, which trades bankrupt companies’ debt. “But when they’re in front of a judge, they no longer control the outcome.”

Christopher Meyering, Sciens’s chief legal officer, didn’t immediately return a call seeking comment on possible advantages for a bidder who is also a shareholder. Matt Benson, a spokesman for Colt at Sard Verbinnen & Co., declined to comment.

The record in bankruptcy court is mixed. In the case of RadioShack Corp., hedge fund Standard General LP, the chain’s biggest shareholder, got first crack at bidding for the retailer’s best assets and won the day.

Leon Black’s Apollo Global Management LP managed to regain control of Momentive Performance Materials Inc. by maneuvers in court, even after sinking the maker of silicones under debt in an earlier buyout. Some senior lenders fought for better terms but lost.

Caesars Fight

At the same time, Apollo is fighting an uphill battle against creditors of Caesars Entertainment Corp. The owners put a heavily indebted unit of the casino giant into bankruptcy this year while striving to hold onto the parent’s most valuable assets.

Caesars investors, many of them equally savvy in the distressed-company game, are threatening that plan and winning key court battles.

Sciens -- which put an independent board in charge of the sales process -- might face a similar fight from Colt bondholders who rejected the company’s refinancing proposals before the gun company turned to bankruptcy court for help.

Creditor outrage is also working in the case of Energy Future Holdings Corp. The Texas company had to ditch a plan to shift assets to favored lenders and is now taking bids for its crown jewel: the Oncor power-distribution unit.

The bankruptcy system provides checks on potential abuses. One is the requirement for competitive bids in judge-refereed asset auctions, said Chip Bowles, a bankruptcy lawyer at Bingham Greenebaum Doll LLP in Louisville, Kentucky, who isn’t involved in the Colt case.

The other is the growing role of sophisticated hedge funds and complex financing arrangements that give investors different interests that must be reconciled, he said.

“There is always criticism of the process when insiders are involved, and in a lot of cases it is justified,” said Bowles. “However, total control of a process that could produce a windfall is very difficult.”

The case is in re Colt Defense LLC, 15-11287, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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