Bankrupt gun maker Colt up for auction. Opening bid: $0

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Gun Maker Colt Files for Bankruptcy

U.S. gun maker Colt filed for bankruptcy protection on Sunday and has put itself up for sale in an unusual auction with an opening proposal from its current owner.

The bid? Zero dollars.

An affiliate of private equity firm Sciens Capital Management has proposed buying Colt Defense CDEFHC.UL by assuming obligations including up to $105 million in outstanding loans and as much as $20 million in new loans, court documents filed on Monday show.

The so-called stalking horse bid does not involve any cash and sheds $250 million in bonds. In other words, Colt would look much like it does now, only without the bonds.

Normally, when a deeply troubled company like Colt proposes to shed an obligation like its bonds, the owners of the company would lose their investment as well.

That is pretty much what bondholders proposed in May, according to the filings in the U.S.Bankruptcy Court in Wilmington, Delaware. The bondholders sought ownership of Colt in return for eliminating half the bond debt, a move Colt rejected as too risky.

Colt feared bondholder ownership could damage relationships with customers, which include the U.S. government, and might jeopardize the lease on company facilities in West Hartford, Connecticut, its Chief Restructuring Officer Keith Maib said in court documents.

The Colt lease is held by an affiliate of Sciens Capital Management.

Maib said the sale was the only way to avoid a shutdown of the business, which would disrupt critical weapon deliveries to law enforcement, eliminate 800 jobs and put retiree benefits at risk.

Colt declined to comment.

Sciens' bid is only an opening move and an auction has been proposed for Aug. 3.

"Anyone who believes it's too low, they have a right to put in whatever bona fide bid they want," said Van Conway, president of turnaround firm Conway MacKenzie, who is not involved. He said Colt would attract bidders. "The company is an icon."

Kevin Starke, an analyst at CRT Capital, said the standard for selecting a winning bid inbankruptcy auction is "highest and best," and bondholders might worry Sciens will influence what amounts to "best."

"I think the bondholders will move to have the judge prevent Sciens from being the stalking horse," said Starke.

Colt is known for its revolvers that Americans carried as the country expanded westward in the 19th Century. Sales of its modern sports rifles and handguns tumbled in the past year.

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