Colt Bankruptcy Bucks Surge in Gun Sales

Colt Defense, the iconic 179-year-old gun maker, filed for bankruptcy amid delays to military contracts and a struggle to capitalize on the surge in consumer firearm sales.

Colt hopes to be auctioned off by Aug. 3, saying it can’t afford drawn-out Chapter 11 proceedings. Sciens Capital Management, Colt’s private-equity backer, will act as a “stalking horse” bidder to start the sale. According to a recent regulatory filing, Sciens currently owns an 87% stake in Colt.

The West Hartford, Conn.-based company holds approximately $355 million in debt. Existing lenders will contribute $20 million in financing to keep Colt running during bankruptcy.

“Colt remains open for business,” said Chief Restructuring Officer Keith Maib.

The bankruptcy filing, which occurred late Sunday, was seen as a near possibility. Colt initiated an exchange offer for its senior notes, but bondholders did not come to the company’s rescue by a June 12 expiration date. Colt had warned that without a deal, it would need to sell itself through bankruptcy.

Colt was on the verge of bankruptcy last year when a unit of Morgan Stanley (NYSE:MS) gave the manufacturer a $70 million loan.

Colt has a storied history. Samuel Colt pioneered mass production of firearms, and the Single Action Army revolver—nicknamed the “Peacemaker”—has been credited as “the gun that won the west.”

Other famous Colt guns include the 1911 pistol, which was developed in partnership with John Moses Browning. The 1911 was the U.S. military’s standard-issue sidearm for decades, serving throughout major conflicts like World War II.

Colt created the M16 and shorter-barreled M4, but the company lost manufacturing contracts tied to both rifles. In 2013, Belgium gun maker FN Herstal outbid Colt and Remington to supply the U.S. military with M4s.

Accounting issues also contributed to Colt’s woes, forcing the company to restate prior years’ financial results.

Colt’s financial decline stands in contrast to a growing consumer market for firearms. While Colt relied heavily on its military business, rival brands like Sturm Ruger (NYSE:RGR) and Smith & Wesson (NYSE:SWHC) benefited from the popularity of polymer pistols and other consumer firearms.

Shares of both Ruger and Smith & Wesson are up roughly 60% since the start of 2015, far outpacing the broader market.

The FBI’s NICS background checks, which are used to gauge consumer sales, hit a record high for the month of May at 1.58 million. Background checks jumped from 8.95 million in 2005 to nearly 21 million in 2014.