Weekend Economists Thanksgiving Leftovers November 29-30, 2014

[Demeter]

14. Junk Bond Carnage, One Company at a Time by Wolf Richter

'TIS THE SEASON TO BE SQUEEZIN' FA-LA-LA-LA-LA, LA-LA-LA-LA!

Storied weapons maker Colt Defense LLC is in a pickle. But it’s not the only junk-rated company in a pickle. The money is drying up. Selling even more new debt to service and pay off old debt is suddenly harder and more expensive to pull off, and holders of the old debt – your conservative-sounding bond fund, for example – are starting to grapple with the sordid meaning of “junk”: Colt announced on Wednesday that it might not be able to make its bond payment in May.

Colt’s revenues plunged 25% to $150 million for the three quarters this year. It’s spilling liberal amounts of red ink. It has $246.5 million in assets, including $61.5 million in Goodwill and intangible assets. Without them, Colt’s $185 million in assets are weighed down by $416.8 million in liabilities, leaving it a negative “tangible” net worth of -$231.8 million. Cash was down to $4 million. In its 10-Q released on Wednesday, Colt admitted that there was “substantial doubt about the Company’s ability to continue as a going concern.”

Moody’s rates the company a merciful Caa2, reflecting “its very high leverage and weak liquidity position,” with negative outlook. This babe is deep into junk territory – and headed for default.

As is to be expected after this much financial engineering, the company is largely owned by a private equity firm: Sciens Management holds “beneficial ownership” of 87% of Colt’s LLC interests...Last week, it got some reprieve, if you can call it that: Morgan Stanley agreed to provide a $70 million senior term loan. This new money replaces Colt’s existing $42.1 million loan that the company said it would have otherwise defaulted on by the end of December. That’s how that original lender got bailed out: new debt to pay off old debt...The new loan will also permit Colt to make a $10.9 million interest payment. Otherwise, the company would have been in default by December 15. That’s how those bondholders got bailed out (for the moment): more new debt to service old debt...The loan would leave Colt with an additional $4.1 million in cash: new debt to pay for new losses.

YOU JUST KNOW THIS ISN'T GOING TO END WELL

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