Colt Defense bonds sink as loanwaivers prove to be no shield

new york » Colt Defense’s bondholders are finding little solace in the 178-year-oldweapons maker’s reprieve on loan restrictions as a 50 percent drop in sales of sports rifles indicates a worsening outlook.

Since receiving a waiver Aug. 6 frommeeting most of its loan covenants for the rest of the year, the company whose pistols have been brandished by Gen. George S. Patton and gunslinger DocHolliday has seen its bonds drop an average 13.4 percent. That’s the most in the Bank of AmericaMerrill LynchU.S. High Yield Small Cap Distressed Issuers Index.

The arms maker is struggling to service $306.8 million of loans and bonds as rifle sales tumble amid dissipating concern the U.S. government will limit the ownership of firearms. Consumers had rushed to buy weapons after shootings in Aurora andNewtown, Conn., fueled speculation that federal restrictions would increase.

“The big concernwas registration restrictions that came down from the Obama administration. As that went away, so did gun sales,” said Brian Ruttenbur, an analyst at Stamford, Conn.-based CRT Capital Group LLC. Ruttenbur said Colt might need to extend the waivers, putting further pressure on its bonds.

Colt spokeswoman Sheri Miller didn’t respond to requests for comment.

Colt’s revenue fell 22 percent in the first six months to $99.7 million as the federal restrictions failed to materialize and the company lost military contracts.

The company’s $246 million of senior unsecured 8.75 percent bonds due inNovember 2017 are “vulnerable” to a missed coupon payment next month because of “poor earnings and cash flow,” according to a Sept. 19 report by Standard & Poor’s analysts led by Chris Mooney in New York. S&P lowered its rating one level to CCC that day, andMoody’s Investors Service cut it to an equivalent Caa2 on Sept. 29.

The bonds have dropped 26.6 cents this year to 59.8 cents on the dollar to yield 29 percent, or more than four times the yield on the Bloomberg High Yield Corporate Bond Index.

The loan waivers eliminated restrictions for the third quarter and modified terms for the last three months of the year, according to S&P. Colt may be unable to avoid breaching its covenants when they return next year.

One mandate includes maintaining at least $42.5 million in earnings before interest, taxes, depreciation and amortization. In the first half of 2014, Colt reported such earnings of $6 million, down from $25 million in the similar 2013 period.

“It’s going to be a huge challenge for them to meet their covenants in 2015,” S&P’s Mooney said in a telephone interview.