Tuesday, February 13, 2018 

Nota bene: Gun bust

There aren’t a lot of corporate bankruptcies these days, which throws the ones which do happen into sharper relief. The latest: Remington Outdoor, the gun manufacturer.

Here’s Bloomberg:

For two centuries, it has been a totem of America’s gun culture -- a name emblazoned on frontier flintlocks and U.S. Army .45s. 

But on Monday Remington Outdoor Co., which traces its history back to 1816, said it would file for bankruptcy protection, succumbing to a slump in business worsened by, of all things, a president who has steadfastly supported Americans’ right to bear arms.

Here’s the thing: Remington hasn’t really “succumbed” to anything more than the fact that its private-equity owners, after buying it for $370 million a decade ago, proceeded to load the company up with more than $1 billion in new debt. Remington isn’t going anywhere; this pre-packaged bankruptcy means very little beyond the fact that its owners, which used to be a single private-equity shop (Cerberus), will now be a group of larger investors, including Franklin Templeton and JPMorgan Asset Management.

The details are quite complicated, involving various warrants and whatnot, but the long and short of it is that the plan converts a bunch of debt to equity, and the company emerges from the process with an enterprise value of $700 million. That’s double the purchase price in 2007.

Cerberus owned Remington for the greatest years in living memory to be an arms manufacturer. For much of the last decade, Remington has made substantial profits — indeed, it looked healthy enough, during those years, that lenders were willing to advance a billion dollars against future revenues. Nearly all of that money, it’s reasonable to assume, ended up going to Cerberus.

In other words, Remington has been a hugely profitable win for its current owners. It ended up turning into a classic private-equity play: buy cheap, lever up, strip out all the profits you can, invest as little as possible, convert all the debt into a special dividend, and then walk away, leaving the creditors to pick up whatever’s left over.

So let’s not read this bankruptcy filing as being a sign that the American gun industry broadly is in great trouble. It looks like all of Remington’s suppliers and employees are going to be untouched; its guns will still roll off the production lines and be used to kill animals and people; its brand will still be plastered across gun shops nationwide. Sure, the industry is in a cyclical downturn, thanks to the unexpected election of Donald Trump in 2016. And cyclical downturns can have substantial financial implications for the owners of highly-leveraged companies.

There’s a rhyme here: Trump, the man who became extremely rich by borrowing billions of dollars and then not paying them back, has ended up causing Cerberus’s Stephen Feinberg to do exactly the same thing. Much as many of us would love to see Feinberg getting his gun-related comeuppance here, that really isn’t what’s happening. More’s the pity.