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As gun control debate heats up, sentiment mixed on arms-makers' debt

With debate about gun laws again raging following the recent school shooting in Parkland, Fla., investor sentiment from leveraged finance investors regarding gun manufacturers and names connected to the industry has remained mixed.

One pertinent player in the high-yield bond market is Olin Corp., a chemical manufacturer whose Winchester Ammunition Inc. segment offers sporting ammunition, reloading components, small-caliber military ammunition and components, and industrial cartridges. Olin 5% notes due 2030 moved in blocks on Feb. 23, to close down half a point, at 97, yielding 5.34%. These bonds are the borrower's most recent print, having priced at par in January, as a $550 million issue. Month-to-date, the paper has shed 3.25 points. At the Feb. 23 close, Olin 5.125% notes due 2027 were down 4.875 points month-to-date, at 99.75.

Vista Outdoor Inc. 5.875% notes due 2023 were trading in small pieces early in the Feb. 26 session, at 99.25, for a 6.03% yield, up from 99 at the close on Friday, Feb. 23, trade data show. The company's Shooting Sports segment designs, develops, produces and sources ammunition and firearms.

Overall, activity in the names has been light, as both Olin and Vista are relatively small companies, sources noted.

In the leveraged-loan secondary market, term debt for Remington Outdoor Co. Inc. remains in the mid-20s following news of the company's impending bankruptcy. As of Feb. 26, Remington term debt due April 2019 (L+425, 1.25% London Interbank Offered Rate floor) was quoted at 25/26, down from the low 40s earlier in the month.

Market watchers said the 15-point dip is more a function of the company's impending restructuring than of the national conversation about guns. Under the terms of the issuer's proposed restructuring, the Cerberus Capital Management LP-backed company said it plans to swap the bulk of its debt for equity. Term-loan lenders would receive 82.5% of the equity in the company and a pro rata share of $2.67 million in cash upon a Chapter 11 exit.

This month, S&P Global Ratings lowered Remington's corporate credit rating to D from CCC– because it failed to make an interest payment on term debt, marking the sole default in the aerospace and defense sector this year.

In December 2017, Moody's analyst Kevin Cassidy said the company's credit profile is constrained by the "longer term threat of increased gun regulations," noting that the agency's credit view reflects concerns over the sustainability of the company's capital structure, given its poor operating performance and high leverage.

Bumpier than expected

Remington would not be the first firearms manufacturer to make a trip to bankruptcy court. Industry peer Colt Defense LLC underwent its own restructuring in 2015. Colt's exit term loan due January 2021 is quoted at 50/55 now, down two points from the start of the month.

But given the current climate, Remington's restructuring may be bumpier than expected, some say.

"One of the hardest things when it comes to restructuring is when the business itself — or the industry in this case — becomes a moving target," says David Tawil, president of Maglan Capital, a hedge fund that focuses on distressed debt.

Tawil makes a comparison to another industry where "macro developments [swung] valuations all over the place" in recent years: the oil and gas space, where low oil prices made it hard to pin down an actual value of companies attempting to restructure.

"When that [valuation] becomes a very fluid target, it becomes difficult to restructure," Tawil says.

When valuations become extremely wide it becomes difficult for key constituents in the case to come to a consensus, and it may motivate creditors who are most out of the money to keep a company in bankruptcy via a lengthy valuation fight.

"The industry is going through an existential crisis, as formidable an existential crisis as we've seen," Tawil says. "The paradigm we've seen as far as a reaction to a mass shooting has been broken. And therefore the ability to predict what will happen to the industry, and therefore, by extension, the company, has become much more questionable. Therefore, we will get a situation where there will be a lot of difference of opinion on what the proper projections are."

Leveraged Commentary & Data (LCD) is an offering of S&P Global Market Intelligence, which is owned by S&P Global Inc.