By Tom Hals
WILMINGTON, Del (Reuters) - Gun maker Colt Defense and its creditors are close to a deal on a plan to bring the company out of bankruptcy, but if it fails, the business will go on the auction block next month, a company lawyer told a judge on Thursday.
Colt filed for bankruptcy earlier this year due to falling sales of its sport rifles and the loss of military contracts. The company's private equity owner has been battling its bondholders for control of the West Hartford, Connecticut-based business, and the parties are pressured by Colt's dwindling cash.
"It's fair to say the parties are very close to a deal," Colt lawyer John Rapisardi told the U.S. Bankruptcy Court in Wilmington, Delaware. "The parties are working to finalize a term sheet and an agreement can be reached in a couple days."
Colt wanted more time for talks but was forced to court by Morgan Stanley, which is using its bankruptcy loan to demand the start of a court-supervised auction process.
Judge Laurie Silverstein paused the hearing and sent the parties into a conference room to work out an agreement. The parties agreed to auction procedures, but postponed by three weeks the deadline for bids and a sale. An auction would be held on Oct. 20.
Colt filed for bankruptcy in June with a plan to sell the company to its private equity owner, Sciens Capital Management, in return for some of Colt's debt. Under that plan, which was abandoned, holders of the company's $250 million in bonds would have received nothing.
Bondholders have proposed their own plan, which includes eliminating a large portion of their debt in return for control of the company.
A Sciens affiliate has an interest in the Colt lease, which expires in November, and creditors have alleged the private equity firm is using that lease to discourage possible bidders and unfairly increase its leverage in the case.
If Colt does go to auction, it may have brewing labor problems.
A lawyer for United Auto Workers union warned that the company plans to market its business to potential buyers without its collective bargaining agreement, which would prompt the union to take Colt to arbitration.
The union lawyer said the workers supported efforts to reach a consensual plan to bring Colt out of bankruptcy.
The case is Colt Holding Co LLC, U.S. Bankruptcy Court, District of Delaware, No. 15-11296
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Dan Grebler)