How America’s oldest gun maker went bankrupt.

A Remington assembly room in 1917. Bettmann/Getty Images








The news spread around Huntsville, Ala., in the winter of 2014. Remington, the country’s oldest gun maker, had decided to expand from its historic home in upstate New York to a gigantic former Chrysler factory near the airport. Workers at the new plant, the company said, would earn a minimum average of $19.50 an hour assembling shotguns, pistols, hunting rifles and AR-15-style semiautomatics. The city’s mayor wrote in a newspaper column that he was thrilled that Remington’s quest for a new factory space had ended in Huntsville. He calculated the typical annual salary as $42,500.

Doors opened in spring 2015. News from the inside was scarce, but this was more or less to be expected. Workers in the gun industry endure a special kind of scrutiny, like metal detectors at the exits and visits to their homes from A.T.F. agents looking for weapons that have gone missing. When Remington forbade employees to speak to outsiders about their jobs or fired a person who removed a smartphone from his pocket in the vicinity of the line, the explanation was assumed to be that the company was protecting its secrets, including the pace of its production. “Those assault rifles,” one employee told me, “they couldn’t make them fast enough.” That year, Remington earned $191 million in gross profit on $809 million of revenue.

At the top of the employees’ checks, the name “Remington Arms” was printed, along with the address of the company’s new facility at 1816 Remington Circle SW in Huntsville. But this was somewhat misleading. While the guns were still stamped with the thick-footed Remington R, the company no longer existed as a fully independent entity. Seven years before Remington came to Huntsville, it was purchased, at a relative bargain, by a private-equity firm that controlled tens of billions of dollars from its offices in Manhattan.

The firm, Cerberus Capital Management, takes its name from the three-headed, dragon-tailed dog who, in Greek mythology, stands guard at the gates of Hades.

When Cerberus bought Remington in 2007, the world was hurtling through the greatest rush of private-equity acquisitions in history. From 2002 to the crash in 2008, hundreds of billions of dollars a year were deployed in private-equity deals by firms like Cerberus, KKR and Blackstone. After the crash briefly interrupted its momentum, the industry came back in force. The United States government was responding to the crisis by lowering borrowing costs to kick-start the economy. For private-equity firms, the access to cheap debt was a gift: It allowed them to purchase a long list of targets, then borrow more money using those targets as collateral. During the recovery, private-equity firms made an average of one trillion dollars’ worth of acquisitions every year. In 2017 there were a record 9,500 deals. By 2019, according to the consulting firm McKinsey, the industry controlled $3.4 trillion in assets globally. If private equity were a country, it would be the fifth-largest economy on earth, beating India, Britain and France.

Across the negotiating table sat Battle, the head of the Chamber of Commerce and the state’s economic-development director. They flipped their cards one by one. The governor’s office would give Remington a significant abatement of their income tax for 10 years. The Tennessee Valley Authority would provide discounted electricity. Alabama Industrial Development Training, a state agency, would train Remington’s workers free, as it had done for 800,000 others at big-name companies in Alabama, like Boeing, Raytheon and Mercedes.

Then Battle flipped the fourth ace: He agreed to purchase and renovate the former Chrysler factory in Huntsville for $12.5 million and give it to Remington rent-free. Press could scarcely believe his good fortune. “It is hard to think of a deal that is better than the Remington deal from the perspective of the company,” he told me. “And I’ve done easily 200.”

There was, however, a hidden, vaguely mysterious quirk of the company’s finances. In 2012, more or less in the middle of the best climate for gun makers in a generation, America’s oldest continually operating manufacturer abruptly, and for no easily discernible reason, borrowed hundreds of millions of dollars. When the company came to Alabama, it owed $828 million to its creditors. While this number, compared with the company’s earnings, represented a comfortable ratio on the balance sheet, it was nonetheless curious. The debt could conceivably have been explained by the cost of opening a new factory were it not for the fact that Remington got its factory free.

Last fall, a former Remington executive, who asked that his name not be used for fear of a backlash, opened the door to his house in Huntsville and beckoned me into his study, where we sat on either side of a fireplace.

He was hired, the executive explained, as the plant was coming online, and he was tasked with wrangling together some scattered acquisitions. The business was, according to him, “in shambles.” It seemed that the companies Cerberus had moved to Alabama had been “bought and forgot.” He explained that he was “a realist” about business, a game in which not everyone gets “a shiny rose at the end,” but even so he sensed that something had gone deeply wrong. Executives were fired at a fast clip. Line employees came and went. Parts piled up on the factory floor. Most worrying, Cerberus, which was trying to integrate disparate brands — the father-son pastoralism of Remington with the urban-militia aesthetic of AAC, for instance — seemed to him miserly when it came to marketing. “The decisions were all about: Where can I save another dime?” he told me.

I went back and reread Remington’s public filings. It was obvious when the debt appeared, in 2012. What wasn’t clear was where the money went. I showed the filings to a professor of finance. He said it looked as if Cerberus had wound up in debt to itself. “Seems like they did something stupid,” he said. “But that can’t be right, because they’re not stupid.”

In order to buy Remington, Cerberus, as most private-equity firms would, created a new entity, a holding company. Instead of Cerberus buying a gun company, Cerberus put money into the holding company, and the holding company bought Remington. The entities were related but — and this was crucial — each could borrow money independently. In 2010, Cerberus had the holding company borrow $225 million from an undisclosed group of lenders, most likely hedge funds. Because this loan was risky — the lenders would be paid only if Remington made a lot of money or was sold — the holding company offered a generous interest rate of around 11 percent, much higher than a typical corporate loan. When the interest payments were due, the holding company paid them not in cash but with paid-in-kind notes, that is, with more debt. These are known as PIK notes.

The holding company now had $225 million in borrowed cash. Cerberus, meanwhile, owned most of the shares of the holding company’s stock, basically slips of paper they acquired when they created the holding company. The handoff happened next: The holding company spent most of the $225 million buying back its own stock, effectively transferring all the borrowed cash to Cerberus. Cerberus would keep that money no matter what. Meanwhile Remington continued rolling along as though nothing had happened, because Remington itself was not responsible for the holding company’s debt. Remington was just an “operating company” that the holding company owned, something that allowed the holding company to borrow money, the way you would take a necklace to a pawnshop. These were garden-variety maneuvers in a private-equity buyout. In the trade, this is called “financial engineering.” People get degrees in it.

In April 2012, Cerberus did something fateful, which probably seemed smart at the time. It had Remington borrow hundreds of millions of dollars and use it to buy the holding company’s debt, effectively transferring responsibility for the principal and the interest payments onto Remington. America’s oldest gun company now owed the money that Cerberus had used to pay itself back for having bought the company in the first place.

But there was a catch. Because the operating company borrowed the money with a normal loan — and not with PIK notes — interest payments were required in cash. Suddenly Remington was carrying hundreds of millions of dollars in debt that, if it could not be paid, would cause the business to go bankrupt.

After the 2016 election, researchers at Cerberus saw an omen in their data. Applications through the National Instant Criminal Background Check System, which are known as “NIC checks,” were dropping by double-digit percentages. A plunge in NIC checks foreshadows a corresponding plunge in gun sales, which is what happened in the months that followed. Remington’s profit slid toward zero. The debt, meanwhile, was racing upward, like a flame licking a fuse.

For Cerberus’s executives, the predicament was like being bitten by a trusted pet. Cerberus has a habit of hiring power brokers from the United States government, many of them prominent Republicans. The former vice president Dan Quayle became chairman of Cerberus Global Investments in 1999; the former Treasury secretary John W. Snow joined Cerberus seven years later. The Republican donor William Richter is a founder. Since May 2018, Feinberg has been a member of Trump’s Intelligence Advisory Board, an independent entity created to advise the president on national-security matters. But if Obama was the best, Trump was proving to be the worst gun salesman of all time.

Remington executives arranged a meeting with their creditors. They calmly explained the situation. Remington had been loaded with debt; now it couldn’t pay the interest. After listening politely, the banks made a proposal: They would exchange the money they were owed for an ownership stake in Remington, a so-called Chapter 11 bankruptcy or “debt-for-equity swap.” This arrangement would allow Remington to stay running, albeit under distant ownership, until a plan could be drawn up for its future, such as a sale or a liquidation of assets.

In March, Remington announced that it would lay off about 200 employees between its Ilion and Huntsville factories. Shortly after that, the state of Alabama, in a routine payroll audit, found that Remington had missed its hiring targets: Only 450 people were working at the plant at the beginning of 2018, as opposed to the 680 promised in the development agreement. In response, the county and state revoked a number of their tax incentives and demanded the return of $500,000. Remington, not Cerberus, will be responsible for the sum. By the time the state finished its audit, the private-equity firm had long since exited the scene.

Read the complete article on the New York Times here.

By Ted

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