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Market justice

12 December 2017 By Rob Cox

Just before Thanksgiving, the families of 10 victims of the Sandy Hook Elementary School shooting came closer to something like justice than they have in the nearly five years since 20 children and six educators were murdered in their classrooms. They had their day before Connecticut’s Supreme Court, which agreed to consider their contention that the maker of the AR-15 rifle used in the tragedy could be held liable for the killings.

Whatever the Constitution State’s justices eventually decide, the market is already rendering its verdict. Remington Outdoor, which produced the Bushmaster used by the Sandy Hook shooter, looks to be hurtling toward bankruptcy. It may have company: though the firearms trade has never had a better friend in the White House than Donald Trump, the industry is in dismal shape. With bumper sales having already met years of future demand, inventories and capacity are unsustainably high.

The years since the Sandy Hook massacre, most of which coincided with Barack Obama’s second term as president, will go down as a golden era for the American consumer-arms complex. A series of high-profile mass shootings generated calls for enhanced federal gun-safety regulations. None materialized. What it did produce was an unprecedented stockpiling of weapons, bolstering sales for firms like Remington and boosting the budget of lobbying group, and ardent Trump supporter, the National Rifle Association.

Consider some of the cumulative figures since the Newtown tragedy, whose five-year anniversary falls on December 14. Start with data from the FBI’s National Instant Criminal Background Check System, generally considered the best proxy for gun sales. There have been 118 million of these since December 2012, suggesting that more than a third of all firearms extant in the United States have been purchased in just the past half decade.

More precise sales figures are hard to come by, in part because the NRA has been so effective at beating back attempts to shed any transparency on the business. The NRA has been a big beneficiary, too, of the post-Sandy Hook boom. The nonprofit’s budget surged 36 percent in 2013, and totaled $1 billion in the three years that followed, according to its tax returns. At that rate, it will have brought in another $600 million or so in just the past two years.

Then there are the largest publicly traded makers of guns and ammo, American Outdoor Brands (formerly Smith & Wesson) and Sturm Ruger. They have reported combined revenue of around $6.2 billion since the massacre. Due to the volatility of sales, however, their shares have underperformed, rising 39 percent and remaining flat, respectively. Fold in privately held Remington’s $4.3 billion of sales since Adam Lanza used one of its semi-automatic rifles to kill the schoolchildren, and the three accounted for $10.6 billion of sales.

But in capitalism, when money flows with abandon, bad decisions tend to get made. That partly explains why Colt Defense filed for bankruptcy two years ago. Remington’s accounts illustrate a similar dynamic. The company was assembled through a series of takeovers, including of Bushmaster in 2006, by private-equity firm Cerberus, which once upon a time called it Freedom Group. After it bought Remington Arms in 2007, Cerberus had aspirations for an initial public stock offering two years later.

After Sandy Hook, however, the investment group led by Stephen Feinberg came under heavy pressure from many of the limited partners in its funds, such as the California State Teachers’ Retirement System, to exit the civilian arms trade altogether. Some threatened not to back future Cerberus fundraising rounds. Without a willing buyer for Remington, and no chance of an IPO, the company larded up on debt and effectively bought itself out from the investors.

At the time, when gun sales were booming, that might have looked sensible. Not so much today. In the first nine months of 2017, as the potential for any sort of gun-safety regulation has receded under a Trump presidency, and notwithstanding the horrific mass shootings in Las Vegas and Sutherland Springs, Texas, Remington’s sales plunged 27 percent, resulting in a $28 million operating loss. That’s before paying $46 million to lenders.

Indeed, Remington’s balance sheet looks like a paper target after one of its R-15 VTR SS Varmint rifles is done firing at it. At the end of October, the company claimed assets of $953 million against liabilities of $1.3 billion, including $948 million of debt. Some $552 million of that is a first-lien term loan maturing in April 2019. Another $220 million of notes are due in 2020. Just before Thanksgiving, S&P slashed Remington’s corporate credit rating to CCC-minus, a notch away from default, sending the prices for both debentures plunging.

For the Sandy Hook parents aiming to find a chink in the blanket liability accorded gunmakers by the Protection of Lawful Commerce in Arms Act of 2005, Remington’s difficulties are inconsequential. Money, one tells me, was never the point of the suit. Their hope is that Connecticut’s highest court will allow them to proceed with a case charging Remington negligently and willfully entrusted the public with a military-style rifle that was never meant for civilians. That would create a precedent for holding Big Gun accountable for the costs its products inflict on society.

Seeing Remington file for Chapter 11 protection from creditors in the coming year would merely be the first step in that arduous quest.

This is a Breakingviews prediction for 2018. To see more of our predictions, click here.

 

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