By choosing to place Remington in a Southern state, Press was acknowledging how much the gun business had transformed. Historically, gun makers operated in the North, in New England’s “Gun Valley” or, like Remington, in upstate New York. Smith & Wesson and Colt were established in the 1850s by businessmen in Massachusetts and Connecticut, respectively. During the Civil War, arsenals in Massachusetts furnished huge quantities of firearms to the Union Army. But social mores had changed. The year that Michael Press sent his letters, New York passed the SAFE Act, one of the nation’s most stringent gun-control measures. Battle summarized to me the message the law sent to gunmakers: “If you like guns,” he said, “then you need to go somewhere else.”
There was a secondary benefit. Composed entirely of “right to work” states, the South allowed employees in unionized shops to opt out of paying dues, effectively guaranteeing that any union encountered by Remington would be worse-funded, and therefore less powerful, than a counterpart in the North. At Remington’s factory in Ilion, N.Y., employees had health care and long-term contracts thanks to the United Mine Workers of America. They were difficult to fire, and they stuck together. In some cases, multiple generations of men in the same family had worked on the line. “That union,” a former Remington executive told me disdainfully, “had them by the balls.”
[ … ]
In exchange for tens of millions in incentives, Remington had only to commit to a few terms, laid out in a fat document called a development agreement. First, it had to hire enough employees every year so that, in 2021, it would have a local work force of 1,868. Second, starting immediately, it had to pay those employees a minimum average hourly wage of $19.50, rising to $20.19 in 2017. All parties signed.
[ … ]
The dream was lofty and ambitious, and Huntsville was only a piece of it. Cerberus had been trying for years to assemble a dominant American gun company. First, in 2006, it purchased Bushmaster, known for its AR-15-style rifles. Then it paid $118 million in cash for Remington and assumed the company’s debt. Other acquisitions followed, until by 2013, 18 businesses were rolled up together under Cerberus’s roof. One of Kollitides’s jobs was to oversee the necessary layoffs. In Ilion, where Remington has operated for 191 years on the same site — unfinished weapons had to travel from one brick building to the next — 231 people lost their jobs. There were 160 layoffs at Montana Rifleman in Kalispell, Mont. The Advanced Armament Corporation, a manufacturer of suppressors and silencers, closed its plant in Georgia, and 68 people were let go from D.P.M.S. Panther Arms in St. Cloud, Minn.; 65 from Para USA in Pineville, N.C. What remained was to increase profit margins by combining all these scattered production lines into a single megafactory.
[ … ]
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.
[ … ]
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.
Despite all this frenzy, he was certain that Cerberus had somehow made a great deal of money on Remington even before opening the Huntsville factory. According to him, Cerberus had made “hundreds of millions of dollars” almost immediately. “They pulled out all that money up front, took as much cash as they could.”
“How?” I said.
He squinted cryptically. “They get their money.”
I realized he didn’t know. 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.”
I asked Gustavo Schwed, a professor of private equity at New York University who spent 24 years in the industry, to help me review the documents. Schwed pored over the many years of financial data and located two separate debt transactions, one of which was so esoteric I would never even have known to look for it. Together, these transactions explained not just the mysterious 2012 loan but, indirectly, the way the deal finally unraveled.
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. There were plenty of sensible reasons to do this. Gun sales were high, and the debt that Remington took out was cheaper to service than the paid-in-kind debt.
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.
By the time the factory opened in Huntsville, the various players stood in vastly different positions. The private-equity firm had made back its initial investment and was playing with house money. Remington owed hundreds of millions that it hadn’t borrowed. And its workers, urgently, had to make a lot of guns.
[ … ]
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. Magnifying his negative impact, gun makers had already ramped up production ahead of Hillary Clinton’s expected victory: In 2017 the market was choked with surplus product, and Trump’s Second Amendment enthusiasm was dousing any hope of a panic buy.
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.
And that, folks, is how it’s done. You hire the connected suits and elitists to the BOD, make shady deals, hide the debt, gamble on what’s going to happen in the future, and hope for the best. When the best doesn’t happen, you shaft the working man, who has already shafted you by forming unions and making it too expensive to do business to begin with.
Because American has lost its soul. It has exchanged the Puritan work ethic, the pride of working hard, making a good product or providing a needful service to others, and supporting your family through these means, for high stakes gambling where people get hurt and lives get ruined.
Gambling is a Luciferian project. It’s wicked, because only God knows the future because He has decreed it. He has ordered us not to engage in divination, prophesies, witchcraft, crystal balls, palm reading, tea leaves, astrology and other manner of superstition and paganism. The Wall Street suits are just dressed up heathens with bones sticking through body parts, dancing around fires and bowing to totem poles.
It serves Ceberus right. I’m sorry for the folks in Huntsville, Alabama. They didn’t deserve this.
6 years ago
