By Stephanie Gleason 

Gun manufacturer Colt Defense LLC has struck an 11th-hour deal with Morgan Stanley that removes the immediate threat of default and allows the company to make a November payment to its bondholders.

The company said Tuesday that a Morgan Stanley affiliate will lend it $70 million--a senior term loan maturing in 2018. With the injection of cash, Colt said it is able to make a $10.9 million bond payment, which was due Monday. Proceeds from the new Morgan Stanley loan will also pay off the company's existing $50 million term loan.

Colt said the new loan "will provide it with the time and flexibility necessary to support its medium and long term objectives," according to filings with the U.S. Securities and Exchange Commission.

Last Wednesday, Colt warned that it might be unable to make this payment to bondholders. Had Colt skipped the payment, the company would have entered a 30-day grace period, giving it until Dec. 15 before it would have been in default under the bond agreement.

However, even if it was able to make the payment to bondholders, Colt said it was likely to be out of compliance with its $48.1 million term loan agreement by Dec. 31.

This new loan removes both of those immediate threats.

Colt's bond prices rebounded to 55 cents Tuesday on the news, still deeply distressed but a significant jump from last week when prices hit a low of 35 cents on the dollar amid the prospect of Colt's skipped payment.

Colt warned of the possibility of default last week in a disclosure explaining the reasons it was unable to meet its deadline for filing a quarterly financial statement.

The company said declining demand for commercial rifles and handguns and delays in sales to the U.S. government had hurt its business.

It expects to report a 50% to 60% decline in operating income for the quarter ended Sept. 28 from the year-earlier period, the company said. It also expects to swing to an operating loss for the first nine months of the year, according to financial disclosures.

Colt has been manufacturing firearms since 1836 and supplying to the U.S. military since 1847. The company is currently based in West Hartford, Conn., and Kitchener, Ontario.

Write to Stephanie Gleason at stephanie.gleason@wsj.com

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