Contract analysis

1. Cascabel Financial Holdings, Inc. ("Cascabel," "CFH," or the "Company"), a Delaware corporation, and Cascabel Asset Management LLC ("CAM"), a Delaware limited liability company and registered investment adviser with the U.S. Securities and Exchange Commission (the "SEC"), filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on September 8, 2023 (the "Petition Date"). The Debtors continue to

2. Ridgeline Community Bank ("Ridgeline" or "RCB"), a Delaware state-chartered commercial bank regulated by the Delaware Office of the State Bank Commissioner (the "State Bank Commissioner") and the Federal Deposit Insurance Corporation (the "FDIC"), is a wholly-owned subsidiary of Cascabel. Ridgeline was intentionally and purposefully excluded from the chapter 11 filing and continues to operate in the ordinary cours

3. By this Motion, the Debtors seek entry of the DIP Orders authorizing the Debtors to enter into a $75,000,000 Senior Secured Superpriority Debtor-in-Possession Credit Facility (the "DIP Facility") with Driftwood Absolute Return Fund Ltd. ("Driftwood" or "DARF"), a Cayman Islands exempted company, as DIP Lender (the "DIP Lender"). The DIP Facility is comprised of two tranches: (a) $43,000,000 of new money financing

4. The need for the DIP Facility is immediate and acute. Without the liquidity provided by the DIP Facility, the Debtors will be unable to fund ongoing operations, meet payroll obligations, pay critical vendors, maintain the CAM advisory platform (which manages approximately $1.2 billion in client assets under management), service the administrative costs of these chapter 11 cases, and pursue a value-maximizing restr

5. The DIP Facility represents the best available financing after an extensive and thorough pre-petition marketing process conducted by Solstice Partners LLC ("Solstice Partners"), the Debtors' investment banker, under the direction of Managing Director David R. Chin. Solstice Partners contacted multiple potential DIP lenders, solicited indications of interest, and evaluated competing proposals. After careful conside

6. The Debtors have been unable to obtain post-petition financing on an unsecured basis, on a basis secured by junior liens, or through the granting of administrative priority claims alone. The Debtors' deeply negative equity position, ongoing operating losses, and the stigma associated with the bankruptcy filing preclude the Debtors from accessing traditional credit markets or obtaining DIP financing on lesser terms

7. In connection with the DIP Facility, the Debtors propose to provide the pre-petition first lien lenders (other than Driftwood, whose claims are being rolled up) with a comprehensive adequate protection package, including replacement liens, section 507(b) superpriority claims, monthly adequate protection payments at the non-default contract rate, a $3,500,000 adequate protection reserve, and reimbursement of counse

8. This Motion is filed by the Debtors' counsel, Whitfield, Graves & Sato LLP (Jonathan R. Whitfield, lead partner; Rachel P. Dumont, lead associate), in coordination with Calderwood & Harkness LLP (Colette Whitman, responsible partner; Amy Chesterton, lead associate), counsel to Driftwood, the DIP Lender. The factual statements set forth herein are supported by the Declaration of Terrence M. Kowalski, Chief Restruct

9. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference of the United States District Court for the District of Delaware, dated February 29, 2012. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (D), and (M). The Debtors confirm their consent, pursuant to Local Rule 9013-1(f), to the entry of a final order by this Court to the e

10. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. Cascabel Financial Holdings, Inc. is incorporated in the State of Delaware, and both Debtors maintain their principal offices within this District.

11. The statutory predicates for the relief requested herein are sections 105(a), 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), and 507(b) of the Bankruptcy Code, Bankruptcy Rules 2002, 4001, 6004, and 9014, and the Local Rules of this Court.

II. BACKGROUND A. The Debtors' Business

12. Cascabel Financial Holdings, Inc. is a Delaware corporation with its principal office located at 1200 Market Street, Suite 900, Wilmington, Delaware 19801. Cascabel's federal employer identification number is 84-3291057. Cascabel serves as a holding company for a mid-market financial services platform combining two principal business lines: (a) investment advisory services, conducted through Cascabel Asset Manage

13. Cascabel Asset Management LLC. CAM is a Delaware limited liability company and wholly-owned subsidiary of Cascabel. CAM is registered as an investment adviser with the SEC under the Investment Advisers Act of 1940, as amended. As of the Petition Date, CAM managed approximately $1.2 billion in client assets under management ("AUM") across a range of investment strategies, including fixed income, equity, and multi-

14. Ridgeline Community Bank. Ridgeline is a Delaware state-chartered commercial bank and wholly-owned subsidiary of Cascabel. Ridgeline is regulated by the State Bank Commissioner and the FDIC. As of the Petition Date, Ridgeline held total deposits of approximately $385 million and maintained a network of branch offices serving communities throughout northern Delaware and southeastern Pennsylvania. Ridgeline was int

15. The Debtors' management team includes Gerald T. Harmon, Chief Executive Officer, and Susan K. Nakamura, Chief Financial Officer. In anticipation of the chapter 11 filing, Cascabel's board of directors engaged Alderpoint Advisory Partners LLC ("Alderpoint") as the Debtors' financial advisor and, on August 25, 2023, appointed Terrence M. Kowalski, a managing director of Alderpoint, as Chief Restructuring Officer ("

16. Cascabel's financial distress stemmed from three principal causes that, in combination, eroded the Company's liquidity and capital position and ultimately necessitated the commencement of these chapter 11 cases.

17. Concentrated Commercial Real Estate Loan Losses at Ridgeline Community Bank. Ridgeline's commercial real estate ("CRE") loan portfolio experienced significant deterioration beginning in mid-2022, driven by declining property values in the office and retail sectors within Ridgeline's primary lending markets. As interest rates rose through 2022 and into 2023, a number of Ridgeline's CRE borrowers experienced diffic

18. Failed Acquisition of a Fintech Lender. In late 2022, Cascabel entered into a definitive agreement to acquire a fintech lending platform for an aggregate purchase price of approximately $55 million. The transaction was expected to diversify Cascabel's revenue base and provide a technology-enabled origination channel for consumer and small business loans. However, the acquisition was terminated in early 2023 after

19. Liquidity Crisis Triggered by Depositor Outflows. During the first and second quarters of 2023, Ridgeline experienced significant depositor outflows as regional banking concerns intensified in the wake of several high-profile bank failures nationally. Uninsured depositors, in particular, accelerated withdrawals from Ridgeline, reducing the bank's deposit base by approximately $75 million over a six-month period.

20. As of the Petition Date, Cascabel had consolidated total assets of approximately $620 million and consolidated total liabilities of approximately $710 million, reflecting a negative equity position of approximately $90 million. The Debtors' available unrestricted cash at the holding company level was insufficient to fund ongoing operations, pay employees, maintain the CAM advisory platform, and service the admini

21. On September 8, 2023 (the "Petition Date"), Cascabel Financial Holdings, Inc. and Cascabel Asset Management LLC each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in this Court. The cases are being jointly administered under Case No. 23-11487 (KFM) for procedural purposes pursuant to Bankruptcy Rule 1015(b).

22. Ridgeline Community Bank was excluded from the chapter 11 filing and continues to operate in the ordinary course under the ongoing regulatory supervision of the State Bank Commissioner and the FDIC. The exclusion of Ridgeline from the chapter 11 cases was a deliberate and essential element of the Debtors' restructuring strategy, designed to preserve the stability of the banking subsidiary, protect depositors, and

23. The Debtors filed their schedules of assets and liabilities and statements of financial affairs on September 22, 2023. On the same date, the United States Trustee for the District of Delaware (the "U.S. Trustee") appointed the Official Committee of Unsecured Creditors (the "Committee") pursuant to section 1102 of the Bankruptcy Code. The Committee retained Breckenridge McCoy LLP (Thomas A. Breckenridge, lead part

24. The Debtors continue to operate their businesses and manage their properties as debtors in possession. No trustee, examiner, or patient care ombudsman has been appointed in these cases. The Debtors have filed, or intend to file, various "first day" motions seeking authority to, among other things, pay employee wages and benefits, maintain existing cash management systems, pay certain pre-petition claims of critic

25. As of the Petition Date, the Debtors' pre-petition funded debt totaled approximately $183,500,000, structured in three tranches as follows:

26. First Lien Term Loan. On January 15, 2021, Cascabel entered into a $120,000,000 senior secured term loan (the "First Lien Term Loan") pursuant to that certain Credit Agreement, dated as of January 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time, the "First Lien Credit Agreement"), among Cascabel, as borrower, the lenders party thereto from time to time (collectively, the "Fir

27. As of the Petition Date, the aggregate outstanding principal balance under the First Lien Term Loan was $120,000,000, plus accrued and unpaid interest and fees. The First Lien Lenders and their respective holdings are as follows:

28. Driftwood holds $32,000,000 in face amount of the First Lien Term Loan, representing approximately 26.67% of the total first lien facility. Driftwood acquired its position on the secondary market through a series of trades executed between March and July 2023 at a weighted average price of approximately $0.68 per dollar of face value, resulting in an aggregate cost basis of approximately $21,760,000. The Debtors

29. Second Lien Notes. On or about June 1, 2020, Cascabel issued $45,000,000 in aggregate principal amount of 10.50% Senior Secured Second Lien Notes due June 1, 2027 (the "Second Lien Notes") pursuant to that certain Indenture, dated as of June 1, 2020 (as amended, restated, supplemented, or otherwise modified from time to time, the "Second Lien Indenture"), between Cascabel, as issuer, and Zynvaro Trust Company ("Z

30. Unsecured Notes. Cascabel has outstanding $18,500,000 in aggregate principal amount of bilateral unsecured notes bearing interest at 8.00% per annum, maturing on March 1, 2025 (the "Unsecured Notes"). The Unsecured Notes are not secured by any liens on the Debtors' assets.

31. The Debtors' total pre-petition funded debt is summarized as follows: E. Pre-Petition Marketing Process

32. In anticipation of a potential chapter 11 filing, the Debtors retained Solstice Partners LLC ("Solstice Partners") on August 10, 2023, to market DIP financing opportunities and explore strategic alternatives for the Debtors' businesses. Solstice Partners is a nationally recognized investment bank with significant experience advising distressed companies and facilitating DIP financings. David R. Chin, a Managing D

33. Under Mr. Chin's direction, Solstice Partners conducted an expedited but thorough pre-petition marketing process. Solstice Partners prepared a confidential information memorandum describing the Debtors' business, financial condition, and DIP financing needs, and distributed the memorandum to a broad universe of potential DIP lenders, including commercial banks, specialty finance companies, private credit funds, a

34. After evaluating all received proposals, the Debtors, in consultation with Solstice Partners, Alderpoint, and CRO Kowalski, determined that the DIP proposal submitted by Driftwood represented the best available terms for the Debtors' estates. The Driftwood proposal was selected based on a comprehensive evaluation of the following factors: (a) pricing and overall cost of capital; (b) facility size and the adequacy

35. The material terms of the DIP Facility, as set forth in the DIP Credit Agreement (the "DIP Credit Agreement"), are summarized below. This summary is qualified in its entirety by reference to the DIP Credit Agreement, a copy of which is attached hereto as Exhibit C, and the DIP Term Sheet, a copy of which is attached hereto as Exhibit E. To the extent of any inconsistency between this summary and the DIP Credit Ag

36. Parties. Cascabel Financial Holdings, Inc. and Cascabel Asset Management LLC, as borrowers (collectively, the "Borrowers"); Driftwood Absolute Return Fund Ltd., as DIP Lender.

37. Facility Size. The DIP Facility provides for a total commitment of $75,000,000, comprised of the following two tranches: (a) New Money DIP Tranche: $43,000,000 in new money financing, available in two draws: (i) Draw 1 (Interim): $18,000,000, available upon entry of the Interim DIP Order; and (ii) Draw 2 (Final): $25,000,000, available upon entry of the Final DIP Order. (b) Roll-Up Tranche: $32,000,000, represent

38. Interest Rate. The DIP Facility bears interest at a rate per annum equal to Adjusted Term SOFR plus 900 basis points, with a SOFR floor of 4.00%. The minimum all-in interest rate on the DIP Facility is 13.00% per annum. Interest is payable monthly in arrears in cash.

39. Default Rate. Upon the occurrence and during the continuance of an Event of Default (as defined in the DIP Credit Agreement), the outstanding obligations under the DIP Facility shall bear interest at an additional 200 basis points above the otherwise applicable rate (i.e., Adjusted Term SOFR plus 1,100 basis points), with a minimum default rate of 15.00% per annum.

40. Maturity. The DIP Facility will mature on the earliest of: (i) twelve (12) months from the Petition Date (i.e., September 8, 2024); (ii) the effective date of a confirmed chapter 11 plan of reorganization or liquidation (the "Effective Date"); (iii) the consummation of a sale of substantially all of the Debtors' assets pursuant to section 363 of the Bankruptcy Code; or (iv) the occurrence of an Event of Default t

41. Commitment Fee. A commitment fee equal to 2.00% of the total $75,000,000 commitment (the "Commitment Fee"), in the amount of $1,500,000, shall be fully earned upon entry of the Interim DIP Order and shall be payable to the DIP Lender from the proceeds of Draw 1. The Commitment Fee shall be non-refundable and shall not be subject to disgorgement.

42. Exit Fee. An exit fee equal to 1.50% of all amounts drawn under the DIP Facility (the "Exit Fee"), shall be payable to the DIP Lender upon the earlier of maturity, repayment in full, or acceleration of the DIP Facility. Based on the full $75,000,000 commitment, the Exit Fee would total $1,125,000.

43. Unused Line Fee. An unused line fee equal to 0.50% per annum on the daily average undrawn portion of the New Money DIP Tranche (the "Unused Line Fee"), accruing from the date of entry of the Interim DIP Order and payable quarterly in arrears. The Unused Line Fee shall cease to accrue upon the earlier of the full draw-down of the New Money DIP Tranche or the maturity of the DIP Facility. C. Security — Priming Lien

44. The DIP Facility will be secured by first priority priming liens (the "DIP Liens") on substantially all assets of the Debtors, whether now owned or hereafter acquired, including, without limitation, all accounts, inventory, equipment, general intangibles, intellectual property, contract rights, deposit accounts, securities accounts, investment property, instruments, documents, chattel paper, letter-of-credit righ

45. The DIP Liens include a lien on the proceeds of avoidance actions arising under chapter 5 of the Bankruptcy Code, including sections 544, 545, 547, 548, 549, 550, and 553 of the Bankruptcy Code (collectively, "Avoidance Action Proceeds"), subject to entry of the Final DIP Order.

46. Excluded Collateral. The DIP Collateral expressly excludes any and all assets of Ridgeline Community Bank that are subject to regulatory restrictions imposed by the State Bank Commissioner and the FDIC. The Debtors and the DIP Lender acknowledge that Ridgeline operates as a regulated banking subsidiary outside of these chapter 11 cases and that its assets are not available to secure the DIP Facility.

47. Priming of Pre-Petition Liens. The DIP Liens are senior and prior to all existing liens on the DIP Collateral, including the first priority liens securing the First Lien Term Loan and the second priority liens securing the Second Lien Notes. The DIP Facility primes the existing pre-petition first lien term loan, as authorized by section 364(d)(1) of the Bankruptcy Code, subject to the adequate protection provisio

48. All obligations arising under the DIP Facility, including all principal, interest, fees, costs, expenses, and other amounts owing thereunder (collectively, the "DIP Obligations"), shall constitute allowed superpriority administrative expense claims against each of the Debtors' estates (the "DIP Superpriority Claims") pursuant to sections 364(c)(1) and 507(b) of the Bankruptcy Code. The DIP Superpriority Claims sh

49. Upon entry of the Final DIP Order, $32,000,000 in face amount of Driftwood's pre-petition first lien claims under the First Lien Credit Agreement shall be deemed rolled up into the DIP Facility on a dollar-for-dollar basis (the "Roll-Up"). The Roll-Up Tranche shall constitute DIP Obligations under the DIP Credit Agreement and shall be entitled to the same DIP Liens and DIP Superpriority Claims as the New Money DI

50. Upon the effectiveness of the Roll-Up, Driftwood's pre-petition secured claims in the amount of $32,000,000 under the First Lien Credit Agreement shall be extinguished and deemed satisfied in full, and such claims shall be replaced with DIP claims of equal face amount under the DIP Credit Agreement. Following the Roll-Up, Driftwood shall no longer hold any claims under the First Lien Credit Agreement, and the agg

51. The Roll-Up is conditioned on entry of the Final DIP Order and is subject to the Challenge Period described in Section V below. F. Budget and Financial Reporting

52. The Debtors shall operate in accordance with a 13-week rolling cash flow budget (the "Budget"), which is attached to the DIP Credit Agreement as Exhibit B and a copy of which is attached hereto as Exhibit D. The Budget sets forth the Debtors' projected receipts and disbursements on a weekly basis for the initial 13-week period following the Petition Date.

53. The Budget shall be updated every four (4) weeks on a rolling basis, subject to the approval of the DIP Lender (such approval not to be unreasonably withheld, conditioned, or delayed). Each updated Budget shall extend the projection period by an additional four weeks, maintaining a rolling 13-week forecast at all times.

54. The DIP Credit Agreement establishes permitted variances from the Budget. Specifically, the Debtors' actual results shall not deviate from the Budget by more than the following thresholds: (a) revenue: plus or minus 10%; and (b) disbursements: plus or minus 15%. Variance testing shall be conducted on a cumulative bi-weekly basis, with the first variance test occurring at the end of the second full week following

55. In addition to the Budget, the Debtors shall provide the DIP Lender with weekly cash flow reports, monthly financial statements, and such other financial information as the DIP Lender may reasonably request from time to time. The Debtors shall also provide the DIP Lender with prompt notice of any material adverse change in the Debtors' business, operations, assets, or financial condition. G. Milestones.

56. The DIP Credit Agreement contains the following milestone provisions (the "Milestones"), which require the Debtors to achieve specified restructuring benchmarks within established time frames: (a) Interim DIP Order: The Court shall have entered the Interim DIP Order within five (5) business days of the Petition Date (target date: September 15, 2023). (b) Final DIP Order: The Court shall have entered the Final DIP

57. Failure to satisfy any Milestone by the applicable deadline shall constitute an Event of Default under the DIP Credit Agreement, unless such Milestone is extended by the DIP Lender in its sole discretion. H. Carve-Out.