Contract analysis

From: Claudia Merritt <cmerritt@calderwoodharkness.com> To: Michelle Kaplan <mkaplan@nexfordindustrial.com> Cc: David Engstrom <dengstrom@nexfordindustrial.com> Date: Thu, 06 Mar 2025 04:17:00 -0000 Subject: Nexford — $1.4B Term Loan B — Financial Covenant Framework and EBITDA Add-Back Definitions

I hope you're well. I wanted to reach out regarding the financial covenant framework in the Nexford credit agreement negotiations with Whitfield & Gage LLP (counsel to Crescent Harbor Bank, N.A. as lead left arranger and administrative agent). As you know, we received the second W&G draft of the credit agreement on March 5, and we are preparing to return our marked draft to Margaret Ashby and her team on March 8. Bef

The W&G second draft now includes the agent's proposed covenant mechanics in full, so this is the right moment to focus on the details. I've set out the key issues below.

**1. Overview of the Springing Financial Covenant**

The credit agreement includes a single springing financial covenant: a maximum first lien net leverage ratio of 5.00x (5.00:1.00), tested quarterly on a trailing four-quarter basis. Importantly, the covenant is tested **only when** aggregate outstanding revolving loans exceed 40% of revolving commitments under any revolving facility.

Because no revolving facility is being established as part of the current transaction, the springing covenant would only become operative if a revolving facility is later added through the incremental facility provisions. This is a customary structure for institutional Term Loan B transactions — the covenant effectively provides a backstop in the event a revolving facility is drawn significantly, while leaving the te

**2. Pro Forma Leverage at Closing — Baseline Reference**

For context, pro forma first lien net leverage at closing is approximately **3.38x**, calculated as follows:

- First lien net debt: $1,400,000,000 (Term Loan B) less $100,000,000 (pro forma balance sheet cash) = $1,300,000,000 - LTM Adjusted EBITDA: $385,000,000 - First lien net leverage: $1,300,000,000 ÷ $385,000,000 ≈ **3.38x**

For reference, pro forma total net leverage (including the $250,000,000 of 7.250% Senior Unsecured Notes due 2028 that are not being refinanced) is approximately **4.03x**:

- Total net debt: ($1,400,000,000 + $250,000,000 – $100,000,000) = $1,550,000,000 - $1,550,000,000 ÷ $385,000,000 ≈ **4.03x**

That gives us approximately 1.62 turns of headroom under the 5.00x first lien net leverage covenant threshold at closing, which should be comfortable. That said, I would value your perspective on the projected leverage trajectory over the next several quarters, particularly as the 1.00% annual amortization ($3,500,000 per quarter) begins with the first payment on June 30, 2025. If you have internal projections you're

**3. Key Covenant Mechanics Issues for Nexford's Input**

There are several areas in the definitional framework where I want to make sure we have adequate flexibility for Nexford. I've set these out in detail below.

**a. Definition of "Consolidated EBITDA" — Add-Back Definitions**

The credit agreement defines "Consolidated EBITDA" (the draft's defined term for what we have been referring to as Adjusted EBITDA) starting from consolidated net income and adding back customary items (interest expense, income taxes, depreciation, and amortization), plus a series of permitted adjustments.

The current LTM Adjusted EBITDA of $385,000,000 includes $28,000,000 in permitted add-backs over reported EBITDA of $357,000,000, broken down as follows:

- **$12,000,000** — acquisition-related costs (from the Lakeshore Precision Engineering, Inc. acquisition in 2024 and integration of prior bolt-on acquisitions, including Clearfield Tool & Die, Summit Industrial Fabrication, and Ridgepoint Specialty Coatings) - **$8,500,000** — non-recurring restructuring charges - **$4,500,000** — sponsor management fees payable to Granite Peak Capital Partners, LP - **$3,000,000**

I want to flag several specific add-back categories where we should focus:

**(i) Pro Forma Cost Savings and Synergies.** The W&G draft permits add-backs for projected cost savings and synergies from acquisitions, provided they are reasonably expected to be realized within **18 months** and supported by a responsible officer's certificate. Michelle, I'd appreciate your view on whether 18 months is a sufficient realization period or whether the company would prefer **24 months** given the tim

**(ii) Cap on Add-Backs.** The W&G draft includes a cap on non-recurring, pro forma, and projected adjustments equal to **25% of Consolidated EBITDA** (calculated before giving effect to such adjustments). This is within the market range — we typically see caps of 15% to 30% in recent TLB transactions. The current $28,000,000 in add-backs represents approximately 7.3% of the $385,000,000 adjusted figure, so Nexford i

**(iii) Sponsor Management Fee Add-Back.** The current annual management fee payable to Granite Peak is $4,500,000. Our position should be that this is an **uncapped, permitted add-back** — not subject to the 25% cap — since it is a recurring cost associated with the sponsor's ownership that will be incurred throughout the term of the facility. Could you confirm that $4,500,000 is the current annual amount and whethe

**(iv) Run-Rate Cost Savings from Operational Initiatives.** Are there any specific operational improvement programs currently in progress (or planned for the near term) that the company would want the flexibility to add back on a run-rate basis? If so, we should ensure the definition accommodates those adjustments.

**b. Testing Mechanics — Quarterly Testing and Measurement Period**

The W&G draft provides for the covenant to be tested on a trailing four-quarter (LTM) basis, with the measurement period ending on the last day of each fiscal quarter. Compliance certificates are required within **60 days** of each quarter-end, or **90 days** for the fiscal year-end.

Michelle, I want to confirm that Nexford's financial reporting timeline supports these delivery deadlines. Specifically, can Ashworth & Kendrick LLP — and I know Helen Yamamoto's team has been the engagement partner on the audit — deliver the audited annual financials within the 90-day window for the fiscal year ending December 31? If the timeline is tight, we can negotiate for 120 days on the annual delivery, though

I also want to raise the question of whether Nexford and Granite Peak would like to negotiate an **equity cure right** — that is, the right for the sponsor to inject equity into Nexford to cure a financial covenant breach. This is not currently in the W&G draft or the agreed term sheet, but equity cure provisions are available in many sponsor-backed TLB transactions and can provide a valuable safety net.

- A maximum of **two cures** in any four consecutive fiscal quarter period - A **lifetime cap** of five cures over the life of the facility - The equity contribution would be added to EBITDA (or, in some structures, used to reduce net debt) solely for purposes of the leverage calculation for the relevant test period

I would recommend discussing this with Ryan Ostrowski at Granite Peak and Patricia Voss at Kellner Brandt & Associates LLP (sponsor's counsel) to determine whether the Sponsor wants to pursue this. If so, I can raise it with Margaret Ashby at Whitfield & Gage in our next round.

**4. Interaction with Excess Cash Flow Sweep**

I want to briefly flag the connection between the leverage ratio definitions and the excess cash flow sweep mechanics, since the same Consolidated EBITDA definition drives both. The ECF sweep percentage steps down based on first lien net leverage as follows:

- **50%** of excess cash flow when first lien net leverage **exceeds 4.25x** - **25%** when first lien net leverage is **at or below 4.25x but above 3.50x** - **0%** when first lien net leverage is **at or below 3.50x**

At pro forma closing leverage of approximately 3.38x, Nexford would currently sit in the **0% sweep tier**, which is a favorable position. However, leverage could tick upward if EBITDA softens or if the company draws on any future revolving facility. I would ask that you consider how the company's internal projections for FY2025 and FY2026 map to these step-down thresholds, particularly the 3.50x breakpoint.

**5. Interaction with Incremental Facility Provisions**

Finally, I want to note that the incurrence test for ratio-based incremental term loans and revolving commitments (beyond the free-and-clear basket of the greater of $280,000,000 and 100% of LTM EBITDA) is set at **4.50x first lien net leverage** on a pro forma basis. The Consolidated EBITDA definition used for the springing financial covenant will be the **same definition** used for these incurrence tests. Getting t

Michelle, I would appreciate it if you could:

1. **Review the add-back categories** outlined above and confirm whether the current $28,000,000 in adjustments captures all items Nexford would want included on a go-forward basis, or whether there are additional categories we should build into the definition. 2. **Provide your view on the 25% cap and the 18-month realization period** for projected cost savings and synergies — specifically, whether we should push fo

I would suggest we arrange a call early next week — myself, Marcus Leung, you, and Priya — to discuss these items before we finalize the borrower's mark-up of the credit agreement. Would Monday or Tuesday work on your end?

As you can see, the overall financial covenant framework is borrower-friendly given the covenant-lite structure, but the devil is very much in the definitional details. Getting these right now will serve Nexford well throughout the life of the facility.

As a reminder, Marcus circulated the relevant definitional sections from the W&G second draft — Consolidated EBITDA, First Lien Net Leverage Ratio, and Excess Cash Flow — to the Nexford team earlier this week. Please don't hesitate to reach out if you need those resent or if you have any questions in the interim.

Thank you for your time on this, Michelle. I look forward to discussing.

**Claudia Merritt** Partner, Banking & Finance Calderwood & Harkness LLP 425 Lexington Avenue New York, New York 10017 Direct: (212) 555-4738 Email: cmerritt@calderwoodharkness.com

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