Catherine and Benjamin,
I am writing on behalf of our client, Meridian Consumer Brands LLC ("Meridian"), in connection with the proposed $40,000,000 asset-based revolving credit facility (the "Facility") to be extended by Ridgeline National Bank, N.A. ("Ridgeline"). We have carefully reviewed the further revised term sheet received from Ridgeline, transmitted via your office on March 28, 2022, as well as the preliminary appraisal summary delivered by Bellweather Appraisal Group LLC ("Bellweather") on March 21, 2022. Attached for your review are (i) Calderwood & Harkness's annotated markup of the revised term sheet reflecting Meridian's counter-comments and (ii) a detailed borrowing base analysis memorandum with sensitivity tables prepared by Meridian's finance team, which we believe will be helpful in framing the discussion below.
While Meridian appreciates the progress made to date, there are several areas in the revised term sheet where Ridgeline's proposed collateral eligibility criteria and advance rate structure require further negotiation. We address each in turn.
**1. Inventory Eligibility — Bellweather's Exclusions Are Overly Conservative**
We acknowledge that Bellweather commenced its preliminary field examination on March 7, 2022, and delivered its preliminary appraisal summary on March 21, 2022. In that summary, Bellweather flagged approximately $12 million in seasonal and slow-moving SKUs as ineligible, reducing eligible inventory from approximately $54 million (at cost) to approximately $42 million (at cost).
Meridian respectfully submits that Bellweather's exclusion of these SKUs is overly conservative and does not reflect the realities of Meridian's consumer products business. Seasonal inventory build-outs are a core component of the operating cycle for a company in the personal care and household goods sectors, and the seasonal SKUs identified by Bellweather are standard inventory items with demonstrated sell-through history. These items are typically liquidated within a single seasonal cycle and do not constitute obsolete or unsaleable inventory. Treating them as ineligible collateral materially distorts the true borrowing base available to support the Facility.
We request that Ridgeline reconsider the scope of Bellweather's inventory exclusions, or, at a minimum, that the parties engage in a dialogue regarding which specific SKU categories should properly be reclassified as eligible. Meridian's position is that eligible inventory should remain at approximately $54 million at cost, or at most that only a narrow subset of the flagged $12 million should be excluded.
**2. Receivables Aging Threshold — The 90-Day Standard Should Be Maintained**
Meridian objects to Ridgeline's proposal in the March 28 revised term sheet to tighten the receivables aging threshold from greater than 90 days past invoice date to greater than 60 days past invoice date. This change alone reduced eligible receivables from approximately $38 million to approximately $31 million — a reduction of approximately $7 million.
A 90-day receivables aging threshold is the market standard for asset-based lending facilities extended to consumer products borrowers, whose retail and distribution customers frequently operate on 60- to 90-day payment cycles. Meridian's receivables portfolio has a strong historical collection profile, and receivables aged 61–90 days do not present heightened credit risk. Meridian's independent auditors, Pemberton & Locke CPAs LLP, can provide supporting aging analysis from the FY2021 audited financial statements if that would be helpful to Ridgeline's underwriting team. We request restoration of the 90-day threshold in the final term sheet.
**3. Inventory Advance Rate — 75% of NOLV Is Market-Supported**
Meridian reiterates its counter-proposal of a 75% advance rate against net orderly liquidation value ("NOLV") of eligible inventory, versus Ridgeline's proposed 65% of NOLV. We note that Bellweather's preliminary NOLV estimate is 70% of cost.
The difference between the parties' positions is significant. We walk through the math below to illustrate:
- *Ridgeline's current position* (tightened eligibility criteria and 65% advance rate): Eligible inventory of ~$42M × 70% NOLV = ~$29.4M NOLV × 65% = ~$19.11M inventory component; eligible receivables of ~$31M × 85% = ~$26.35M; total borrowing base of ~$45.46M. This provides only approximately $5.46M of excess availability over the $40M commitment — a cushion of approximately 13.7%, which Meridian views as inadequate to support the seasonal fluctuations inherent in its business.
- *Meridian's position* (restoring original eligibility criteria and applying 75% advance rate): Eligible inventory of ~$54M × 70% NOLV = ~$37.8M × 75% = ~$28.35M; eligible receivables of ~$38M × 85% = ~$32.3M; total borrowing base of ~$60.65M. This provides robust support for the $40M Facility with meaningful headroom.
- Even under a *middle-ground scenario* — accepting some reduction in eligible inventory but applying the 75% advance rate and restoring the 90-day receivables aging threshold — the borrowing base would adequately support the full $40M commitment with a commercially reasonable cushion.
Meridian's proposed 75% of NOLV advance rate is supported by comparable ABL transactions in the consumer products sector and is consistent with market practice for borrowers of Meridian's size and credit profile (FY2021 revenue of approximately $185 million, EBITDA of approximately $22.4 million, and total assets of approximately $142 million). More detailed sensitivity analysis is set forth in the attached borrowing base analysis memorandum.
**4. Impact on Facility Economics and Meridian's Working Capital Needs**
We wish to emphasize that the proposed $40 million ABL Facility is intended to fund Meridian's working capital needs and seasonal inventory build-outs, and the facility size was specifically calibrated to these requirements. As you are aware, Meridian is a portfolio company of Brindoval Partners Fund III, LP, and the ABL Facility is a key component of Meridian's capital structure alongside the existing $75 million first lien term loan with Greystone Capital Finance LLC (outstanding balance of approximately $61.5 million as of January 2022, maturing December 2025). Any material reduction in borrowing base headroom would undermine the Facility's utility and frustrate its core commercial purpose.
We would also note that the interest rate structure — SOFR + 200 bps with a 25 bps floor, stepping down to SOFR + 175 bps when average quarterly availability exceeds $20 million — further underscores the importance of maintaining adequate borrowing base capacity. A constrained borrowing base would effectively prevent Meridian from achieving the pricing step-down, an outcome that is inconsistent with the economics contemplated by both parties at the outset of this transaction.
**Next Steps**
Meridian remains committed to reaching agreement on mutually acceptable terms and hopes to resolve these collateral eligibility and advance rate issues promptly. We would appreciate it if you and Benjamin could review the attached markup and borrowing base analysis and revert with Ridgeline's response at your earliest convenience.
We would also suggest scheduling a call among the parties to discuss these issues in real time. Stephanie Okafor and Raymond Chu are available to participate and are copied here. Please let us know your availability later this week or early next week.
Finally, once collateral eligibility terms are agreed, we will also need to turn to the intercreditor arrangement with Greystone, which remains to be formally negotiated. We look forward to addressing that in due course.
Thank you for your time and attention. We look forward to hearing from you.
Best regards,
Daniel Obi Associate, Banking & Finance Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, NY 10006 T: (212) 555-4837 E: dobi@calderwoodharkness.com
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**Attachments:** 1. second-revised-term-sheet-markup.docx — C&H Annotated Markup of Ridgeline Revised Term Sheet (March 28, 2022) — Borrower's Counter-Comments 2. borrowing-base-analysis-memo.xlsx — Borrowing Base Analysis Memorandum — Collateral Sensitivity and Advance Rate Analysis (April 8, 2022)