CALDERWOOD & HARKNESS LLP CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED
599 Lexington Avenue, 36th Floor New York, NY 10022
MEMORANDUM
To: Sandra Tung, Responsible Partner, Mergers & Acquisitions
From: Andrew Fitzpatrick, Lead Associate, Mergers & Acquisitions
Date: August 10, 2022
Re: Review of Debt Commitment Letter — Harborview National Bank, N.A. — $60,000,000 Senior Secured Term Loan Facility in Connection with Meridian Consumer Brands LLC's Proposed Acquisition of the CleanLeaf and PureHaven Product Lines from Briarwood Home Essentials, Inc.
Matter No.: 1011-00005
Reviewed by: Sandra Tung
I. Executive Summary
This memorandum presents a detailed analysis of the commitment letter dated August 5, 2022 (the "Commitment Letter"), executed by Harborview National Bank, N.A. ("Harborview"), a national banking association headquartered at One Harborview Plaza, Charlotte, NC 28202, acting in its capacity as Lead Arranger and Administrative Agent, which provides for a $60,000,000 senior secured term loan facility (the "Term Loan Facility") to Meridian Consumer Brands LLC ("Meridian" or the "Borrower"), a limited liability company organized and existing under the laws of the State of Delaware.
The Term Loan Facility is intended to partially fund the proposed acquisition (the "Acquisition") by Meridian of the CleanLeaf and PureHaven consumer product lines (the "Acquired Assets") from Briarwood Home Essentials, Inc. ("Briarwood"), an Ohio corporation, pursuant to a definitive asset purchase agreement currently under negotiation. The aggregate purchase price for the Acquisition is $95,000,000. Of this amount, $60,000,000 will be funded through the proceeds of the Term Loan Facility, with the remaining $35,000,000 to be funded by an equity contribution from Lakepoint Capital Partners, LP ("Lakepoint"), Meridian's private equity sponsor, pursuant to a separate equity commitment letter dated August 12, 2022. The Lakepoint equity commitment letter will be the subject of a separate memorandum to be issued by this office following its receipt and review.
Our overall assessment is that the Commitment Letter is generally market-standard for a middle-market acquisition financing of this size and nature. The pricing (SOFR plus 375 basis points), the fee structure, and the general conditionality framework are consistent with what we would expect for a $60,000,000 senior secured term loan in the current lending environment. However, this memorandum identifies a number of areas of concern that merit the deal team's careful attention. In particular, the following issues are flagged for discussion:
• The conditionality provisions afford Harborview meaningful discretion, particularly through the broadly drafted due diligence satisfaction condition and the material adverse effect ("MAE") condition, which fall short of the "certain funds" or "SunGard-style" conditionality that would provide Meridian with a higher degree of funding certainty.
• The flex provisions in the Commitment Letter — encompassing pricing flex (up to 50 basis points of spread increase and up to 100 basis points of original issue discount), structural flex (adjustments to amortization and financial covenants), and market flex (broader modifications to reflect prevailing market conditions at the time of syndication) — create uncertainty around the final economic and structural terms of the facility.
• The timing constraints imposed by the Commitment Letter — specifically, the six-month commitment period expiring on February 5, 2023, and the ticking fee that commences on November 3, 2022 (90 days after the Commitment Letter date) — require that the deal team and Meridian management proceed on an accelerated timeline to avoid incremental costs and, ultimately, the risk of commitment expiration without closing.
The Relationship Manager at Harborview for this engagement is Carolyn Dubois, who has been the primary point of contact throughout the financing process.
II. Transaction Overview
This section provides an overview of the material terms of the Acquisition and the key parties involved, which serve as the factual backdrop for the Commitment Letter analysis that follows.
Buyer. Meridian Consumer Brands LLC is a limited liability company organized under the laws of the State of Delaware, with its principal offices located at 440 Park Avenue South, 18th Floor, New York, NY 10016 (EIN 83-2947106). Meridian is a portfolio company of Lakepoint Capital Partners, LP, a Delaware limited partnership with its principal offices at 200 Clarendon Street, Suite 3200, Boston, MA 02116 (EIN 04-3821567). Lakepoint is managed by its Managing Partner, Thomas Liang. Meridian was formed as an acquisition vehicle for the purpose of acquiring and operating consumer packaged goods brands in the home and personal care segments. Key members of Meridian's management team include Gareth Holloway (Chief Executive Officer), Priya Anand (Chief Financial Officer), and Diana Ressler (General Counsel).
Seller. Briarwood Home Essentials, Inc. is a corporation organized under the laws of the State of Ohio, with its principal offices at 1175 Creekside Drive, Suite 400, Columbus, OH 43215 (EIN 31-1684239). Briarwood is a privately held company; its President and sole shareholder is Malcolm Greer. Briarwood has been the owner and operator of the CleanLeaf and PureHaven product lines since their initial launch, and the proposed sale of these product lines represents a strategic divestiture by Briarwood as it refocuses its operations on other segments.
Transaction Type. The Acquisition is structured as an asset purchase, pursuant to which Meridian will acquire substantially all of the assets constituting the CleanLeaf and PureHaven product lines, including inventory, accounts receivable, equipment, intellectual property (including the "CleanLeaf" and "PureHaven" trademarks), customer contracts, and associated real property and leasehold interests.
Purchase Price. The total purchase price for the Acquisition is $95,000,000, allocated as follows:
• $87,000,000 in cash payable at closing; and
• $8,000,000 in contingent earnout consideration, which is payable to Briarwood if the Acquired Assets achieve product line revenue of at least $72,000,000 during the first twelve months following the closing date (the "Earnout Period").
The cash payable at closing will be funded through a combination of the $60,000,000 Term Loan Facility and the $35,000,000 equity contribution from Lakepoint. It is anticipated that a portion of the closing cash consideration (approximately $9,500,000, representing a 10% holdback) will be deposited into escrow pursuant to an escrow agreement to be negotiated with Atlantic Fiduciary Trust Company.
Acquired Brands. The Acquired Assets comprise two distinct consumer product lines: (a) "CleanLeaf," a line of home cleaning products marketed primarily through grocery, mass retail, and e-commerce channels; and (b) "PureHaven," a line of personal care products marketed through similar channels. Together, the two product lines encompass approximately 142 active stock-keeping units (SKUs) across multiple product categories.
Financial Overview. Based on financial information provided by Briarwood and its auditor, Hargrove & Linton, P.C., the product lines generated the following key financial metrics for fiscal year 2021:
The implied enterprise value to EBITDA multiple of approximately 8.48x is within the range typically observed in middle-market consumer packaged goods transactions, though it represents a full valuation relative to recent comparable transactions in the home and personal care sub-segments. The financial diligence being conducted by Whitfield Ames LLP will be critical in confirming these figures, particularly in light of the $2,500,000 inventory valuation variance that has been identified as a preliminary diligence finding.
Financing Structure. The $95,000,000 purchase price will be funded through the following sources:
The resulting capital structure implies total leverage of approximately 5.36x EBITDA ($60,000,000 / $11,200,000). This leverage level is at the higher end of the range for middle-market acquisition financings but is within the parameters typically underwritten by Harborview and its syndicate participants for consumer products companies with stable, recurring revenue profiles.
Letter of Intent. The parties executed a Letter of Intent on March 28, 2022, which provides for a twelve-month exclusivity period during which Briarwood is prohibited from soliciting or entertaining competing offers for the Acquired Assets. The first draft of the Asset Purchase Agreement ("APA") was circulated by Calderwood & Harkness LLP on behalf of Meridian on July 19, 2022. As of the date of this memorandum, we are awaiting Briarwood's markup of the APA, which Briarwood's counsel, Caldwell, Pruitt & Shaw LLP, has indicated will be returned shortly.
Advisors. The key professional advisors involved in the transaction are summarized below:
III. Summary of Key Commitment Letter Terms
This section provides a detailed summary and analysis of the material terms contained in the Commitment Letter and the attached indicative term sheet.
A. Parties
The Commitment Letter identifies the following parties:
Lead Arranger and Administrative Agent. Harborview National Bank, N.A., a national banking association organized under the laws of the United States, headquartered at One Harborview Plaza, Charlotte, NC 28202. Harborview is acting in the dual capacity of Lead Arranger (responsible for arranging and syndicating the facility) and Administrative Agent (responsible for administering the facility on behalf of the lender group following closing). The designation of Harborview in both roles is standard for middle-market facilities of this size, where the arranger typically retains the administrative agent role. The Relationship Manager at Harborview for the transaction is Carolyn Dubois.
Borrower. Meridian Consumer Brands LLC, as described in Section II above.
Syndicate Participant. The Commitment Letter identifies Pinnacle Credit Partners, LP, a Delaware limited partnership with offices at 600 Lexington Avenue, Suite 2100, New York, NY 10022, as the initial syndicate participant. The contact at Pinnacle is Rajan Mehta. Pinnacle is expected to take down a portion of the $60,000,000 facility in the syndication, with the specific hold amount to be determined in the definitive credit agreement and related assignment documentation. The inclusion of an identified syndicate participant at the commitment letter stage is typical where the lead arranger has pre-arranged a portion of its distribution prior to full syndication.
It is worth noting that while Harborview serves as both Lead Arranger and Administrative Agent, the ultimate composition of the lender group following syndication may include additional participants beyond Pinnacle. The syndication mechanics are discussed in greater detail in Section VI of this memorandum.
B. Facility Description
Type. The facility is structured as a senior secured term loan facility. It is not a revolving credit facility, and accordingly, once the Term Loan Facility is drawn and funded at closing, amounts repaid or prepaid may not be reborrowed. This is a standard structure for acquisition financings where the proceeds are required to fund a discrete purchase price payment at closing.
Aggregate Principal Amount. $60,000,000. The full amount is expected to be funded in a single draw at closing of the Acquisition.
Tenor. The specific maturity date of the Term Loan Facility will be set forth in the definitive credit agreement. For middle-market acquisition term loans of this type, we would expect a maturity date that is five to seven years following the closing date. The attached term sheet should specify the intended tenor; we note that this detail will be finalized during the credit agreement negotiation process.
Amortization. The Term Loan Facility will be subject to a quarterly amortization schedule as set forth in the attached term sheet. The amortization schedule will require regular quarterly principal payments, with the balance of the principal due at maturity (the so-called "balloon" payment). We should review the amortization schedule carefully to confirm that the required quarterly payments are serviceable based on the projected free cash flow of the Acquired Assets. In addition, the term sheet indicates that the credit agreement will include excess cash flow sweep provisions, pursuant to which a specified percentage (typically 50% to 75%) of excess cash flow generated by Meridian in each fiscal year will be applied to prepay the outstanding principal of the Term Loan Facility. The excess cash flow sweep is a standard feature that functions as a de-leveraging mechanism and accelerates principal repayment in periods of strong cash flow generation.
Security. The Term Loan Facility will be secured by a first priority lien on all Acquired Assets, which includes:
(a) Inventory (finished goods, raw materials, and work-in-process);
(b) Accounts receivable;
(c) Equipment;
(d) intellectual property, including the "CleanLeaf" and "PureHaven" trademarks, trade names, domain names, and related IP rights;
(e) Owned real property located at 500 Commerce Boulevard, West Jefferson, OH 43162 (the "West Jefferson Facility"); and
(f) The leasehold interest at 2800 Industrial Parkway, Marysville, OH 43040 (the "Marysville Facility"), subject to obtaining landlord consent from Buckeye Industrial Properties LLC for the assignment of the lease to Meridian in connection with the Acquisition.
The security package is comprehensive and covers substantially all tangible and intangible assets constituting the Acquired Assets. Perfection of the security interests will require the filing of UCC-1 financing statements in the applicable jurisdictions, the execution of intellectual property security agreements for filing with the United States Patent and Trademark Office, and, with respect to the real property assets, the execution and recording of mortgages or deeds of trust. We will coordinate with local Ohio counsel as necessary to ensure proper perfection.
The requirement that the leasehold interest at the Marysville Facility be included in the security package underscores the importance of obtaining the landlord consent from Buckeye Industrial Properties LLC in a timely manner. As discussed further in Section IV below, this consent request has not yet been submitted as of the date of this memorandum.
Guaranty. The obligations of Meridian under the Term Loan Facility will be guaranteed by Lakepoint Capital Partners, LP, in its capacity as Meridian's private equity sponsor, and by any direct or indirect subsidiaries of the Borrower that are formed following the closing of the Acquisition. The inclusion of a sponsor guaranty is notable and provides Harborview with additional credit support beyond the asset-level collateral. We should confirm with Lakepoint and its counsel the scope and any limitations of the Lakepoint guaranty, including whether it is a full guaranty or a limited guaranty (e.g., capped at a specified amount or limited to "bad boy" acts), as this will have significant implications for Lakepoint's exposure.
C. Interest Rate
Applicable Rate. The interest rate applicable to the Term Loan Facility is the Secured Overnight Financing Rate ("SOFR") plus a credit spread of 375 basis points per annum. This all-in rate is market-consistent for a middle-market senior secured acquisition term loan with the leverage profile and credit characteristics of this transaction.
The Commitment Letter specifies that the SOFR-based rate will include a customary credit spread adjustment ("CSA"), which is intended to account for the structural differences between SOFR and the legacy LIBOR benchmark that was previously the market standard for floating rate commercial loans. The transition from LIBOR to SOFR has been a significant development in the leveraged lending market, and the benchmark transition provisions in the Commitment Letter should be reviewed to ensure they are consistent with the Alternative Reference Rates Committee ("ARRC") recommended best practices and fallback language. We do not anticipate any issues in this regard, as Harborview has generally adopted ARRC-compliant benchmark provisions in its recent loan documentation.
Default Rate. The Commitment Letter provides for a customary default rate increase of 200 basis points above the otherwise applicable interest rate upon the occurrence and during the continuance of an event of default under the credit agreement. This is standard and expected.
Interest Payment Periods. Interest is payable quarterly in arrears, which is the standard payment frequency for term loan facilities in the middle market. We should confirm in the definitive credit agreement whether interest is computed on the basis of a 360-day year (actual/360) or a 365/366-day year (actual/actual), as this calculation convention can result in a marginally higher effective rate under the actual/360 convention.
D. Commitment Fee
Rate. The Commitment Letter requires Meridian to pay a commitment fee of 50 basis points per annum on the committed but undrawn amount of the Term Loan Facility (i.e., $60,000,000).
Payment Terms. The commitment fee is payable quarterly in arrears, commencing on the date of the Commitment Letter (August 5, 2022) and continuing through the earlier to occur of (a) the funding of the Term Loan Facility at closing of the Acquisition, or (b) the termination or expiration of the commitment (whether by reason of expiration on February 5, 2023, or earlier termination).
Practical Significance. Because the Term Loan Facility is a term loan facility (rather than a revolving credit facility under which amounts are drawn and repaid from time to time), the commitment fee applies to the full $60,000,000 committed amount from the date of the Commitment Letter until closing or commitment termination. On an annualized basis, the 50 basis point commitment fee represents $300,000 per annum, or approximately $25,000 per month. From August 5, 2022 through the anticipated closing date, this fee represents a meaningful carrying cost that the deal team should factor into the overall transaction economics.
E. Ticking Fee
Rate. In addition to the commitment fee, the Commitment Letter provides for a ticking fee of 25 basis points per annum on the committed but unfunded amount of the Term Loan Facility.
Commencement Date. The ticking fee does not commence on the date of the Commitment Letter but rather begins to accrue 90 days after the Commitment Letter date — that is, on November 3, 2022.
Payment Terms. The ticking fee is payable in addition to the commitment fee and accrues on a quarterly basis once triggered. Once the ticking fee commences, Meridian will be responsible for both the 50 basis point commitment fee and the 25 basis point ticking fee, for a combined cost of carry of 75 basis points per annum on the $60,000,000 undrawn commitment.
Practical Implication. The ticking fee is a mechanism commonly used by lenders to incentivize borrowers to close transactions within a reasonable timeframe. If the closing of the Acquisition does not occur by November 3, 2022, the aggregate cost of carry on the undrawn commitment increases from $300,000 per annum ($25,000 per month) to $450,000 per annum ($37,500 per month). Over the remaining three-month period from November 3, 2022 to the commitment expiration on February 5, 2023, the incremental ticking fee could add approximately $37,500 in additional cost.
Recommendation. We recommend that the deal team alert Meridian management — specifically Gareth Holloway (CEO), Priya Anand (CFO), and Diana Ressler (General Counsel) — as well as Lakepoint (Thomas Liang) to the November 3, 2022 ticking fee trigger date and its cost implications. This date should be marked on the deal calendar, and all workstreams should be managed with a view toward achieving closing prior to this date to the extent feasible. If closing cannot be achieved by November 3, 2022, the incremental cost should be factored into Meridian's projections and the overall transaction budget.
F. Expiration Date
Commitment Expiration. The Commitment Letter expires by its terms on February 5, 2023, which is six months from the date of execution (August 5, 2022). If the Acquisition has not closed and the Term Loan Facility has not been funded by February 5, 2023, Harborview's commitment to fund the facility terminates automatically, with no obligation on the part of Harborview to extend the commitment or to fund the facility thereafter.
Extension. The Commitment Letter does not contain a unilateral extension option in favor of Meridian. If the Acquisition has not closed by the expiration date, any extension of the commitment would require a new commitment letter or an amendment to the existing Commitment Letter, which would be subject to Harborview's willingness to extend and would likely involve a re-underwriting of the credit. Given prevailing market conditions and the potential for changes in Harborview's risk appetite or the credit markets generally, there is no assurance that an extension would be available on the same terms (or at all).
Risk Assessment. The six-month commitment window is tight given the current status of the transaction. As of the date of this memorandum, the APA remains in early-stage negotiation (the first draft was circulated on July 19, 2022, and the seller's markup has not yet been received). Due diligence is ongoing, with several critical workstreams — including the Phase I Environmental Site Assessment, financial diligence, and IP diligence — not yet completed. Additionally, the landlord consent from Buckeye Industrial Properties LLC has not yet been requested, and seven customer contract consents are outstanding. Any significant delays in these areas — whether arising from unresolved diligence findings, protracted APA negotiations, third-party consent delays, regulatory issues, or other unforeseen complications — could push the closing date past the February 5, 2023 expiration date. The timing analysis is discussed in greater detail in Section X of this memorandum.
IV. Conditions Precedent to Funding
The Commitment Letter sets forth a comprehensive set of conditions precedent that must be satisfied (or waived by Harborview) prior to the initial funding of the Term Loan Facility. These conditions are organized and discussed below by category.
A. Documentation Conditions
The following documentation conditions must be satisfied prior to funding:
1. Definitive Asset Purchase Agreement. Execution and delivery of a definitive Asset Purchase Agreement between Meridian and Briarwood, in form and substance satisfactory to Harborview. The inclusion of a "satisfactory to the lender" standard with respect to the APA gives Harborview the right to review and approve the terms of the acquisition agreement, which is standard for lender commitments of this type. We should ensure that the APA, as negotiated with Briarwood, does not contain provisions that would be objectionable to Harborview (e.g., unusually broad indemnification obligations of the buyer, material purchase price adjustments, or conditions to closing that create risk of non-consummation).
2. Definitive Credit Documentation. Execution and delivery of the definitive credit agreement, security agreement, pledge agreement, guaranty agreement, and all related loan documents, each in form and substance consistent with the Commitment Letter and the attached term sheet. The negotiation of the definitive credit agreement will be a significant workstream and should commence promptly following the completion of APA negotiations and the satisfaction of Harborview's key diligence requirements.
3. Legal Opinions. Delivery of legal opinions from Borrower's counsel (Calderwood & Harkness LLP) and, if required, local counsel in Ohio, covering customary matters including enforceability of the loan documents, due authorization and execution by the Borrower, no conflicts with organizational documents or applicable law, and the perfection and priority of security interests in the collateral. We should begin preparation of the legal opinion early in the process and coordinate with Ohio local counsel as necessary regarding opinions on perfection of security interests in real property and other Ohio-situs collateral.
4. UCC Financing Statements and Perfection Documents. Delivery of executed UCC-1 financing statements for filing in the appropriate jurisdictions, together with intellectual property security agreements, mortgage instruments (for the West Jefferson owned real property), and any other documents required to perfect Harborview's first priority lien on the collateral.
B. Due Diligence / Information Conditions
The following due diligence and informational conditions must be satisfied prior to funding:
1. Satisfactory Due Diligence. Completion of Harborview's satisfactory due diligence review of the Acquired Assets, encompassing financial, legal, environmental, and operational diligence. This is a broadly drafted condition that provides Harborview with subjective discretion to determine whether the results of its diligence review are satisfactory. As discussed further in Section XI below, this condition represents a meaningful conditionality risk, as Harborview retains the ability to decline funding based on diligence findings that it deems unsatisfactory, even if such findings might not rise to the level of a material adverse effect.
2. Audited Financial Statements. Receipt of audited financial statements for the CleanLeaf and PureHaven product lines for fiscal years 2019, 2020, and 2021. These audited financial statements have been prepared by Briarwood's auditor, Hargrove & Linton, P.C., under the supervision of engagement partner Daniel Yee. We understand that the audited financial statements for all three fiscal years have been delivered to Harborview and are being reviewed as part of the financial diligence process. We should confirm with Harborview that the delivered financial statements are satisfactory in form and substance.
3. Interim Financial Statements. Receipt of interim unaudited financial statements for the product lines through the most recent quarter-end prior to closing. Depending on the closing date, this may require financial statements through June 30, 2022 or September 30, 2022. We should coordinate with Briarwood and Hargrove & Linton to ensure timely delivery of interim financial statements.
4. No Material Adverse Change. The Commitment Letter requires that there shall have been no material adverse change in the business, assets, or financial condition of the CleanLeaf and PureHaven product lines since the reference date specified in the Commitment Letter. The definition of "material adverse change" or "material adverse effect" will be a critical negotiating point in the definitive credit agreement. We should seek to align the MAE definition in the credit agreement with the MAE definition in the APA and to include customary carve-outs (e.g., for general economic or industry conditions, changes in law or accounting standards, and conditions resulting from the announcement of the transaction).
Note regarding conditionality. The combination of the broadly drafted "satisfactory due diligence" condition and the MAE condition affords Harborview a significant degree of subjective discretion to decline funding. In "certain funds" or "SunGard-style" commitment letters, which are common in large-cap leveraged buyout financings, the lender's conditions to funding are limited to (a) the absence of a material adverse effect (narrowly defined), (b) accuracy of specified fundamental representations, (c) receipt of specified documentation, and (d) the consummation of the acquisition in accordance with the acquisition agreement without material adverse amendments or waivers. I recommend discussing with Sandra Tung whether it would be advisable to negotiate with Harborview for narrower conditionality language in the definitive credit agreement, particularly with respect to the due diligence satisfaction condition. At a minimum, we should seek to convert the open-ended "satisfactory due diligence" condition into a more objective standard (e.g., no materially adverse findings inconsistent with the information provided to Harborview in the confidential information memorandum).
C. Acquisition-Related Conditions
The following conditions relate to the consummation of the Acquisition itself:
1. Simultaneous Closing. The closing of the Acquisition shall occur simultaneously with the initial funding of the Term Loan Facility. This is a standard requirement ensuring that the loan proceeds are used for their intended purpose — funding the acquisition purchase price.
2. Acquisition on Agreed Terms. The Acquisition shall be consummated in accordance with the terms of the definitive APA, without any material amendment, modification, or waiver that is adverse to the interests of Harborview as lender. This condition is designed to protect Harborview from situations where the terms of the acquisition are changed after the commitment letter is executed in a manner that negatively affects the credit. We should monitor this condition carefully during APA negotiations and flag any proposed changes that could be deemed material or adverse to Harborview.
3. Governmental and Regulatory Approvals. Receipt of all material governmental and regulatory approvals required in connection with the Acquisition. We note that the Hart-Scott-Rodino ("HSR") pre-merger notification filing is not required for this transaction, as Briarwood does not meet the size-of-person test under the HSR Act. Accordingly, no antitrust regulatory approval is necessary. We should confirm whether any other governmental approvals (e.g., state or local permits, industry-specific licenses) are required in connection with the transfer of the Acquired Assets.
4. Third-Party Consents. Receipt of all material third-party consents required in connection with the Acquisition. Two categories of third-party consents are particularly significant:
(a) Landlord Consent — Marysville Facility. Consent from Buckeye Industrial Properties LLC, the landlord of the Marysville Facility, is required for the assignment of the lease in connection with the Acquisition. This consent has not yet been requested as of the date of this memorandum. We understand that the consent request will be submitted to Buckeye Industrial Properties LLC on or about October 7, 2022, which leaves a relatively narrow window for obtaining the consent prior to the targeted closing date. Delays in obtaining this consent could jeopardize the ability to satisfy this condition precedent and, consequently, the ability to close the transaction and fund the Term Loan Facility.
(b) Customer Contract Consents. Of the 23 customer contracts included in the Acquired Assets, 7 contain change-of-control or assignment consent provisions that require the consent of the counterparty prior to the assignment of the contract to Meridian. The identities of these counterparties and the status of the consent requests should be tracked and monitored as part of the closing checklist. Failure to obtain all 7 consents may or may not be fatal, depending on whether Harborview deems the consents that are obtained sufficient to satisfy the condition or whether the unconsented contracts are deemed material.
Risk Flag. The delay in submitting the landlord consent request to Buckeye Industrial Properties LLC is a significant concern. Landlord consents in commercial lease assignments can be time-consuming, particularly where the landlord requires financial information about the new tenant, negotiations over lease modifications, or payment of consent fees. We strongly recommend that the consent request be submitted at the earliest practicable date, and that the deal team coordinate with Meridian management to prepare the supporting documentation that Buckeye Industrial Properties LLC may require in connection with its evaluation of the consent request.
D. Equity Contribution Condition
The Commitment Letter requires that, as a condition to funding, the Borrower shall have received (or shall receive contemporaneously with the funding of the Term Loan Facility) the $35,000,000 equity contribution from Lakepoint Capital Partners, LP, pursuant to the equity commitment letter dated August 12, 2022.
This condition is a fundamental structural requirement ensuring that Harborview's $60,000,000 term loan is supported by the $35,000,000 equity cushion that was underwritten as part of the financing structure. The debt-to-equity ratio implied by the financing structure is approximately 1.71:1 ($60,000,000 debt / $35,000,000 equity), resulting in an equity contribution of approximately 36.8% of the total purchase price. The total leverage relative to FY2021 EBITDA of $11,200,000 is approximately 5.36x ($60,000,000 / $11,200,000), which is within the range typically acceptable for Harborview's middle-market acquisition lending program.
It is critical that the Lakepoint equity commitment letter be reviewed for consistency with the Harborview Commitment Letter and that any cross-conditionality issues be identified and resolved. This analysis will be the subject of a separate memorandum, as noted in Section I above.
E. Insurance Conditions
The Commitment Letter requires delivery of evidence of insurance coverage for the Acquired Assets, including property insurance, casualty insurance, and general liability insurance, naming Harborview as lender loss payee and/or additional insured, as applicable. This is a standard condition for secured lending transactions and should be coordinated with Meridian's insurance broker.
We note that the Commitment Letter does not expressly require the procurement of a representations and warranties ("R&W") insurance policy as a condition to funding. However, the R&W insurance process is currently underway. Northbridge Risk Advisors LLC (contact: Alison Chu) is acting as Meridian's R&W insurance broker, and Sentinel Specialty Insurance Company (underwriter: Mark Ellison) has been identified as the proposed carrier. If the R&W policy is bound, it will provide additional protection to Meridian (and, indirectly, to Harborview through enhanced recovery prospects in the event of a breach of Briarwood's representations and warranties), but it is not a lender condition precedent to funding.
F. No Default / No MAE
The Commitment Letter requires that, at the time of funding:
1. No default or event of default shall have occurred and be continuing under the credit agreement; and
2. No material adverse effect shall have occurred with respect to the Acquired Assets or the product lines since the reference date of June 30, 2022.
The "no default" condition is standard and should not present issues, as Meridian will be a newly formed borrower with no pre-existing debt obligations under the credit agreement at the time of initial funding. The "no MAE" condition is discussed further in Section XI.B.4 below.
G. Other Conditions
The Commitment Letter contains the following additional conditions precedent:
1. Fees and Expenses. Payment of all fees, costs, and expenses owing to Harborview and its counsel in connection with the Commitment Letter and the definitive credit documentation, including the commitment fee, ticking fee (if applicable), and the arrangement fee specified in the separate fee letter.
2. Officer's and Secretary's Certificates. Delivery of customary officer's certificates and secretary's certificates from the Borrower, certifying (among other things) the due organization and good standing of the Borrower, the authority of its officers to execute the loan documents, incumbency of signing officers, and the accuracy of organizational documents.
3. Good Standing Certificates. Delivery of certificates of good standing (or equivalent) for the Borrower from the Delaware Secretary of State and from the Secretary of State of any other jurisdiction in which the Borrower is qualified to do business.
4. Escrow Agreement. If the $9,500,000 escrow holdback from the closing purchase price is to be funded from the proceeds of the Term Loan Facility, delivery of an escrow agreement in form and substance satisfactory to Harborview. The escrow agent is Atlantic Fiduciary Trust Company (contact: Gregory Fenn). We should clarify with Harborview whether the escrow holdback amount is expected to be funded from the Term Loan proceeds or from the Lakepoint equity contribution, as this will affect the sources and uses analysis and the conditions to funding.
5. KYC/AML/BSA Compliance. Satisfactory completion of Harborview's "know your customer" (KYC), anti-money laundering (AML), and Bank Secrecy Act (BSA) compliance procedures with respect to the Borrower, its officers, its equity holders, and Lakepoint. These requirements should be addressed as early in the process as possible to avoid last-minute delays.
V. Flex Provisions
The Commitment Letter contains flex provisions that afford Harborview the right to modify certain economic and structural terms of the Term Loan Facility in connection with the syndication process. Flex provisions are standard in commitment letters for syndicated credit facilities, as they allow the lead arranger to adjust terms to market-clear the facility. However, they also create uncertainty for the borrower regarding the final terms of the financing. Each category of flex is discussed below.
A. Pricing Flex
The Commitment Letter permits Harborview to increase the interest rate spread on the Term Loan Facility by up to 50 basis points — from the initial SOFR plus 375 basis points to SOFR plus 425 basis points — if Harborview determines that such an increase is necessary to achieve successful syndication of the facility. In addition, Harborview may, as an alternative to or in combination with a spread increase, introduce an original issue discount ("OID") of up to 100 basis points (i.e., the facility would be funded at 99 cents on the dollar rather than par).
Impact Assessment. If Harborview exercises the full pricing flex:
• A 50 basis point increase in the interest rate spread would increase annual interest expense by approximately $300,000 on the full $60,000,000 facility (assuming the full principal amount is outstanding). Over the life of a five-to-seven-year facility (with amortization), the cumulative additional interest expense would be material.
• A 100 basis point OID would reduce net proceeds to Meridian by $600,000 at funding (i.e., Meridian would receive $59,400,000 in cash but would owe $60,000,000 in principal). This shortfall would need to be funded from other sources (e.g., additional equity from Lakepoint or a reduction in the cash available for the purchase price).
• If both flex components are exercised to their maximum extent, the combined impact would be a $300,000 per annum increase in interest cost plus a $600,000 reduction in net proceeds.
Recommendation. We recommend negotiating with Harborview, if possible, to impose a cap on the aggregate pricing flex (i.e., the total economic impact of spread increases and OID combined) and to require that Harborview use commercially reasonable efforts to syndicate the facility at the initial pricing before exercising any flex. In addition, we should seek a provision requiring Harborview to provide Meridian with prior notice and, if feasible, an opportunity to comment before flex is exercised.
B. Structural Flex
The Commitment Letter grants Harborview the right to modify certain structural terms of the Term Loan Facility as part of the syndication process. Specifically, Harborview retains the right to:
• Modify the amortization schedule, including by increasing required quarterly amortization payments by up to 25% above the levels contemplated in the initial term sheet;
• Adjust financial maintenance covenants, including by adding new financial covenants or tightening the levels of existing covenants; and
• Reallocate commitments between Harborview and Pinnacle Credit Partners, LP, or among other syndicate participants, as necessary to achieve optimal distribution of the facility.
Risk Assessment. The structural flex provisions create meaningful uncertainty regarding the final terms of the credit agreement. An increase of up to 25% in the required quarterly amortization could result in a significantly accelerated principal repayment schedule, which would reduce the amount of free cash flow available to Meridian for operations, capital expenditures, and distributions. Similarly, the addition or tightening of financial maintenance covenants could impose more restrictive ongoing compliance requirements on Meridian, potentially increasing the risk of a covenant default in a downside scenario.
Meridian should understand that the terms of the definitive credit agreement may differ from the indicative terms set forth in the Commitment Letter and the attached term sheet, and that the exercise of structural flex could materially affect the economics and operational flexibility of the borrower. We should discuss these risks with Priya Anand and Gareth Holloway to ensure that Meridian's financial projections are stress-tested under various flex scenarios.
C. Market Flex
The Commitment Letter contains broad market flex language permitting Harborview to modify the terms of the Term Loan Facility to reflect then-current market conditions at the time of syndication. This is the broadest category of flex and may encompass changes beyond those specifically enumerated in the pricing flex and structural flex provisions. The market flex includes the right to:
• Change the tenor (maturity) of the facility;
• Adjust mandatory prepayment provisions, including changes to the excess cash flow sweep percentage, asset sale prepayment requirements, or other mandatory prepayment triggers; and
• Alter the security package, including by requiring additional collateral or modifying the priority of liens.
The market flex provision is a standard "catch-all" designed to allow Harborview to respond to broader shifts in credit market conditions that may affect the ability to syndicate the facility. While we would not expect Harborview to exercise market flex absent a meaningful deterioration in market conditions, the provision does afford the arranger significant latitude.
VI. Syndication Mechanics
The Commitment Letter establishes the framework for the syndication of the Term Loan Facility. Syndication is the process by which Harborview, as Lead Arranger, will distribute portions of the $60,000,000 facility to other institutional lenders and credit funds, thereby reducing its own hold position and diversifying the credit risk.
Initial Syndicate. As noted in Section III.A, the Commitment Letter identifies Pinnacle Credit Partners, LP (contact: Rajan Mehta, 600 Lexington Avenue, Suite 2100, New York, NY 10022) as the initial syndicate participant. The expected hold amounts — that is, the portion of the $60,000,000 facility that Harborview will retain on its own books and the portion that will be allocated to Pinnacle — will be specified in the definitive credit agreement and related assignment and acceptance documentation. It is possible that additional syndicate participants beyond Pinnacle may be added during the syndication process, depending on market demand and Harborview's distribution strategy.
Syndication Timeline. Harborview intends to commence the syndication process following the execution of the definitive credit agreement. The timing of syndication is important because the flex provisions discussed in Section V become operative during the syndication period — any pricing, structural, or market flex exercised by Harborview will reflect the conditions encountered during the syndication process.
Borrower Cooperation Obligations. The Commitment Letter imposes affirmative cooperation obligations on Meridian in connection with the syndication process. Specifically, Meridian is required to:
(a) Provide financial and other information reasonably requested by Harborview in connection with the preparation of a confidential information memorandum (the "CIM") for distribution to prospective syndicate participants;
(b) Make members of management (including Gareth Holloway, Priya Anand, and Diana Ressler) available for lender meetings, presentations, and due diligence sessions;
(c) Provide access to Meridian's advisors, including Wavecrest Partners LLC (Steven Marchetti, Lena Kowalski) and Whitfield Ames LLP, for purposes of responding to lender inquiries; and
(d) Otherwise cooperate with Harborview's efforts to achieve successful syndication of the facility.
These cooperation obligations are standard and should not be unduly burdensome, but Meridian management should be advised of the time commitment that may be required during the syndication period, particularly with respect to management presentations to prospective lenders.
Clear Market Provision. The Commitment Letter includes a "clear market" provision, pursuant to which Meridian agrees not to issue, syndicate, or incur any competing debt financing during the syndication period without Harborview's prior written consent. This provision is designed to prevent Meridian from introducing competing paper into the market during the period in which Harborview is seeking to place the Term Loan Facility with syndicate participants, as competing issuances could adversely affect investor demand and pricing for the Term Loan Facility. The clear market provision is standard in syndicated lending commitment letters.
Syndication Risk Assessment. Given the $60,000,000 facility size and the middle-market nature of the transaction, we assess syndication risk as moderate. The consumer packaged goods sector and the specific sub-segments in which CleanLeaf and PureHaven operate have historically attracted interest from both bank lenders and non-bank credit funds. However, market conditions at the time of syndication will be a key determinant of Harborview's ability to place the facility at the initial pricing. If credit market conditions deteriorate between now and the syndication date, Harborview may need to exercise its pricing flex to achieve successful distribution, which could increase costs to Meridian as described in Section V.A above.
VII. Key Representations and Covenants in the Term Sheet
The term sheet attached to the Commitment Letter outlines the categories of representations, warranties, and covenants that will be included in the definitive credit agreement. While the specific language of these provisions will be negotiated during the credit agreement documentation process, the term sheet provides a general framework for the key terms. This section summarizes the principal categories.
A. Representations
The credit agreement will contain customary representations and warranties by the Borrower, including:
• Organization, good standing, and authority to execute and perform under the loan documents;
• Enforceability of the loan documents;
• No conflicts with organizational documents, applicable law, or material agreements;
• Compliance with all applicable laws and regulations;
• Accuracy and completeness of financial statements delivered to the lender;
• No undisclosed liabilities;
• Good and marketable title to the Acquired Assets, free and clear of liens other than permitted liens;
• No material adverse effect since the reference date;
• Accuracy of information provided in connection with KYC/AML/BSA compliance; and
• Such other representations as are customary for credit agreements of this type.
We note that there is an important interplay between the representations in the credit agreement and the representations made by Briarwood in the APA. The credit agreement representations should not be drafted more expansively than what Meridian can reasonably support based on the information obtained through the due diligence process of the Briarwood product lines. For example, if Briarwood's financial statements contain noted qualifications or if the due diligence reveals areas of uncertainty (such as the $2,500,000 inventory valuation variance), the credit agreement representations should be appropriately qualified to avoid inadvertent breaches. We will work closely with the Harborview documentation team to ensure appropriate alignment.
B. Affirmative Covenants
The term sheet contemplates the following affirmative covenants:
• Delivery of quarterly unaudited and annual audited financial statements within specified timeframes following the end of each fiscal quarter and fiscal year, respectively;
• Maintenance of insurance in amounts and with coverage satisfactory to the lender;
• Compliance with all applicable laws, rules, and regulations;
• Preservation and maintenance of the Acquired Assets and ongoing business operations;
• Provision of access to books, records, and properties for inspection by the lender and its advisors upon reasonable notice; and
• Delivery of compliance certificates and other periodic reporting as required by the credit agreement.
These are standard affirmative covenants for middle-market credit agreements and should not be the subject of significant negotiation. We will review the specific formulations in the credit agreement draft for reasonableness and market consistency.
C. Negative Covenants
The term sheet contemplates the following negative covenants, which will restrict certain actions by the Borrower without the prior consent of Harborview (or the requisite lenders under the credit agreement):
• Indebtedness. Limitations on the incurrence of additional indebtedness, subject to customary carve-outs and baskets;
• Liens. Limitations on the creation or incurrence of liens on assets of the Borrower, subject to customary permitted liens;
• Investments. Limitations on investments, loans, and advances by the Borrower;
• Dividends and Distributions. Restrictions on the payment of dividends, distributions, or other payments to equity holders (including distributions to Lakepoint), subject to agreed-upon exceptions;
• Asset Sales. Limitations on dispositions of assets outside the ordinary course of business;
• Affiliate Transactions. Restrictions on transactions with affiliates other than on arm's-length terms;
• Nature of Business. Restrictions on material changes to the nature or scope of the Borrower's business; and
• Anti-Layering. Provisions prohibiting the Borrower from incurring subordinated or mezzanine indebtedness that would be structurally senior to or pari passu with the Term Loan Facility without the consent of the lenders.
The negative covenant package is the area of the credit agreement that will most directly affect Meridian's operational and financial flexibility during the term of the facility. We will need to negotiate appropriate carve-outs, baskets, and thresholds for each of these covenants to ensure that Meridian has sufficient flexibility to operate the business, make necessary capital expenditures, and pursue strategic opportunities. In particular, the dividend and distribution covenant will be important to Lakepoint, as it will determine the ability of Meridian to make distributions to its equity holders.
D. Financial Covenants
The term sheet contemplates that the credit agreement will include at least one financial maintenance covenant. Based on market practice for middle-market acquisition term loans of this nature, we anticipate that the financial covenant package will include one or more of the following:
• Total Leverage Ratio. A maximum total leverage ratio (i.e., total funded debt / trailing twelve-month EBITDA), tested quarterly;
• Fixed Charge Coverage Ratio. A minimum fixed charge coverage ratio (i.e., EBITDA less capital expenditures and taxes / scheduled debt service), tested quarterly;
• Minimum EBITDA. A minimum EBITDA threshold, tested quarterly.
The specific covenant levels have not yet been finalized and will be the subject of negotiation during the credit agreement documentation process. These levels are also subject to Harborview's structural flex (see Section V.B above), which permits Harborview to tighten the financial covenants if necessary to achieve successful syndication.
Recommendation. We recommend that Meridian and Wavecrest Partners carefully model the projected financial performance of the Acquired Assets under the financial covenant structure to ensure that adequate cushion exists relative to the covenant levels. Based on FY2021 EBITDA of $11,200,000, the initial total leverage ratio would be approximately 5.36x ($60,000,000 / $11,200,000), declining over time as the term loan amortizes and (assuming continued growth) EBITDA increases. Any adjustments to the EBITDA calculation — including the potential impact of the $2,500,000 inventory valuation variance identified in the financial diligence — could affect the cushion relative to the covenant levels. We should coordinate with Whitfield Ames to understand the potential EBITDA impact and with Wavecrest Partners to run sensitivity analyses.
VIII. Events of Default
The term sheet sets forth the standard categories of events of default that will be included in the definitive credit agreement. These include:
1. Payment Defaults. Failure to make required payments of principal, interest, fees, or other amounts when due, subject to customary grace periods for non-principal payments;
2. Breach of Representations. Any representation or warranty made by the Borrower proving to be materially inaccurate as of the date made or deemed made;
3. Covenant Defaults. Failure to comply with any affirmative, negative, or financial covenant contained in the credit agreement, subject to applicable cure periods for specified covenants;
4. Cross-Default. Default under any other indebtedness of the Borrower or any guarantor in excess of a specified threshold amount;