Attachments: 1. Ridgeline Mezzanine Term Sheet — C&H Markup (Redline) — 07.14.2023.docx 2. Ridgeline Mezzanine Term Sheet — C&H Commentary Memo — 07.14.2023.docx
Robert and Janet,
I hope this message finds you well. Copying Stephanie, Philip, and Lisa on our side.
We have completed our initial review of the term sheet received from Ridgeline Mezzanine Capital Fund III, LP on July 10, 2023 in connection with the proposed $120,000,000 mezzanine financing. Attached please find: (1) a marked-up redline of the term sheet reflecting our proposed revisions, and (2) a separate commentary memo highlighting the key commercial and legal points we believe warrant discussion before we respond to Ridgeline and its counsel.
Stephanie and I would like to schedule a call early next week — ideally Monday or Tuesday (July 17 or 18) — to walk through our comments in detail and receive Stonefield's instructions before we engage with Ridgeline and Archer Blackwell & Moss LLP (Harrison Moss and Angela Whitford). We have also been coordinating with Andrew Thornton at Zynvaro Thornton Advisory Group on the commercial points and expect to have his input available for that call.
For ease of reference, I have set forth below a summary of the headline terms as proposed by Ridgeline, followed by our substantive commentary and the areas where we need your direction.
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**I. SUMMARY OF KEY TERMS AS PROPOSED BY RIDGELINE**
- **Borrower:** Stonefield Logistics Group Inc. - **Mezzanine Lender:** Ridgeline Mezzanine Capital Fund III, LP (sole lender; no syndication) - **Commitment Amount:** $120,000,000 - **Interest Rate:** 1,100 basis points (11.00%) per annum — 850 bps cash pay (quarterly in arrears) / 250 bps PIK (payment-in-kind, compounding quarterly) - **Default Rate:** Additional 200 bps (total 1,300 bps / 13.00%) - **Day Count:** Actual/360 - **Interest Payment Dates:** Last business day of each calendar quarter - **Maturity:** 6 years from closing (anticipated closing late September 2023; maturity September 29, 2029) - **Purpose:** Capital expenditure program — fleet expansion, terminal facility buildout, and technology upgrades - **Warrant Coverage:** 3.0% of fully-diluted equity on a post-exercise basis; $0.01 nominal exercise price; detachable and immediately exercisable; weighted-average broad-based anti-dilution protection; put right on change of control, IPO, or 7th anniversary of issuance at fair market value per independent appraiser - **Commitment Fee:** 2.00% of committed amount ($2,400,000), payable at closing - **Governing Law:** New York - **Collateral:** Second-priority lien on substantially all assets (shared collateral with senior facility), plus first-priority pledge of 100% equity interests in Stonefield by Cascade Ridge SLG Holdings, LLC (parent pledge not shared with senior lenders) - **Guarantors:** Cascade Ridge SLG Holdings, LLC; Stonefield Intermodal Services, Inc.; Stonefield Fleet Management, LLC; and Stonefield Freight Brokerage, Inc.
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**II. KEY COMMENTARY AND NEGOTIATION POINTS**
**A. Interest Rate Structure (850 Cash / 250 PIK)**
The blended 1,100 bps rate is within the range we discussed with Mercer Thornton for mezzanine financings in the current market for sponsor-backed credits with this leverage profile, and we do not view it as an outlier.
That said, we want to flag several points for your consideration:
- The PIK component (250 bps, compounding quarterly) will accrete to principal over the 6-year term, increasing the outstanding balance and, accordingly, the absolute amount of cash interest over time. We recommend that Stonefield model this out carefully to understand the total cost of capital through maturity, inclusive of the compounding effect. - The Actual/360 day count convention is standard for facilities of this type but results in a slightly higher effective interest cost than a 365-day convention (approximately 1.4% more interest over a full year). - We recommend confirming with Janet whether the cash flow projections supporting the CapEx program can absorb the quarterly cash interest burden. At 850 bps cash on $120 million of principal, annualized cash interest is approximately $10.2 million ($2.55 million per quarter), exclusive of the PIK accrual.
**Client instruction needed:** Whether to push back on the PIK margin (e.g., propose 200 bps PIK instead of 250 bps, reducing the blended rate to 1,050 bps) or accept the 250 bps PIK as proposed.
**B. Default Rate**
The additional 200 bps (total 1,300 bps / 13.00%) upon an event of default is standard for mezzanine financings. We recommend ensuring in the definitive documentation that the default rate applies only during the continuance of an event of default and not merely upon the occurrence of a default that has not yet matured into an event of default following any applicable notice and cure periods.
**C. Warrant Coverage**
This is a critical commercial point that will require input from Cascade Ridge Capital Partners (Vincent Palumbo):
- **Dilution.** 3.0% of fully-diluted equity at a $0.01 nominal exercise price represents significant equity dilution. In our experience, warrant coverage in mezzanine transactions of this size typically ranges from 1.5% to 4.0%, so 3.0% is within market but at the midpoint-to-higher end of the range. - **Anti-dilution.** The weighted-average broad-based anti-dilution formulation is the more borrower/sponsor-friendly of the two standard approaches (the alternative being full-ratchet). This is a favorable point. - **Put right.** The put right is exercisable upon a change of control, IPO, or the 7th anniversary of issuance (i.e., September 29, 2030) at fair market value as determined by a mutually selected independent appraiser. Notably, the 7th anniversary trigger falls one year beyond the loan maturity date, which effectively extends Ridgeline's economic interest in Stonefield's equity past the debt tenor. We recommend discussing with Cascade Ridge whether to (a) propose a cap on the put price, (b) align the put right expiration with the loan maturity date rather than the 7th anniversary, and/or (c) negotiate the appraiser selection mechanism — for example, each side selects one appraiser and the two selected appraisers choose a third. - **Tax implications.** The detachable warrants will require analysis regarding OID allocation and the treatment of the $0.01 exercise price. We are flagging this for Sylvia Hartwell in our Tax Group and for Patricia Baines at Caldwell Baines & Associates so we can begin the tax structuring analysis promptly.
**Client instruction needed:** Acceptability of 3.0% dilution to Cascade Ridge; whether to counter with a lower percentage (e.g., 2.0–2.5%); approach to put right mechanics and timing.
**D. Financial Covenants**
*1. Maximum Total Leverage Ratio*
The term sheet proposes a maximum total leverage ratio of 4.25x, stepping down to 4.00x after Q3 2024 and 3.75x after Q3 2025, tested quarterly. At closing, total leverage is expected at approximately 3.75x ($407 million total funded debt ÷ $108.6 million LTM Adjusted EBITDA), providing approximately 50 basis points of initial cushion against the 4.25x opening covenant level.
We note that the step-downs are aggressive. The 3.75x level effective Q3 2025 leaves essentially no cushion against current leverage and will require meaningful EBITDA growth to maintain compliance. We recommend proposing delayed step-downs — for example, 4.00x after Q1 2025 and 3.75x after Q1 2026 — to provide additional runway, particularly given the capital expenditure ramp contemplated by the business plan.
*2. Minimum Fixed Charge Coverage Ratio*
The proposed minimum FCCR of 1.10x (tested quarterly) is reasonable. However, we need to confirm the FCCR definition — specifically the numerator and denominator components — and ensure it aligns with the corresponding definition in the Senior Credit Agreement to avoid inadvertent cross-default risk arising from definitional discrepancies between the two facilities.
*3. Minimum Liquidity*
The $15,000,000 minimum liquidity covenant (unrestricted cash plus undrawn revolver availability) appears manageable at closing. With $12 million expected to be drawn on the $50 million senior revolver, undrawn availability of approximately $38 million plus operating cash should provide comfortable headroom. That said, we recommend stress-testing this against downside scenarios to ensure compliance through the term.
*4. Maximum Capital Expenditures*
The $85,000,000 per fiscal year ceiling with a 25% carryforward of unused amounts needs to be reviewed against the fleet expansion and terminal facility buildout plan. Given that the stated purpose of the financing is to fund CapEx, the ceiling must accommodate the planned spending trajectory. We recommend reviewing this against the business plan projections that Andrew Thornton has been working with.
**Client instruction needed:** Whether to push on step-down timing for the leverage covenant; CapEx ceiling adequacy relative to the business plan; FCCR definition.
**E. Mandatory Prepayment — Change of Control**
A change of control triggers mandatory prepayment at 103% of outstanding principal plus all accrued interest (including accrued PIK) and also triggers the warrant put right.
"Change of control" is defined to include: (a) any person or group (other than Cascade Ridge and its affiliates) acquiring more than 50% of voting equity of Stonefield; (b) Stonefield ceasing to be a direct wholly-owned subsidiary of Cascade Ridge SLG Holdings, LLC; and (c) a sale of all or substantially all assets.
We have two concerns:
- **Trigger (b)** is potentially problematic. As drafted, any internal reorganization or restructuring of the holding company chain — even one that does not result in a change of ultimate control — could inadvertently trip this provision. We recommend negotiating carve-outs for internal reorganizations and restructurings that do not result in a change of ultimate beneficial ownership or control. - **Cross-reference to Senior Credit Agreement.** The change of control definition should be cross-referenced against the corresponding definition in the Senior Credit Agreement (as it will be amended by Amendment No. 3) to ensure there is no inconsistency or gap that could be exploited or create unintended triggers.
The 103% prepayment premium is within the market range for mezzanine facilities (typically 101–105%).
**Client instruction needed:** Whether to accept the 103% premium or counter; scope of carve-outs for trigger (b).
**F. Intercreditor Framework**
The term sheet contemplates a Senior/Mezzanine Intercreditor Agreement among Whitmore National Bank, N.A. (as Senior Agent), Ridgeline, and acknowledged by Stonefield. The key provisions are as follows:
- **Standstill period.** 180 days following delivery of a Payment blockage Notice by the Senior Agent before the mezzanine lender may exercise remedies against shared collateral. This is at the longer end of the market range (typically 90–180 days). From the borrower's perspective, a longer standstill can be beneficial as it delays competing enforcement actions, but it also extends the period during which mezzanine cash interest payments may be blocked. - **Payment blockage.** The Senior Agent may block mezzanine cash interest payments for up to 180 consecutive days upon a Senior Event of Default, limited to one blockage per 360-day period. - **Purchase option.** Ridgeline has the right to purchase all senior debt at par plus accrued interest upon acceleration of the senior facility. This is a favorable provision, as it gives the mezzanine lender an alternative to competing enforcement and can protect the borrower from a disorderly senior foreclosure. - **Lien subordination.** Mezzanine liens are junior and subordinate to all senior liens. The Senior Agent has sole control of shared collateral during the standstill period. We will need to carefully negotiate the scope of "sole control" and any protective rights available to Ridgeline during the standstill (e.g., the right to receive notice of, and object to, certain dispositions of shared collateral at below-market prices). - **Enforcement standstill.** 180 days after notice to Senior Agent before the mezzanine lender may enforce against shared collateral.
We note that consents from Whitmore (as Senior Agent) and the senior syndicate lenders — Greystone Commercial Lending Corp., Heritage Pacific Bank, and Clearfield Capital Finance, LLC — will be required. The term sheet references a $137,500 Senior Agent amendment/consent fee (0.05% × $275 million). We recommend commencing informal outreach to Gregory Feinberg at Whitmore soon to preview the request and gauge receptivity. Renshaw Pratt LLP (David Renshaw) will be on the other side as Senior Agent's counsel.
**Client instruction needed:** Position on standstill duration (whether to counter at 120 or 150 days); approach to sole control provisions; timing for senior consent solicitation.
**G. Fees and Transaction Costs**
For your reference, the estimated total transaction costs are as follows:
| Fee / Cost
All fees are to be netted from the mezzanine proceeds at closing. We recommend confirming that the Vireo Group expense reimbursement cap is firm and not subject to increase without borrower consent.
**Client instruction needed:** Confirm acceptability of the Vireo Group expense cap; any concerns regarding total transaction cost.
**H. Collateral Structure**
The collateral package consists of two tiers:
- **Second-priority lien** on substantially all assets, shared with the senior facility collateral package (equipment, vehicles, rolling stock, accounts receivable, inventory, intellectual property, and subsidiary equity interests). - **First-priority pledge** by Cascade Ridge SLG Holdings, LLC of 100% of equity interests in Stonefield Logistics Group Inc. This parent equity pledge is not shared with the senior facility and will rank first in priority in favor of Ridgeline.
From a perfection standpoint, we will need UCC filings in Delaware (for DE-organized entities) and Texas (for TX-organized subsidiaries). We will conduct pre-closing lien searches to confirm the existing senior UCC-1 filings by Whitmore as Collateral Agent and to ensure there are no competing or unexpected liens.
The parent equity pledge will require coordination with Cascade Ridge. We recommend discussing the mechanics and any organizational considerations with Vincent Palumbo at an early stage.
**I. Guarantor Package**
The proposed guarantors are:
1. Cascade Ridge SLG Holdings, LLC (intermediate holding company / parent) 2. Stonefield Intermodal Services, Inc. (Texas corporation) 3. Stonefield Fleet Management, LLC (Texas LLC) 4. Stonefield Freight Brokerage, Inc. (Delaware corporation)
This is the same guarantor group as under the senior facility, with the exception that the parent pledge is mezzanine-only. At closing, we will need organizational documents (certificates of formation/incorporation, operating agreements/bylaws), board/member resolutions authorizing the guaranty and related security documents, and secretary's/officer's certificates for each guarantor entity.
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**III. RECOMMENDED NEXT STEPS**
1. **Call with Stonefield and Cascade Ridge.** Schedule a call with Robert, Janet, and the Cascade Ridge team (Vincent Palumbo) for early next week — target Monday or Tuesday, July 17–18 — to discuss the markup and receive instructions on negotiation positions.
2. **Tax structuring analysis.** Coordinate with Sylvia Hartwell (C&H Tax) and Patricia Baines at Caldwell Baines & Associates on the warrant OID allocation and PIK interest deductibility analysis. We aim to have a preliminary tax view available before the term sheet is finalized.
3. **Commercial feedback.** Coordinate with Andrew Thornton at Mercer Thornton on commercial feedback and market-check data points regarding pricing and warrant coverage levels for comparable transactions.
4. **Respond to Ridgeline.** Once we receive your instructions, we will respond to Ridgeline and Archer Blackwell & Moss with Stonefield's counter-positions. The term sheet references a target execution date around July 17; we believe a realistic target for execution is the end of the following week, assuming we can align on positions early in the week.
5. **Senior consent outreach.** Begin informal outreach to Gregory Feinberg at Whitmore National Bank regarding the senior consent process and timeline.
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Please let us know your availability for a call early next week. Stephanie and I are available at your and Janet's convenience over the weekend or on Monday should you wish to discuss any of these points in advance of a broader group call.
I can be reached on my direct line at (212) 409-6238.
Best regards,
Daniel Obi Associate Calderwood & Harkness LLP 601 Lexington Avenue New York, NY 10022 T: (212) 409-6238 E: dobi@calderwoodharkness.com
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