CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Attorneys at Law
601 Lexington Avenue New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
August 21, 2023
Angela N. Whitford, Esq. Archer Blackwell & Moss LLP 1585 Broadway, 34th Floor New York, New York 10036
Re: Stonefield Logistics Group Inc. — $120,000,000 Mezzanine Credit Facility Draft Mezzanine Credit Agreement circulated August 4, 2023 Calderwood & Harkness Matter No. 1012-00001
Dear Ms. Whitford:
We write on behalf of our client, Stonefield Logistics Group Inc. ("Stonefield" or the "Borrower"), a Delaware corporation headquartered at 4800 Commerce Parkway, Suite 1200, Fort Worth, Texas 76107, to transmit the Borrower's comments to the initial draft of the Mezzanine Credit Agreement (the "Draft Agreement") circulated by your firm on behalf of Ridgeline Mezzanine Capital Fund III, LP (the "Mezzanine Lender") on August 4, 2023. The Draft Agreement contemplates a $120,000,000 mezzanine credit facility (the "Mezzanine Facility") to be provided by the Mezzanine Lender to the Borrower.
Enclosed herewith as Attachment A is an annotated redline of the Draft Agreement reflecting the Borrower's proposed revisions and insertions. This cover letter provides a summary of the Borrower's principal comments and the rationale supporting each, organized by subject matter for ease of reference. We anticipate that reviewing this letter in conjunction with the redline will provide the most efficient framework for advancing our discussions.
These comments have been reviewed and approved by Stonefield's General Counsel, Robert D. Nagamine, and its Chief Financial Officer, Janet R. Prescott. In addition, we have coordinated these comments with the legal advisors to Cascade Ridge Capital Partners, LLC (the "Sponsor"), which, through its fund Cascade Ridge Capital Fund V, LP, holds approximately 78.4% of the equity interests in Stonefield through the intermediate holding company Cascade Ridge SLG Holdings, LLC. The Sponsor's views are reflected throughout, and where specific Sponsor-related provisions are implicated we have noted the basis for the Borrower's position.
We note at the outset that the Borrower reserves all rights to raise additional comments on subsequent drafts of the Mezzanine Credit Agreement, the Guaranty Agreement, the Pledge and Security Agreement, the Parent Equity Pledge Agreement, the Warrant Agreement, and any other ancillary documentation. The comments set forth herein are not intended to be exhaustive, and the absence of a comment on any particular provision of the Draft Agreement should not be construed as acceptance thereof.
Our principal comments are organized as follows:
I. DEFINITIONS AND INTERPRETIVE PROVISIONS
A. "Adjusted EBITDA" Definition
The definition of "Adjusted EBITDA" set forth in Section 1.01 of the Draft Agreement departs in several material respects from the definition employed in the Amended and Restated Credit Agreement dated as of April 7, 2022 (the "Senior Credit Agreement") among Stonefield, Whitmore National Bank, N.A. as Administrative Agent, and the senior lenders party thereto. It is critical that the Adjusted EBITDA definition in the Mezzanine Credit Agreement conform to the corresponding definition in the Senior Credit Agreement in order to avoid measurement discrepancies between the two facilities. A divergence in definitions would create the risk that the Borrower could be in compliance with one facility's financial covenants but in default under the other — a result that would be unworkable and was not contemplated by any party during the term sheet negotiations.
Specifically, we request that the definition of Adjusted EBITDA include the following customary add-backs, each of which is recognized under the Senior Credit Agreement:
(i) non-recurring restructuring and reorganization charges;
(ii) transaction expenses and costs incurred in connection with the Mezzanine Facility, the Senior Credit Agreement, and any permitted acquisitions;
(iii) management fees paid to the Sponsor (Cascade Ridge Capital Partners, LLC) to the extent such fees are a permitted restricted payment under the Mezzanine Credit Agreement;
(iv) non-cash stock-based compensation expenses;
(v) run-rate cost savings and synergies projected by the Borrower in good faith to be realized within eighteen (18) months of the relevant action giving rise thereto, capped at a reasonable percentage of Adjusted EBITDA to be agreed upon (the Senior Credit Agreement cap is 25% of pro forma Adjusted EBITDA for the applicable period); and
(vi) other non-cash charges, losses, and expenses (other than non-cash charges representing an accrual of or reserve for future cash expenditures).
For reference, LTM Adjusted EBITDA as of June 30, 2023 is $108,600,000, calculated in accordance with the Senior Credit Agreement definition. This figure serves as the baseline for the Borrower's financial covenant compliance at closing and for the Total Leverage Ratio calculation described in Section III below. Fiscal year 2022 Adjusted EBITDA was $98,400,000 on consolidated revenue of $687,000,000, reflecting the positive trajectory of the business. The definition in the Mezzanine Credit Agreement must support this calculation methodology and produce consistent results when applied to the same underlying financial data.
We have provided specific mark-ups to the definition in the redline at Attachment A and would welcome a discussion to ensure alignment on each add-back component.
B. "Change of Control" Definition
The definition of "Change of Control" set forth in Section 1.01 of the Draft Agreement requires revision to ensure that it is appropriately tailored to the Borrower's existing ownership structure and the legitimate needs of the Sponsor. We accept in principle the three triggers set forth in the draft, namely:
(a) the acquisition by any person or group (other than Cascade Ridge and its affiliates) of more than 50% of the voting equity interests of the Borrower;
(b) Stonefield ceasing to be a direct wholly-owned subsidiary of Cascade Ridge SLG Holdings, LLC; and
(c) the consummation of a sale, transfer, or other disposition of all or substantially all of the assets of Stonefield and its subsidiaries, taken as a whole.
However, we request the following modifications and clarifications:
First, the term "affiliates" of Cascade Ridge, as used in trigger (a), should be defined to include all funds managed by Cascade Ridge Capital Partners, LLC (including, without limitation, successor funds) and their respective co-investment vehicles, parallel funds, and alternative investment vehicles, and should not be limited solely to Cascade Ridge Capital Fund V, LP. The Sponsor routinely employs co-investment vehicles and may from time to time reorganize fund holdings among affiliated entities. Such transfers are ordinary course for a private equity sponsor and should not constitute a change of control event.
Second, and relatedly, transfers of direct or indirect equity interests in the Borrower among Cascade Ridge-affiliated funds and permitted co-investors should be expressly carved out from each of the change of control triggers. This includes transfers to successor funds, co-investment vehicles, limited partners of Cascade Ridge Capital Fund V, LP that co-invest alongside the fund, and any managed account or separate account managed by Cascade Ridge Capital Partners, LLC.
Third, the definition of "Change of Control" should be conformed in all material respects to the definition of "Change of Control" in the Senior Credit Agreement. A misalignment in change of control triggers across the senior and mezzanine facilities would create the risk that a permitted transaction under one facility triggers a default under the other, resulting in unnecessary cross-default exposure and administrative complexity. We note that the Intercreditor Agreement, currently under negotiation, is premised on a consistent treatment of change of control events across both facilities.
C. "Permitted Indebtedness" and "Permitted Liens"
The baskets for Permitted Indebtedness in Section 1.01 of the Draft Agreement are unduly narrow and do not reflect the operational realities of a transportation and logistics business of the Borrower's scale. We request that the definition of "Permitted Indebtedness" be expanded to include, at a minimum, the following:
(i) capital lease obligations in an aggregate outstanding principal amount not to exceed $25,000,000 at any time — the Borrower routinely enters into capital leases for tractors, trailers, and other rolling stock, and this basket is essential for ongoing fleet management;
(ii) purchase money indebtedness in an aggregate outstanding principal amount not to exceed $15,000,000 at any time — this is particularly critical given that the fleet expansion program is a principal stated purpose of the Mezzanine Facility, and the Borrower must retain operational flexibility to finance equipment purchases on customary terms;
(iii) intercompany indebtedness among Stonefield and the subsidiary guarantors (Stonefield Intermodal Services, Inc., Stonefield Fleet Management, LLC, and Stonefield Freight Brokerage, Inc.), in each case subordinated to the obligations under the Mezzanine Credit Agreement to the extent owed by a non-guarantor to a guarantor or the Borrower;
(iv) a general basket for unsecured indebtedness in an aggregate outstanding principal amount not to exceed $10,000,000 at any time, providing necessary operational headroom for miscellaneous financing needs; and
(v) refinancing indebtedness in respect of any of the foregoing, subject to customary limitations (no increase in principal amount beyond accrued interest, premiums, and fees; no shorter maturity; no additional guarantors or collateral).
With respect to Permitted Liens, the Draft Agreement's carve-outs are similarly restrictive and fail to account for liens that arise in the ordinary course of a transportation and logistics business. We request that the definition of "Permitted Liens" include, at a minimum, the following customary carve-outs:
(i) carriers', warehousemen's, mechanics', materialmen's, and repairmen's liens arising in the ordinary course of business — these liens are inherent in the operation of a company that manages a fleet of vehicles, operates terminal and warehouse facilities, and maintains ongoing relationships with carriers and vendors;
(ii) tax liens not yet delinquent or being contested in good faith by appropriate proceedings, provided adequate reserves have been established in accordance with GAAP;
(iii) judgment liens in respect of judgments that do not constitute an Event of Default (i.e., below the agreed judgment default threshold);
(iv) easements, rights-of-way, restrictions, and similar encumbrances on real property that do not materially interfere with the use thereof; and
(v) liens securing Permitted Indebtedness described in clauses (i) and (ii) above (i.e., liens securing capital lease obligations and purchase money indebtedness), limited to the assets financed thereby.
D. "Material Adverse Effect" Definition
The definition of "Material Adverse Effect" in the Draft Agreement lacks customary carve-outs that are standard in credit facilities of this nature. We request that the definition be revised to exclude from the determination of whether a "Material Adverse Effect" has occurred any changes, events, conditions, or developments arising from or related to:
(i) changes in general economic or political conditions or in the financial, credit, or securities markets generally (including changes in interest rates, exchange rates, or commodity prices);
(ii) changes, events, or developments affecting the transportation, logistics, freight brokerage, or intermodal services industries generally and not specifically disproportionately affecting the Borrower and its subsidiaries;
(iii) changes in applicable law, regulation, or GAAP (or the interpretation thereof) occurring after the closing date;
(iv) the effects of the transactions contemplated by the Mezzanine Credit Agreement and the other transaction documents, including the announcement or pendency thereof; and
(v) natural disasters, epidemics, pandemics, hostilities, acts of war, sabotage, terrorism, or military actions, or any escalation or worsening thereof.
These carve-outs are standard market provisions and are included in the Senior Credit Agreement. Their inclusion in the Mezzanine Credit Agreement is necessary to ensure that the Borrower is not subjected to an unreasonably expansive interpretation of "Material Adverse Effect" that could be triggered by events entirely beyond its control.
E. Other Definitional Comments
We have several additional comments on defined terms in Section 1.01 of the Draft Agreement, which are reflected in detail in the enclosed redline:
"Subsidiary." The definition of "Subsidiary" should be conformed to the Senior Credit Agreement definition, which captures only those entities in which the Borrower directly or indirectly owns a majority of the outstanding voting interests or has the power to direct or cause the direction of the management and policies thereof. The Draft Agreement's definition is broader and could inadvertently capture minority-owned joint ventures or non-controlled entities.
"Net Proceeds." The definition of "Net Proceeds" as used in the asset sale mandatory prepayment provisions should include customary reinvestment rights, as discussed further in Section IV.C below. Specifically, Net Proceeds should be net of (a) commissions, brokerage fees, and other customary transaction costs, (b) taxes paid or reasonably estimated to be payable, and (c) amounts required to be applied to the repayment of indebtedness secured by a lien on the disposed asset (i.e., senior debt obligations), in each case to the extent actually paid or reserved.
Day Count Convention. The Draft Agreement states that interest shall be calculated on an Actual/360 day count basis. We confirm that this is consistent with the executed term sheet dated July 17, 2023, and is acceptable.
II. INTEREST RATE AND PAYMENT TERMS
A. Interest Rate Structure
The Borrower accepts the total interest rate of 1,100 basis points (11.00%) per annum, allocated between 850 basis points (8.50%) of current cash pay interest and 250 basis points (2.50%) of payment-in-kind ("PIK") interest, compounding quarterly. This interest rate structure is consistent with the executed term sheet dated July 17, 2023, and was the basis upon which the Borrower agreed to proceed with the transaction.
We request the following clarifications regarding the mechanics of PIK interest:
(i) PIK interest should accrue daily and be added to the outstanding principal balance of the Mezzanine Facility on each quarterly interest payment date (i.e., the last business day of each calendar quarter), and not on any other compounding basis. The Draft Agreement is ambiguous on this point, as Section 2.04(b) refers to PIK interest being "capitalized" without specifying the frequency or mechanics of capitalization.
(ii) The first interest payment date under the Mezzanine Facility should be confirmed as December 29, 2023, with interest accruing from the closing date of September 29, 2023 (or such other closing date as may be mutually agreed).
(iii) The Draft Agreement should expressly state that PIK interest, once capitalized, shall bear interest at the same rate as the original principal (i.e., both cash pay and PIK components), compounding in the same manner.
B. Default Rate
The Borrower accepts the default rate of an additional 200 basis points per annum (for a total rate of 1,300 basis points / 13.00%) upon the occurrence of an Event of Default. However, we request two important clarifications:
(i) The default rate should apply only upon the occurrence and during the continuance of an Event of Default (as defined), and not upon the mere existence of a Default (as defined). The distinction between a "Default" and an "Event of Default" is meaningful, as many Defaults are subject to notice requirements and cure periods before they ripen into Events of Default. Imposition of the default rate during a cure period would undermine the purpose of such cure periods.
(ii) Upon the cure or waiver of the applicable Event of Default, the default rate should cease to apply, and interest should revert to the non-default rate. The Draft Agreement is silent on this point, and we request express language confirming this treatment.
C. Interest Payment Mechanics
We confirm that interest is payable quarterly in arrears on the last business day of each calendar quarter, which is consistent with the term sheet. We request the following additional clarifications:
(i) All references to "business day" in the context of payment date calculations should specify New York business days (i.e., days on which commercial banks in New York City are open for business).
(ii) We request the inclusion of a three (3) business day cure period for administrative or technical payment failures (including, without limitation, wire transfer errors, misdirected payments, and bank processing delays) before such failure triggers an Event of Default under the payment default provisions. This is a customary grace period that protects both parties from the consequences of ministerial errors and is separate from, and in addition to, the cure periods applicable to payment defaults under Section VII.A below.
III. FINANCIAL COVENANTS
A. Maximum Total Leverage Ratio
The Draft Agreement proposes a Maximum Total Leverage Ratio of 4.25x through the fiscal quarter ending June 30, 2024, stepping down to 3.75x beginning with the fiscal quarter ending September 30, 2024. This step-down schedule is materially more aggressive than the terms set forth in the executed term sheet, which the parties negotiated and agreed upon in good faith.
The term sheet dated July 17, 2023 provides for the following step-down schedule:
The Draft Agreement omits the intermediate 4.00x step and accelerates the step-down to 3.75x by a full year. This departure from the agreed term sheet is not acceptable. We request that the step-down schedule be revised to conform to the term sheet, with testing at each fiscal quarter end on a trailing four-quarter basis.
The rationale for the term sheet schedule is grounded in the Borrower's financial profile and the intended use of the Mezzanine Facility proceeds. At closing, Total Funded Debt is projected to be approximately $407,000,000, comprised of the $275,000,000 Senior Term Loan B, $12,000,000 drawn on the Senior Revolving Credit Facility, and $120,000,000 of mezzanine debt. Dividing Total Funded Debt by LTM Adjusted EBITDA of $108,600,000 yields an opening Total Leverage Ratio of approximately 3.75x. This provides only approximately 50 basis points of initial headroom under the 4.25x covenant level.
The Mezzanine Facility is intended to fund a significant fleet expansion and terminal facility buildout program over the next 24 months. During this capital expenditure ramp period, Adjusted EBITDA growth may lag the deployment of capital, temporarily increasing Total Leverage before the new assets begin generating revenue and EBITDA contribution. The accelerated step-down proposed in the Draft Agreement would create an unacceptable compliance risk during precisely the period when the Borrower is deploying the mezzanine loan proceeds for their intended and agreed-upon purpose. This result would be perverse and contrary to the parties' shared objective of a successful financing.
Additionally, we request that the Total Leverage Ratio be tested on a pro forma basis giving effect to any permitted acquisitions and asset dispositions completed during the relevant test period, with appropriate annualization of EBITDA contributions and deductions. Pro forma testing is standard market practice and ensures that the covenant accurately reflects the Borrower's then-current financial position.
B. Minimum Fixed Charge Coverage Ratio
The Borrower accepts the minimum Fixed Charge Coverage Ratio ("FCCR") of 1.10x, which is consistent with the term sheet. However, we request the following modifications to the calculation methodology:
First, the definition of "Fixed Charges" should be conformed to the corresponding definition in the Senior Credit Agreement to the greatest extent practicable, including customary exclusions for non-recurring or extraordinary items that do not represent recurring demands on the Borrower's cash flow.
Second, and of particular importance, we request that capital expenditures included in the denominator of the FCCR calculation be limited to maintenance capital expenditures (i.e., capital expenditures necessary to maintain the existing asset base at its current level of operating capacity) and exclude growth capital expenditures funded from the proceeds of the Mezzanine Facility. Including growth CapEx in the Fixed Charges calculation would penalize the Borrower for deploying the mezzanine loan proceeds for their intended purpose — namely, the fleet expansion and terminal facility buildout — and would effectively constrain the Borrower's ability to utilize the financing as contemplated. This distinction between maintenance and growth capital expenditures is recognized in the Senior Credit Agreement and should be applied consistently here.
C. Minimum Liquidity
The Borrower accepts the minimum liquidity requirement of $15,000,000, defined as the sum of unrestricted cash and cash equivalents of the Borrower and its subsidiaries plus undrawn and available committed amounts under the Senior Revolving Credit Facility.
We request, however, that the liquidity covenant be tested on a monthly basis (as of the last business day of each calendar month), rather than on a daily basis as proposed in the Draft Agreement. Daily testing of a minimum liquidity covenant is atypical for mezzanine credit facilities and imposes an unreasonable administrative burden on the Borrower. Intra-month fluctuations in cash balances are a normal feature of the Borrower's operations — particularly given the cyclical nature of freight volumes and the timing of accounts receivable collections — and should not give rise to technical covenant violations. Monthly testing is consistent with the approach taken in substantially all comparable mezzanine financings in the transportation and logistics sector.
For reference, the Senior Revolving Credit Facility has a total commitment of $50,000,000, of which $12,000,000 is expected to be drawn at closing, leaving $38,000,000 of undrawn availability. Together with the Borrower's unrestricted cash balances, this provides substantial initial headroom above the $15,000,000 minimum.
D. Maximum Capital Expenditures
The Borrower accepts the annual capital expenditure limit of $85,000,000 per fiscal year, with a 25% carryforward of unused amounts from the prior fiscal year into the immediately succeeding fiscal year. We request the following additional modifications:
(i) Insurance/Casualty Exclusion. Capital expenditures funded from insurance proceeds or casualty loss proceeds should be excluded from the CapEx covenant. These expenditures represent the replacement of damaged or destroyed assets and do not represent discretionary spending by the Borrower. Failing to exclude such expenditures could leave the Borrower unable to replace critical fleet assets following a casualty event without breaching the CapEx covenant.
(ii) Asset Disposition Reinvestment Exclusion. Capital expenditures funded from the Net Proceeds of asset dispositions that are subject to reinvestment rights should be excluded from the CapEx covenant. The reinvestment right itself contemplates that the Borrower will deploy such proceeds into replacement assets, and counting the resulting expenditures against the CapEx covenant would effectively negate the reinvestment right.
(iii) Equity-Funded CapEx Exclusion. Capital expenditures funded from the proceeds of equity contributions to the Borrower (whether from Cascade Ridge or otherwise) should be excluded from the CapEx covenant. Such expenditures are funded from equity, not debt, and do not represent a demand on the Borrower's cash flow or debt capacity.
(iv) Catch-Up Provision. We request inclusion of a "catch-up" provision permitting the acceleration of budgeted capital expenditures during the first two fiscal years of the Mezzanine Facility (fiscal years 2024 and 2025) to account for the fleet expansion and terminal facility buildout program. Specifically, the Borrower should be permitted to incur capital expenditures in excess of the $85,000,000 annual cap during these initial years, up to an aggregate amount to be agreed, provided that cumulative capital expenditures over the first two fiscal years do not exceed $170,000,000 (i.e., two times the annual cap). This catch-up provision is essential to permit the Borrower to pursue the investment program that is the stated purpose of the Mezzanine Facility.
E. Equity Cure Rights
The Draft Agreement does not include any equity cure right. The Borrower requests the inclusion of an equity cure provision permitting the Sponsor (Cascade Ridge Capital Partners, LLC, or any of its affiliated funds or co-investment vehicles) to make cash equity contributions to Stonefield to cure any financial covenant default under the Mezzanine Credit Agreement, subject to the following customary limitations:
(i) The equity contribution must be made, and the proceeds thereof applied to the applicable financial covenant calculation, within fifteen (15) business days after the delivery of the compliance certificate evidencing the applicable financial covenant default.
(ii) No more than two (2) equity cures may be exercised in any four (4) consecutive fiscal quarter period.
(iii) No more than five (5) equity cures may be exercised over the life of the Mezzanine Facility.
(iv) The amount of any equity cure contribution shall be added to Adjusted EBITDA for purposes of recalculating the applicable financial covenant as of the end of the relevant fiscal quarter, and such contribution shall be deemed to have been received on the last day of such fiscal quarter.
(v) No equity cure contribution shall reduce the amount of indebtedness or be applied to reduce principal outstanding for purposes of the leverage calculation; rather, the cure contribution shall operate solely as an increase to EBITDA for the relevant period.
(vi) There shall be no requirement that equity cure contributions be applied to prepay the Mezzanine Facility.
Equity cure rights are standard features in sponsor-backed mezzanine financings and provide an important safety valve that protects the value of the Mezzanine Lender's investment while giving the Sponsor an opportunity to support the business through temporary periods of underperformance. We note that the Senior Credit Agreement includes a comparable equity cure provision, and consistency across the facilities is important.
IV. RESTRICTIVE COVENANTS
A. Restricted Payments
The restricted payments covenant in Section 7.06 of the Draft Agreement is overly restrictive and does not account for several categories of payments that are necessary for the ordinary operation of the Borrower's business and the Sponsor's legitimate expectations. We request that the definition of "Permitted Restricted Payments" be expanded to include the following:
(i) Tax Distributions. Distributions to equity holders (including Cascade Ridge SLG Holdings, LLC and, indirectly, Cascade Ridge Capital Fund V, LP and its partners) in amounts necessary to cover their respective income tax liabilities attributable to their direct or indirect ownership of equity interests in Stonefield. To the extent Stonefield is a pass-through entity for tax purposes at any level of the ownership chain, the ability to make tax distributions is essential to avoid trapping tax liability at the holder level without corresponding cash flow. This basket should be available without any pro forma leverage test or other condition (other than no Event of Default).
(ii) Sponsor Management Fees. Payments to Cascade Ridge Capital Partners, LLC (or its designees) of customary management, advisory, and monitoring fees in an annual amount not to exceed $2,000,000. This basket is consistent with the corresponding basket in the Senior Credit Agreement and reflects the standard terms of the Sponsor's management agreement with the Borrower.
(iii) General Dividends and Distributions. Payments of dividends or other distributions on the equity interests of the Borrower, provided that (a) no Default or Event of Default exists at the time of such payment or would result therefrom, and (b) after giving pro forma effect to such payment, the Total Leverage Ratio does not exceed 3.50x. This condition ensures that distributions are made only when the Borrower has achieved meaningful deleveraging and provides the Mezzanine Lender with structural protection.
(iv) Management Equity Repurchases. Repurchases of equity interests from current or former employees, officers, directors, or consultants of the Borrower or its subsidiaries (or their estates, heirs, or beneficiaries), in an aggregate amount not to exceed $1,500,000 per fiscal year. These repurchases are a standard feature of management incentive programs and are necessary to permit the orderly transition of management equity.
B. Debt Incurrence
As discussed in Section I.C above, we request that the Permitted Indebtedness baskets be expanded to accommodate the Borrower's operational needs. In addition to the specific baskets requested therein, we request the inclusion of a general incurrence test permitting the Borrower to incur additional secured indebtedness, provided that on a pro forma basis (after giving effect to such incurrence and the application of proceeds thereof):
(a) the Total Leverage Ratio does not exceed 3.75x; and
(b) the Senior Leverage Ratio (defined as the ratio of senior secured indebtedness to Adjusted EBITDA) does not exceed 2.75x.
This incurrence-based approach preserves the credit structure and subordination arrangements contemplated by the Mezzanine Credit Agreement and the Intercreditor Agreement, while affording the Borrower meaningful operational flexibility to respond to growth opportunities and changing market conditions. The pro forma leverage tests ensure that any additional indebtedness is incurred only within a disciplined framework.
Additionally, we request that refinancing indebtedness be expressly permitted without any further condition, subject only to the following customary limitations: (a) the aggregate principal amount of such refinancing indebtedness does not exceed the principal amount of the indebtedness being refinanced (plus accrued and unpaid interest, premiums, and customary fees and expenses), (b) the maturity date of such refinancing indebtedness is no earlier than the maturity date of the indebtedness being refinanced, and (c) such refinancing indebtedness does not have the benefit of any guaranty or security that did not support the indebtedness being refinanced.
C. Asset Sales
The asset sale covenant in Section 7.05 of the Draft Agreement requires revision in several respects:
Thresholds. The Draft Agreement applies the asset sale restrictions and mandatory prepayment triggers to all dispositions without regard to size. We request the inclusion of a minimum threshold of $5,000,000 per transaction (or $15,000,000 in the aggregate in any fiscal year) before the consent, notification, or mandatory prepayment provisions are triggered. Below these thresholds, asset sales should be freely permitted so long as they are made for fair market value and on arm's-length terms. This approach avoids the administrative burden and transaction delays that would result from subjecting routine, de minimis dispositions to the full apparatus of the asset sale covenant.
Reinvestment Period. The Draft Agreement provides for a twelve (12) month reinvestment period within which Net Proceeds of asset sales must be reinvested in productive assets of the Borrower or its subsidiaries. We request that this period be extended to eighteen (18) months. The Borrower's capital investment program — particularly the terminal facility buildout — involves long lead times for permitting, construction, and equipment procurement. A twelve-month reinvestment window may not be sufficient to complete the reinvestment of proceeds from significant asset dispositions, and the consequence of failing to reinvest within the prescribed period (mandatory prepayment) should not be imposed where the Borrower is diligently pursuing reinvestment in good faith.
Ordinary Course Fleet Dispositions. We request that sales, transfers, or other dispositions of obsolete, worn-out, damaged, or no longer useful fleet equipment (including tractors, trailers, containers, chassis, and other rolling stock) in the ordinary course of business be excluded entirely from the asset sale covenant. This exclusion is critical for a transportation and logistics company. Stonefield regularly rotates its fleet, disposing of aged or high-mileage vehicles and replacing them with newer, more fuel-efficient, and better-maintained units. This rotation is an ordinary course operational activity, not a strategic divestiture, and should not be subject to the constraints of the asset sale covenant or trigger mandatory prepayment obligations.
D. Investments
The Draft Agreement's investment covenant in Section 7.04 is overly restrictive. We request that the definition of "Permitted Investments" include, at a minimum, the following:
(i) investments by the Borrower in any subsidiary that is a guarantor under the Mezzanine Credit Agreement, and investments by any subsidiary guarantor in the Borrower or any other subsidiary guarantor;
(ii) investments in short-term cash equivalents (including money market funds, U.S. Treasury obligations, commercial paper, and certificates of deposit) consistent with the Borrower's cash management policies;
(iii) loans and advances to employees of the Borrower and its subsidiaries in the ordinary course of business (including for travel, relocation, and other business expenses) in an aggregate outstanding amount not to exceed $500,000 at any time;
(iv) investments existing on the closing date, as set forth on a schedule to be delivered at closing (to include, among others, the Borrower's existing minority interest in a regional logistics technology platform); and
(v) a general basket for other investments in an aggregate amount not to exceed $7,500,000 at any time outstanding, providing necessary flexibility for small strategic investments and other ordinary course transactions.
E. Affiliate Transactions
The Borrower accepts the requirement that transactions with affiliates be conducted on terms no less favorable to the Borrower or the applicable subsidiary than those that would be obtained in a comparable arm's-length transaction with an unaffiliated person. This is a reasonable and customary standard.
However, we request the following modifications:
Threshold. The Draft Agreement requires Mezzanine Lender consent for any affiliate transaction with a value in excess of $1,000,000. This threshold is unduly burdensome and would capture a significant number of routine transactions between the Borrower and the Sponsor. We request that the threshold for affiliate transactions requiring the Mezzanine Lender's prior written consent be increased to $2,500,000 per transaction (or series of related transactions). Transactions below this threshold should be permitted without consent, subject to the general arm's-length standard.
Express Carve-Outs. We request that the following categories of affiliate transactions be expressly permitted without any requirement for Mezzanine Lender consent, regardless of amount:
(a) payments under the management agreement between the Borrower and Cascade Ridge Capital Partners, LLC (or its designees), to the extent such payments constitute Permitted Restricted Payments;
(b) payments under any tax sharing agreement or tax indemnity agreement among the Borrower, Cascade Ridge SLG Holdings, LLC, and their respective subsidiaries, provided that such payments are not in excess of the amounts that would be payable by the Borrower and its subsidiaries on a standalone basis;
(c) customary indemnification and expense reimbursement arrangements in favor of directors, officers, and the Sponsor, including directors' and officers' insurance premiums; and
(d) transactions among the Borrower and the subsidiary guarantors (which are, by definition, affiliate transactions but are ordinary course intercompany arrangements).
F. Fundamental Changes (Mergers, Consolidations)
The Borrower accepts the general prohibition on mergers and consolidations set forth in Section 7.03 of the Draft Agreement, except where Stonefield is the surviving entity. However, we request the inclusion of the following carve-outs, which are necessary for ordinary course corporate housekeeping and restructuring:
(i) Mergers among wholly-owned subsidiary guarantors (i.e., the merger of one subsidiary guarantor with and into another subsidiary guarantor) should be expressly permitted, provided that the surviving entity remains a subsidiary guarantor. Such mergers may be undertaken from time to time to simplify the corporate structure or to achieve operational efficiencies and do not adversely affect the Mezzanine Lender's position.
(ii) The liquidation, dissolution, or winding up of any wholly-owned subsidiary guarantor into Stonefield (the Borrower) should be expressly permitted, provided that the Borrower assumes all assets and liabilities of such subsidiary. This is a routine corporate simplification measure that results in all assets and liabilities residing directly with the Borrower, which is the primary obligor under the Mezzanine Credit Agreement.
V. REPRESENTATIONS AND WARRANTIES
A. General Comments
The representations and warranties in Article V of the Draft Agreement contain numerous flat, unqualified statements that do not reflect market practice for a mezzanine credit facility of this nature and size. As a general matter, we request that all representations and warranties be qualified by materiality or Material Adverse Effect qualifiers where appropriate. The imposition of unqualified representations in a credit agreement creates the risk that immaterial deviations from literal compliance — which are inevitable in any complex business enterprise — could give rise to technical defaults and Events of Default out of all proportion to their significance.
In addition, where the subject matter of a particular representation is such that the Borrower cannot reasonably be expected to have complete or perfect knowledge (for example, matters relating to pending or threatened litigation, environmental conditions at third-party locations, or ERISA compliance of multi-employer plans), the representation should be qualified to matters "within the knowledge" of the Borrower or to matters of which the Borrower is "aware" after reasonable inquiry. Knowledge-qualified representations are standard in comparable transactions and reflect the practical reality that no borrower can guarantee the absolute accuracy of statements regarding matters that may be partially beyond its knowledge or control.
B. Financial Statements
The representation in Section 5.05 regarding historical financial statements should be revised to reference specifically the audited financial statements of Stonefield Logistics Group Inc. for the fiscal year ended December 31, 2022, prepared by the Borrower's independent auditors, Braddock & Saylor LLP, in accordance with GAAP (reflecting FY2022 revenue of $687,000,000 and FY2022 Adjusted EBITDA of $98,400,000), and the unaudited interim consolidated financial statements for the six-month period ending June 30, 2023.
Additionally, the "no material adverse change" representation in Section 5.05(b) of the Draft Agreement purports to require the Borrower to represent that no material adverse change has occurred since the date of the term sheet (July 17, 2023). We request that this representation be revised to provide that no Material Adverse Effect has occurred since a specified balance sheet date — specifically, December 31, 2022 (the date of the most recent audited financial statements) or, in the alternative, June 30, 2023 (the date of the most recent interim financial statements). The representation should not function as a forward-looking undertaking; it should be a point-in-time statement that is capable of objective verification as of the closing date.
C. Litigation
The Draft Agreement requires the Borrower to represent that there is no pending or threatened litigation against the Borrower or any subsidiary, without any threshold or de minimis qualifier. This is unreasonable for a company of Stonefield's size and operational scope. Transportation and logistics companies are routinely subject to claims arising from vehicular incidents, cargo damage, employment disputes, and regulatory matters, the vast majority of which are immaterial and are handled in the ordinary course of business.
We request the inclusion of a customary threshold requiring disclosure and representation only with respect to litigation involving amounts in controversy in excess of $5,000,000 individually or $10,000,000 in the aggregate. Litigation below these thresholds should not be required to be disclosed or represented upon, though the Borrower acknowledges its obligation to disclose in the disclosure schedules any material pending litigation of which it is aware.
D. Environmental
Given the nature of the Borrower's operations — which include the operation of a large fleet of diesel-powered vehicles, the maintenance of terminal and warehouse facilities, and the handling and storage of various materials — absolute representations of compliance with all Environmental Laws are neither appropriate nor market. We request that the environmental representations in Section 5.08 be qualified to exclude any conditions, liabilities, or non-compliance that would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
This qualification is particularly important because the Borrower's fleet operations and terminal facilities inevitably involve some interaction with environmental regulatory regimes (including fuel storage, emissions, waste disposal, and stormwater management), and minor technical non-compliance at individual locations should not give rise to a breach of representation under the Mezzanine Credit Agreement.
E. ERISA
The ERISA representations in Section 5.09 should be revised to be limited to ERISA-related events, conditions, or liabilities that would reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect. This is the customary market standard for ERISA representations in credit agreements. The Borrower maintains several employee benefit plans, including a 401(k) plan and certain welfare benefit plans, and minor technical or administrative issues relating to such plans should not constitute a breach of representation.
F. Title to Properties; Liens
The representation regarding good title to properties and assets in Section 5.13 should be qualified by Permitted Liens and Permitted Encumbrances. As drafted, the representation requires the Borrower to represent that it has good and marketable title to all of its properties and assets free and clear of all liens — a statement that is factually inaccurate given the existing lien structure.
In particular, all assets of the Borrower and the subsidiary guarantors are currently subject to a first-priority perfected security interest in favor of Whitmore National Bank, N.A. as Collateral Agent under the Senior Credit Agreement. The Mezzanine Facility itself will be secured by a second-priority lien on substantially the same collateral. The representations must expressly acknowledge this existing senior lien structure and permit all Permitted Liens, including the liens securing the Senior Credit Agreement, the liens to be granted under the Mezzanine Credit Agreement, and the other Permitted Liens described in Section I.C above.
G. Regulatory and Compliance
Given the heavily regulated nature of the transportation and logistics industry, we request the inclusion of an affirmative representation regarding the Borrower's regulatory status and compliance with applicable transportation laws and regulations. Specifically:
(i) The Borrower should represent that it holds a valid USDOT Number (Stonefield USDOT Number 2847391) and that its operating authority issued by the Federal Motor Carrier Safety Administration ("FMCSA") is in full force and effect.
(ii) The Borrower should represent that it is in material compliance with all applicable FMCSA regulations, including regulations relating to driver qualifications, hours of service, vehicle maintenance and inspection, and insurance requirements.
(iii) Standard representations regarding compliance with sanctions laws and regulations (including OFAC sanctions), anti-money laundering laws (including the Bank Secrecy Act and the USA PATRIOT Act), and anti-corruption laws (including the FCPA) should be included in customary form consistent with market practice for sponsor-backed financings.
VI. CONDITIONS PRECEDENT TO FUNDING
A. Documentation Conditions
We request that the list of required closing deliverables set forth in Section 4.01 of the Draft Agreement be finalized and limited to the following, which we believe represent a complete and appropriate set of conditions to funding:
(i) executed counterparts of the Mezzanine Credit Agreement and all ancillary transaction documents, including the Guaranty Agreement, the Pledge and Security Agreement, the Parent Equity Pledge Agreement (pledging 100% of the equity interests in Stonefield by Cascade Ridge SLG Holdings, LLC), the Intercreditor Agreement, and the Warrant Agreement;
(ii) an officer's certificate of an authorized officer of the Borrower, certifying as to the satisfaction of all conditions precedent and confirming that no Default or Event of Default exists;
(iii) secretary's certificates for the Borrower and each subsidiary guarantor (Stonefield Intermodal Services, Inc., Stonefield Fleet Management, LLC, and Stonefield Freight Brokerage, Inc.), attaching certified copies of the organizational documents, board resolutions authorizing the transactions, and incumbency certificates;
(iv) a solvency certificate from the Chief Financial Officer of the Borrower, in form and substance satisfactory to the Mezzanine Lender, certifying the solvency of the Borrower and its subsidiaries on a consolidated basis after giving effect to the transactions;
(v) an initial compliance certificate demonstrating pro forma compliance with all financial covenants as of the closing date;
(vi) legal opinions from Calderwood & Harkness LLP (as counsel to the Borrower) and local counsel as may be reasonably required, addressing customary matters including due authorization, execution, enforceability, and no conflicts;
(vii) UCC-1 financing statements ready for filing in the appropriate jurisdictions (as discussed in Section XI below);
(viii) certificates of good standing (or equivalent) for the Borrower and each subsidiary guarantor from their respective states of organization and, if different, their principal places of business, each dated within thirty (30) days of the closing date; and
(ix) evidence of insurance coverage in form and substance reasonably satisfactory to the Mezzanine Lender, with the Mezzanine Lender named as additional insured and loss payee as its interest may appear.
With respect to the condition in Section 4.01(j) of the Draft Agreement requiring delivery of a third-party appraisal of fleet assets prior to closing, we respectfully request that this condition be removed. A pre-closing fleet appraisal is atypical for mezzanine financing, which is structured as a cash flow-based rather than asset-based credit. Requiring a comprehensive appraisal of Stonefield's fleet — which includes thousands of tractors, trailers, containers, and chassis across multiple terminal locations — would introduce significant delay and expense without commensurate benefit to the Mezzanine Lender's credit analysis. We propose, in the alternative, that any fleet appraisal requirement be converted to a post-closing obligation, to be satisfied within sixty (60) days following the closing date. This approach permits the transaction to close on the anticipated timeline while preserving the Mezzanine Lender's ability to obtain the appraisal if it determines that one is necessary.
B. Execution of Amendment No. 3 and Intercreditor Agreement
The Borrower acknowledges that the execution and delivery of Amendment No. 3 to the Senior Credit Agreement (the "Senior Amendment"), permitting the incurrence of the Mezzanine Facility and the granting of second-priority liens, and the execution and delivery of the Intercreditor Agreement among Whitmore National Bank, N.A. (as Senior Agent), Ridgeline Mezzanine Capital Fund III, LP (as Mezzanine Lender), and the Borrower, are necessary conditions precedent to closing and funding of the Mezzanine Facility. Neither the Borrower nor the Mezzanine Lender disputes this requirement.
We note that the consent solicitation to the senior syndicate lenders commenced on August 18, 2023, and the Borrower's advisors are actively engaged in securing the requisite consents. Based on our discussions with Whitmore National Bank, N.A. (through its counsel, Renshaw Pratt LLP), we expect to receive the necessary consents by early September 2023, well in advance of the target closing date.
We request, however, that the closing condition be drafted to require only that the Senior Agent (Whitmore National Bank, N.A.) has executed and delivered the Senior Amendment and the Intercreditor Agreement, and that the condition not be structured to require evidence of individual consents from each senior syndicate lender (including Greystone Commercial Lending Corp., Heritage Pacific Bank, and Clearfield Capital Finance, LLC). Whether the requisite lender votes have been obtained is a matter between the Senior Agent and the senior syndicate, and the Borrower should not be required to deliver to the Mezzanine Lender evidence of individual lender consents beyond the executed Senior Amendment and Intercreditor Agreement.
C. "No Material Adverse Change" Condition
The "no material adverse change" closing condition in Section 4.01(h) of the Draft Agreement is drafted in broad terms and is not tied to the defined term "Material Adverse Effect" (which, as discussed in Section I.D above, should include customary carve-outs). We request that this closing condition be revised to provide that no event, change, or condition shall have occurred since December 31, 2022 that constitutes a Material Adverse Effect, with the carve-outs discussed in Section I.D above fully incorporated.
We specifically object to the draft's measurement date, which is the date of the term sheet (July 17, 2023). Using the term sheet date as the measurement baseline provides only approximately ten weeks of coverage and creates ambiguity as to the state of affairs that the Borrower is representing. The December 31, 2022 measurement date (the date of the most recent audited financial statements) is the appropriate baseline and is consistent with the MAC representation in Section V.B above.
D. Bring-Down of Representations
The Borrower accepts the requirement that the representations and warranties set forth in the Mezzanine Credit Agreement be brought down as true and correct as of the closing date. However, we request that the bring-down standard be appropriately calibrated to avoid a "double materiality" problem.
Specifically, where a representation is already qualified by materiality or a Material Adverse Effect qualifier, the bring-down should require that such representation be "true and correct in all respects" (since the materiality qualifier is already built into the representation itself). Where a representation is not so qualified (i.e., flat representations as to matters of fact), the bring-down should require that such representation be "true and correct in all material respects." This is the standard market formulation and avoids the illogical result of requiring a materiality-qualified representation to be true and correct "in all material respects" — which would effectively layer one materiality standard on top of another.
VII. EVENTS OF DEFAULT
A. Payment Default
The Borrower accepts the payment default provisions in Section 8.01(a) of the Draft Agreement, subject to the following requests regarding cure periods:
(i) We request a cure period of five (5) business days for the failure to pay interest, fees, or other amounts (other than principal) when due. The Draft Agreement provides only a three (3) business day cure period, which is shorter than market standard for a mezzanine facility and does not provide adequate time for the Borrower to identify and resolve payment processing issues.
(ii) We accept the one (1) business day cure period for the failure to pay principal when due, which reflects the greater severity of a principal payment default.
(iii) We reiterate our request, discussed in Section II.C above, that administrative or technical failures — including wire transfer errors, misdirected payments, bank processing delays, and similar ministerial matters — not constitute an immediate Event of Default, provided that the payment is made within the applicable cure period.
B. Financial Covenant Default
We request the inclusion of a thirty (30) day cure period after delivery of the relevant compliance certificate before a financial covenant breach constitutes an Event of Default. This cure period is necessary to provide the Borrower and the Sponsor with a reasonable period to assess the situation and, if applicable, exercise the equity cure right described in Section III.E above. The thirty-day period commences upon delivery of the compliance certificate (not upon the end of the fiscal quarter), and accordingly does not result in any delayed notification to the Mezzanine Lender — the Mezzanine Lender will be aware of the potential breach from the face of the compliance certificate and can monitor the situation during the cure period.
As discussed in Section III.E, we also request that the equity cure right be expressly cross-referenced in the Events of Default section, so that it is clear on the face of the document that a financial covenant breach that is timely cured through an equity contribution does not constitute an Event of Default.
C. Cross-Default
The Borrower accepts the cross-default provision in Section 8.01(e) of the Draft Agreement, which provides for a cross-default to the Senior Credit Agreement and other material indebtedness. However, we request the following modifications: