CALDERWOOD & HARKNESS LLP
601 Lexington Avenue New York, New York 10022 Telephone: (212) 506-7000 Facsimile: (212) 506-7001
INTERNAL MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
TO: Robert D. Nagamine, General Counsel & Secretary, Stonefield Logistics Group Inc.
FROM: Stephanie Okafor, Partner, Banking & Finance; Daniel Obi, Associate, Banking & Finance — Calderwood & Harkness LLP
DATE: August 8, 2023
RE: Intercreditor Agreement — Key Negotiation Issues in Connection with $120,000,000 Mezzanine Financing from Ridgeline Mezzanine Capital Fund III, LP
Matter No.: 1012-00001
Billing Code: 231892.SLG
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I. Executive Summary and Purpose
The purpose of this memorandum is to analyze the principal negotiation points expected to arise from the draft Intercreditor Agreement that Renshaw Pratt LLP (counsel to Whitmore National Bank, N.A., in its capacity as Senior Administrative Agent and Collateral Agent) is expected to circulate on or about August 11, 2023. This memorandum identifies the key issues that Calderwood & Harkness LLP anticipates will be contested in the intercreditor negotiations and sets forth the borrower-favorable positions that we will seek to advance on behalf of Stonefield Logistics Group Inc. ("Stonefield" or the "Borrower") with respect to each such issue.
As you are aware, Stonefield is pursuing a $120,000,000 mezzanine term loan facility (the "Mezzanine Facility") from Ridgeline Mezzanine Capital Fund III, LP ("Ridgeline" or the "Mezzanine Lender"). The Mezzanine Facility will be secured by a second-priority perfected security interest in substantially the same collateral pool that currently secures Stonefield's existing $275,000,000 senior secured credit facility (as more fully described in Section II below). This layering of secured indebtedness necessitates the execution of an intercreditor agreement among the principal creditor constituencies to govern the relative rights, priorities, and remedies of the senior and mezzanine creditors with respect to the shared collateral.
The Intercreditor Agreement is a critical three-party document among (i) Whitmore National Bank, N.A. ("Whitmore" or the "Senior Agent"), in its capacity as Administrative Agent and Collateral Agent for the senior lender syndicate, (ii) Ridgeline Mezzanine Capital Fund III, LP, as the Mezzanine Lender, and (iii) Stonefield Logistics Group Inc., as the Borrower (in an acknowledging capacity). Although the Borrower is technically an acknowledging party rather than a principal contracting party, the terms of the Intercreditor Agreement have profound implications for Stonefield's operational flexibility, restructuring options, cash flow management, and overall creditworthiness. It is therefore essential that Calderwood & Harkness advocate vigorously for borrower-protective provisions during the negotiation process.
Concurrently with the negotiation of the Intercreditor Agreement, Stonefield must also secure the execution of Amendment No. 3 to the Amended and Restated Credit Agreement dated April 7, 2022 (the "Senior Credit Agreement"), which is necessary to permit the incurrence of the mezzanine indebtedness and the grant of second-priority liens on the shared collateral in favor of Ridgeline. The Senior Agent consent solicitation for Amendment No. 3 is expected to commence on or about August 18, 2023, and the amendment must be in place before or concurrent with the execution of the Intercreditor Agreement.
The Intercreditor Agreement will be governed by the laws of the State of New York. Counterparty counsel in the negotiations will be Renshaw Pratt LLP, led by David C. Renshaw (lead partner), representing the Senior Agent, and Archer Blackwell & Moss LLP, led by Harrison T. Moss (lead partner) and Angela N. Whitford (lead associate), representing the Mezzanine Lender.
This memorandum addresses six principal issue areas that we expect to be the focus of the intercreditor negotiations:
1. Enforcement Standstill Mechanics — the duration, scope, and carve-outs applicable to the period during which the Mezzanine Lender is prohibited from enforcing remedies against shared collateral (Section III);
2. Payment blockage Provisions — the circumstances under which the Senior Agent may block cash interest payments on the Mezzanine Facility and the duration and frequency limitations on such blockage (Section IV);
3. Mezzanine Purchase Option — the Mezzanine Lender's right to purchase all outstanding senior debt upon specified trigger events (Section V);
4. Lien Subordination and Sole Collateral Control — the framework governing the priority of liens on shared collateral, the Senior Agent's exclusive control over shared collateral, and the treatment of the exclusive parent equity pledge (Section VI);
5. Remedies Sequencing and Cure Rights — the ordering of enforcement actions by the respective creditor classes and the preservation of cure rights for the Mezzanine Lender, the Borrower, and the equity sponsor (Section VII); and
6. Borrower-Protective Provisions and Additional Matters — including amendment consent rights, refinancing flexibility, turnover obligations, governing law, and change of control interactions (Section VIII).
A summary table of our recommended negotiating positions, fallback positions, and hard limits is provided in Section IX. Section X sets forth the anticipated process and timeline for the negotiations, and Section XI contains our request for client instructions.
II. Background: Capital Structure and Transaction Overview
A. Existing Senior Credit Facility
Stonefield's existing senior secured credit facility is governed by the Amended and Restated Credit Agreement, dated as of April 7, 2022 (originally dated November 15, 2019), among Stonefield Logistics Group Inc., as Borrower, Whitmore National Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto from time to time (as amended by Amendment No. 1, dated September 12, 2022, and Amendment No. 2, dated March 3, 2023, the "Senior Credit Agreement").
The senior lender syndicate is composed of the following institutions:
The Senior Credit Agreement provides for the following credit facilities:
Senior Term Loan B. A term loan in the original principal amount of $275,000,000, bearing interest at SOFR plus 375 basis points per annum, with a scheduled maturity date of November 15, 2026. The Term Loan B is subject to mandatory prepayment upon the occurrence of certain events, including excess cash flow sweeps, asset sale proceeds, and insurance/condemnation proceeds, in each case as set forth in the Senior Credit Agreement. As of the date of this memorandum, the outstanding principal balance of the Term Loan B is $275,000,000 (no principal amortization payments have been made to date, consistent with the bullet maturity structure).
Senior Revolving Credit Facility. A revolving credit facility with aggregate commitments of $50,000,000, bearing interest at SOFR plus 350 basis points per annum, with a maturity date of November 15, 2025. As of the date of this memorandum, approximately $12,000,000 is expected to be drawn on the revolving facility at the time of the mezzanine closing, with $38,000,000 of available undrawn capacity remaining. The revolving facility is subject to customary commitment fee provisions on undrawn amounts.
The senior facility is secured by a first-priority perfected security interest in substantially all assets of Stonefield and its subsidiary guarantors, including:
• All equipment, vehicles, and rolling stock;
• All accounts receivable;
• All inventory;
• All intellectual property (including trademarks, trade names, patents, and copyrights);
• All equity interests in direct and indirect subsidiaries;
• All deposit accounts and securities accounts (subject to certain exclusions);
• All general intangibles; and
• Proceeds of all of the foregoing.
The subsidiary guarantors under the Senior Credit Agreement are Stonefield Intermodal Services, Inc., Stonefield Fleet Management, LLC, and Stonefield Freight Brokerage, Inc. Each subsidiary guarantor has granted a first-priority security interest in its assets in favor of the Senior Agent.
The relationship manager for the senior facility at Whitmore National Bank, N.A. is Gregory S. Feinberg, Managing Director. We have had productive interactions with Mr. Feinberg in connection with the consent solicitation process, and we anticipate that Whitmore's credit team will be constructive, though firm, in the intercreditor negotiations.
B. Proposed Mezzanine Facility
The proposed Mezzanine Facility will be governed by a Mezzanine Credit Agreement expected to be dated on or about September 14, 2023 (the "Mezzanine Credit Agreement"), among Stonefield Logistics Group Inc., as Borrower, and Ridgeline Mezzanine Capital Fund III, LP, as Mezzanine Lender. An initial draft of the Mezzanine Credit Agreement was circulated by Archer Blackwell & Moss LLP on August 4, 2023, and Calderwood & Harkness is currently conducting a detailed review of that draft (a separate memorandum addressing issues specific to the Mezzanine Credit Agreement will follow).
The principal terms of the Mezzanine Facility are as follows:
Mezzanine Lender. Ridgeline Mezzanine Capital Fund III, LP, as the sole lender. The Mezzanine Facility will not be syndicated. The deal lead at Ridgeline is Katherine M. Stroud, Managing Director.
Principal Amount. $120,000,000.
Interest Rate. 1,100 basis points (11.00%) per annum, consisting of (a) 850 basis points cash pay, payable quarterly in arrears, and (b) 250 basis points payment-in-kind ("PIK"), compounding quarterly and added to the outstanding principal balance.
Maturity. Six years from closing (anticipated maturity date: September 29, 2029).
Mezzanine Collateral. The Mezzanine Facility will be secured by:
(a) A second-priority perfected security interest in the same asset pool that secures the senior facility (i.e., substantially all assets of Stonefield and the subsidiary guarantors), subject to the intercreditor arrangements described in this memorandum; and
(b) A first-priority pledge of 100% of the equity interests in Stonefield Logistics Group Inc. held by Cascade Ridge SLG Holdings, LLC (the "Parent Equity Pledge"). The Parent Equity Pledge is exclusive collateral for the benefit of the Mezzanine Lender and will not be shared with the senior lender syndicate.
The distinction between the shared collateral (on which the Mezzanine Lender holds a second-priority lien) and the exclusive mezzanine collateral (the Parent Equity Pledge, on which the Mezzanine Lender holds a first-priority lien) is of central importance to the intercreditor negotiations and is discussed in detail in Section VI below.
C. Post-Closing Capital Structure
Following the closing and funding of the Mezzanine Facility, Stonefield's capital structure will be as follows:
Based on Stonefield's last-twelve-months ("LTM") Adjusted EBITDA of $108,600,000 as of June 30, 2023, the pro forma leverage profile at closing is expected to be as follows:
• Total Leverage Ratio: 3.75x ($407,000,000 / $108,600,000)
• Senior Leverage Ratio: 2.64x ($287,000,000 / $108,600,000)
• Incremental Mezzanine Leverage: 1.10x ($120,000,000 / $108,600,000)
Stonefield's equity sponsor is Cascade Ridge Capital Partners, LLC, which holds approximately 78.4% of the outstanding equity interests in Stonefield through its wholly-owned subsidiary, Cascade Ridge SLG Holdings, LLC. The Managing Partner of Cascade Ridge Capital Partners, LLC is Vincent A. Palumbo.
D. Parties to the Intercreditor Agreement
The Intercreditor Agreement will be entered into among the following parties:
(a) Whitmore National Bank, N.A. — acting in its capacity as Administrative Agent and Collateral Agent for the senior lender syndicate (the "Senior Agent");
(b) Ridgeline Mezzanine Capital Fund III, LP — as the Mezzanine Lender; and
(c) Stonefield Logistics Group Inc. — as the Borrower, in an acknowledging capacity.
We anticipate that Renshaw Pratt LLP will also require that the subsidiary guarantors — Stonefield Intermodal Services, Inc., Stonefield Fleet Management, LLC, and Stonefield Freight Brokerage, Inc. — execute acknowledgments to the Intercreditor Agreement. This is standard market practice and should not present any substantive issues. In addition, Cascade Ridge SLG Holdings, LLC, as the pledgor under the Parent Equity Pledge, may be asked to acknowledge certain provisions of the Intercreditor Agreement, particularly those relating to the exclusion of the Parent Equity Pledge from the shared collateral regime.
III. Issue 1: Enforcement Standstill Mechanics
A. Overview of Expected Senior Agent Position
In a standard senior/mezzanine intercreditor framework, the mezzanine lender is required to "stand still" — that is, to refrain from exercising enforcement remedies against shared collateral — for a specified period following the mezzanine lender's delivery of written notice to the senior agent of the mezzanine lender's intent to exercise such remedies. The enforcement standstill is designed to provide the senior lenders with an exclusive window during which they may pursue their own enforcement actions against the shared collateral without interference from the junior creditor.
Based on our review of current market practice and our prior dealings with Renshaw Pratt LLP in comparable transactions, we anticipate that the Senior Agent's initial draft of the Intercreditor Agreement will propose a 180-day enforcement standstill period following delivery of written notice by the Mezzanine Lender to the Senior Agent of the Mezzanine Lender's intent to exercise remedies against shared collateral. During this 180-day period, the Mezzanine Lender would be prohibited from taking any enforcement action with respect to shared collateral, including without limitation:
• Foreclosing on or selling any shared collateral;
• Directing any disposition of shared collateral;
• Commencing any action or proceeding with respect to shared collateral;
• Exercising any right of set-off against deposit accounts constituting shared collateral; or
• Otherwise realizing upon or collecting any shared collateral.
Throughout the standstill period, the Senior Agent (acting in its capacity as Collateral Agent for the senior lender syndicate) would retain sole and exclusive control over the disposition and enforcement of shared collateral. The Mezzanine Lender would have no right to direct the Senior Agent to take (or refrain from taking) any action with respect to the shared collateral during this period.
We note that a 180-day standstill period is at the longer end of market practice for senior/mezzanine intercreditor agreements. In our experience, standstill periods in comparable transactions have ranged from 90 days to 180 days, with 120 to 150 days being common in middle-market transactions of this size and credit quality.
B. Borrower-Favorable Positions to Pursue
Stonefield has a significant interest in the structure and duration of the enforcement standstill. A standstill that is too long can harm the Borrower by creating a prolonged period of uncertainty during which the Borrower's ability to restructure, negotiate with creditors, or pursue alternative financing solutions is impaired. Conversely, a standstill that is too short may not provide sufficient time for the senior lenders to evaluate their options and may precipitate hasty enforcement actions that destroy enterprise value. From the Borrower's perspective, the optimal framework balances the senior lenders' need for priority of enforcement with the preservation of the Borrower's restructuring flexibility.
We recommend pursuing the following borrower-favorable positions:
Shorter Standstill Period. We recommend initially proposing a 120-day standstill period, rather than the 180-day period that the Senior Agent is expected to request. A 120-day standstill provides the senior lenders with a meaningful period of exclusive enforcement rights while limiting the duration of uncertainty for the Borrower. If the Senior Agent resists a 120-day period, we would be prepared to fall back to 150 days as a compromise, and would accept 180 days only if the carve-outs described below are sufficiently robust.
Automatic Termination Upon Senior Inaction. We recommend proposing that the standstill automatically terminate if the Senior Agent has not commenced enforcement action against the shared collateral within the standstill period. The rationale for this position is straightforward: the purpose of the standstill is to give the senior lenders priority of enforcement, but if the senior lenders choose not to enforce, the Mezzanine Lender's remedies should be fully restored. Without an automatic termination provision, there is a risk that the standstill simply delays any enforcement action, leaving the Borrower in limbo while its financial condition deteriorates.
Carve-Outs from the Standstill. Even during the standstill period, the Mezzanine Lender should retain the right to take certain actions that do not involve enforcement against shared collateral or that serve important protective functions. We recommend insisting that the following actions be carved out of the standstill:
(a) Acceleration of mezzanine obligations. The Mezzanine Lender should be permitted to declare the mezzanine obligations immediately due and payable during the standstill, even though it cannot yet enforce against shared collateral. Acceleration is a necessary predicate to the exercise of the purchase option and other rights, and it should not be deferred merely because enforcement is stayed.
(b) Exercise of the purchase option. The Mezzanine Lender's right to purchase the senior debt (see Section V below) should be exercisable during the standstill. Indeed, the standstill period may be precisely the time when exercise of the purchase option is most valuable, as it provides an alternative to protracted enforcement proceedings.
(c) Filing of proofs of claim in bankruptcy. If a bankruptcy case is commenced during the standstill period, the Mezzanine Lender must be free to file proofs of claim and otherwise participate in the bankruptcy proceedings to protect its interests.
(d) Enforcement against the Parent Equity Pledge. As discussed in detail in Section VI below, the Parent Equity Pledge is exclusive mezzanine collateral and is not part of the shared collateral pool. The Mezzanine Lender's right to enforce against the Parent Equity Pledge should not be subject to the standstill under any circumstances. This is a critical carve-out that we expect the Senior Agent to resist, and we should be prepared for significant negotiation on this point.
No Rolling or Serial Standstills. Once a standstill period has expired with respect to a particular set of defaults, the Senior Agent should not be permitted to reimpose a new standstill based on the same set of defaults. Without this limitation, the Senior Agent could effectively extend the standstill indefinitely by repeatedly delivering new standstill notices, thereby permanently preventing the Mezzanine Lender from exercising its remedies. This outcome would be detrimental to both the Mezzanine Lender and the Borrower, as it would create perpetual uncertainty without resolution.
C. Interaction with Mezzanine Lender Interests
On the standstill issue, the Borrower's interests and the Mezzanine Lender's interests are largely aligned. Ridgeline, acting through its counsel at Archer Blackwell & Moss LLP, will likely resist any standstill period longer than 180 days and will prefer a shorter period. We anticipate that Ridgeline will be a natural ally in pushing for a 120-day or 150-day standstill.
That said, Ridgeline may ultimately be willing to accept a 180-day standstill if the purchase option and cure right carve-outs described above are sufficiently robust. From Ridgeline's perspective, the standstill is less concerning if the Mezzanine Lender retains the ability to purchase the senior debt and thereby take control of the enforcement process. We should be attuned to this dynamic and ensure that any concession on standstill duration is matched by strengthened carve-outs.
We recommend coordinating with Archer Blackwell & Moss LLP (Harrison T. Moss and Angela N. Whitford) in advance of the first negotiating session with Renshaw Pratt LLP to develop a joint approach on the standstill issue. Presenting a unified Borrower/Mezzanine Lender position will be significantly more effective than allowing the Senior Agent to divide the parties and negotiate concessions bilaterally.
D. Recommended Position
• Initial Proposal: 120-day standstill with automatic termination upon senior inaction, plus the carve-outs described in Section III.B above.
• Fallback: 180-day standstill with robust carve-outs (acceleration, purchase option, proofs of claim, Parent Equity Pledge enforcement, no rolling standstills) and automatic termination upon senior inaction.
• Hard Limit: Under no circumstances should Stonefield agree to a standstill period exceeding 180 days. A standstill longer than 180 days is outside of market norms and would represent an unacceptable constraint on both the Mezzanine Lender's and the Borrower's rights.
IV. Issue 2: Payment blockage Provisions
A. Overview of Payment blockage Mechanics
The payment blockage provisions in an intercreditor agreement give the Senior Agent the right, upon the occurrence and continuance of a specified event of default under the Senior Credit Agreement, to block the Borrower from making cash interest payments on the mezzanine facility. The mechanics typically operate as follows:
1. A "Senior Event of Default" occurs under the Senior Credit Agreement.
2. The Senior Agent delivers a "Payment blockage Notice" to the Borrower and the Mezzanine Lender, specifying the nature of the Senior Event of Default and invoking the payment blockage provisions of the Intercreditor Agreement.
3. During the resulting "Blockage period," the Borrower is prohibited from making any cash interest payments on the Mezzanine Facility (and, in some formulations, from making any payments of any kind, including principal, on the Mezzanine Facility).
4. Typically, PIK interest continues to accrue during the blockage period, with the unpaid amounts being capitalized and added to the outstanding principal balance of the Mezzanine Facility.
5. The blockage period continues for the lesser of (a) the specified number of days stated in the Intercreditor Agreement and (b) the date on which the underlying Senior Event of Default is cured or waived.
The payment blockage mechanism is a powerful tool for the senior lenders, as it effectively redirects cash flow from the mezzanine debt service to the preservation of the senior lenders' priority position. From the Borrower's perspective, however, the payment blockage creates significant challenges, including the potential for PIK accrual (which increases the mezzanine principal balance and thereby increases leverage), damage to the relationship with the Mezzanine Lender, and constraints on the Borrower's ability to manage its overall debt service obligations.
B. Expected Terms and Market Practice
Based on market practice and our experience with Renshaw Pratt LLP, we anticipate that the Senior Agent's draft will include the following payment blockage terms:
• blockage Period: Up to 180 consecutive days per Payment blockage Notice.
• Frequency Limitation: No more than one Payment blockage Notice per 360-day period (this is consistent with market standard and provides a reasonable limitation on the Senior Agent's ability to impose serial blockages).
• Trigger: The occurrence and continuance of a payment default or any other specified Senior Event of Default under the Senior Credit Agreement. We expect the Senior Agent to seek broad triggers that encompass not only payment defaults and insolvency events but also financial covenant defaults and other non-payment defaults.
We note that if PIK interest continues to accrue during a blockage period, the result is an increase in the outstanding mezzanine principal balance. This has direct implications for Stonefield's leverage ratios and financial covenant compliance, as discussed in Section IV.D below.
C. Borrower-Favorable Positions to Pursue
We recommend advocating for the following borrower-favorable positions with respect to the payment blockage provisions:
Limit Triggering Events. The most important issue for the Borrower is the scope of the events that can trigger a payment blockage. We recommend arguing that payment blockage should be triggered only by:
(a) Payment defaults under the Senior Credit Agreement (i.e., the failure by the Borrower to pay principal, interest, or other amounts when due to the senior lenders); and
(b) Bankruptcy/insolvency events (i.e., the filing of a voluntary or involuntary bankruptcy petition, the appointment of a receiver, an assignment for the benefit of creditors, or similar events).
The blockage should not be triggerable by financial covenant defaults (e.g., a breach of the total leverage ratio or the fixed charge coverage ratio under the Senior Credit Agreement) or by other non-payment defaults (e.g., a failure to deliver financial statements, a breach of a negative covenant, or a cross-default to other indebtedness). The rationale for this position is that the Borrower should not have its cash interest payments to the Mezzanine Lender blocked merely because of a technical covenant breach at the senior level that has not resulted in any actual failure to make payments. Payment blockage is an extraordinary remedy and should be reserved for circumstances where the senior lenders' access to cash flow is genuinely imperiled.
Duration. Consistent with our position on the enforcement standstill (Section III above), we recommend seeking a maximum blockage period of 120 days, rather than the 180-day period that the Senior Agent is expected to propose. If the Senior Agent resists a 120-day maximum, we would accept 180 days as a fallback, but only with the protections described below.
Frequency Cap. We should confirm that the Intercreditor Agreement includes a firm limitation of no more than one Payment blockage Notice per 360-day period. We should resist any attempt by the Senior Agent to reset the 360-day clock upon the occurrence of a new or different default. In other words, if a Payment blockage Notice is delivered on Day 1 and the resulting blockage period expires on Day 120 (or Day 180), the Senior Agent should not be able to deliver a second Payment blockage Notice until Day 361, regardless of whether a new default has occurred in the interim.
Mandatory Withdrawal Upon Cure. The Senior Agent should be required — not merely permitted — to withdraw the Payment blockage Notice promptly upon the cure or waiver of the underlying Senior Event of Default. The Intercreditor Agreement should specify a time frame (e.g., within 3 business days of cure) within which the withdrawal must be delivered. Upon withdrawal, all payment obligations should resume immediately.
Reinstatement of Payments. Once the blockage period expires or the underlying default is cured, the Borrower should be required to resume cash interest payments on the Mezzanine Facility on the next regularly scheduled payment date. With respect to the treatment of deferred cash amounts (i.e., cash interest that was not paid during the blockage period), we recommend seeking an election right for the Borrower: the Borrower may elect either (a) to pay the deferred cash amounts in a single lump sum upon the expiration of the blockage or (b) to convert the deferred cash amounts to PIK, which would be added to the outstanding mezzanine principal balance. This election right preserves the Borrower's cash flow flexibility at a time when its financial condition may be stressed.
"Same Default" Limitation. If a blockage is imposed based on a particular Senior Event of Default, the Senior Agent should not be permitted to impose a subsequent blockage based on the same default (even if such default has not been cured) after the initial blockage period has expired. Without this limitation, the Senior Agent could effectively create a permanent blockage by repeatedly invoking the same uncured default, circumventing the duration and frequency limitations.
D. Impact on Stonefield's Cash Flow
The cash flow impact of a payment blockage is significant and warrants careful analysis. At a cash interest rate of 850 basis points on a principal balance of $120,000,000, the quarterly cash interest payment on the Mezzanine Facility is approximately $2,550,000. A 180-day blockage period would therefore defer approximately $5,100,000 in cash interest payments (representing two quarterly payments).
If these deferred amounts are converted to PIK and added to the mezzanine principal balance, the resulting increase in funded debt would modestly affect Stonefield's leverage ratios. Specifically:
• The additional $5,100,000 of PIK principal would increase total funded debt from $407,000,000 to approximately $412,100,000.
• Assuming constant LTM Adjusted EBITDA of $108,600,000, the total leverage ratio would increase from 3.75x to approximately 3.80x.
• The incremental impact is relatively modest, but it could be meaningful if Stonefield is operating near its financial covenant thresholds at the time a blockage is imposed.
We strongly recommend that Stonefield's Chief Financial Officer, Janet R. Prescott, model the cash flow impact of a potential 180-day payment blockage scenario and assess the impact on financial covenant compliance under both the Senior Credit Agreement and the Mezzanine Credit Agreement. In addition, we recommend discussing this analysis with Zynvaro Thornton Advisory Group, LLC (Andrew S. Thornton) in connection with the broader financial modeling for the mezzanine financing.
E. Recommended Position
• Initial Proposal: Payment blockage triggered only by payment defaults and insolvency events; 120-day maximum blockage period; same-default limitation; mandatory withdrawal upon cure; Borrower election right for treatment of deferred cash amounts.
• Fallback: 180-day maximum blockage period with broader triggers (including financial covenant defaults), but with a firm frequency cap of one blockage per 360-day period, mandatory cure/withdrawal mechanics, same-default limitation, and Borrower election right for deferred amounts.
• Hard Limit: Under no circumstances should Stonefield agree to payment blockage provisions that lack a frequency cap (one per 360-day period) or that permit serial blockages based on the same uncured default.
V. Issue 3: Mezzanine Purchase Option
A. Description. The Intercreditor Agreement will include a provision granting Ridgeline, as the Mezzanine Lender, the right to purchase all of the outstanding senior debt from the senior lender syndicate (the "Purchase Option"). The Purchase Option is a standard feature of senior/mezzanine intercreditor agreements and serves a critical function: it allows the mezzanine lender, as the junior creditor, to prevent a potentially value-destructive enforcement process by acquiring the senior debt and stepping into the shoes of the senior lenders.
The basic mechanics of the Purchase Option are as follows:
• Trigger: The Purchase Option becomes exercisable upon the acceleration of the senior facility — that is, upon the senior lenders' declaration that all senior obligations are immediately due and payable following the occurrence of a Senior Event of Default.
• Purchase Price: The Mezzanine Lender purchases all outstanding senior debt at par (100% of the outstanding principal amount of the senior loans) plus all accrued and unpaid interest through the date of purchase.
• Effect: Upon completion of the purchase, the Mezzanine Lender steps into the shoes of the senior lenders, including obtaining all first-priority liens on the shared collateral and all rights, remedies, and obligations under the Senior Credit Agreement. The Mezzanine Lender effectively becomes both the senior and mezzanine creditor, which gives it complete control over the enforcement process and eliminates the intercreditor conflicts that can impair a restructuring or workout.
From the Borrower's perspective, the Purchase Option is highly beneficial. If exercised, it replaces a fragmented senior lender syndicate (with potentially divergent interests among Whitmore, Greystone, Heritage Pacific, and Clearfield) with a single creditor (Ridgeline) that holds both the senior and mezzanine positions. A single creditor is typically more willing and able to engage in a consensual restructuring or to provide operational flexibility, as it is not constrained by intercreditor conflicts or majority lender voting requirements.
B. Borrower-Favorable Positions to Pursue
We recommend advocating for the following borrower-favorable positions with respect to the Purchase Option:
Broader Triggers. We recommend seeking to expand the events that trigger the Mezzanine Lender's right to exercise the Purchase Option beyond acceleration alone. Specifically, the Purchase Option should also become exercisable upon:
(a) Commencement of enforcement by the Senior Agent against shared collateral (e.g., the Senior Agent's delivery of a notice of intent to foreclose, the filing of a UCC foreclosure notice, or the commencement of judicial enforcement proceedings);
(b) Exercise of default remedies under the Senior Credit Agreement (including the exercise of set-off rights, the sweeping of deposit accounts, or the application of cash proceeds to senior obligations); and
(c) Filing of an involuntary bankruptcy petition by one or more senior lenders against the Borrower or any subsidiary guarantor.
The rationale for broader triggers is that the Borrower benefits from the Mezzanine Lender having the maximum possible opportunity to acquire the senior debt and prevent a destructive enforcement process. Limiting the Purchase Option to acceleration alone creates a gap: the senior lenders could commence enforcement proceedings without formally accelerating the senior debt, or could exercise remedies short of acceleration (such as sweeping cash collateral) that cause significant harm to the Borrower's operations.
Reasonable Exercise Window. The Purchase Option should be exercisable within 10 business days of the triggering event. This provides the Mezzanine Lender with a reasonable period to evaluate the situation, arrange financing for the purchase (if necessary), and complete the transaction. We note that Ridgeline, as a dedicated mezzanine fund, should have the financial capacity to fund the purchase, but 10 business days provides a reasonable cushion.
In addition, the Senior Agent should be required to provide prompt written notice to both Stonefield and Ridgeline upon the occurrence of any triggering event (i.e., acceleration or commencement of enforcement). Without mandatory notice, the exercise window may effectively be shortened because the Mezzanine Lender may not learn of the triggering event until days after it occurs.
No Consent of Senior Lenders Required. The Purchase Option should be available as of right, without any consent, approval, or other action by the individual members of the senior lender syndicate. The Intercreditor Agreement should expressly override any consent-to-assignment provisions in the Senior Credit Agreement to the extent they would otherwise apply to a purchase under the Purchase Option. This is a critical protection: if the purchase were subject to the consent of individual lenders, one or more lenders could block the purchase and defeat the purpose of the Purchase Option entirely.
Assignment Mechanics. The Senior Credit Agreement (as amended by Amendment No. 3) should expressly permit the assignment of the senior loans to the Mezzanine Lender upon exercise of the Purchase Option without the payment of any assignment fee, transfer fee, or processing fee. We will need to ensure that the language of Amendment No. 3 includes an appropriate carve-out from any assignment restrictions.
Borrower Consent to Assignment. To avoid any potential argument that Stonefield's consent is required under the Senior Credit Agreement for an assignment to the Mezzanine Lender, Stonefield should provide its irrevocable consent to any such assignment in the Intercreditor Agreement itself. This eliminates a potential procedural obstacle and ensures that the Purchase Option can be exercised swiftly.
C. Senior Agent Likely Resistance Points
We anticipate that Renshaw Pratt LLP will resist certain of the positions described above, particularly the following:
Broadening Triggers Beyond Acceleration. The Senior Agent's counsel will likely argue that the Purchase Option should be triggered only upon formal acceleration of the senior obligations, not upon other enforcement-related events. The argument will be that the Purchase Option is an extraordinary right that should be reserved for the most extreme circumstances (i.e., a full acceleration), and that extending it to enforcement actions short of acceleration gives the Mezzanine Lender excessive leverage over the senior lenders' workout strategy.
Our response should be that the Borrower's interest in preserving enterprise value justifies broader triggers, and that the senior lenders' ability to commence enforcement without triggering the Purchase Option creates a perverse incentive to avoid formal acceleration while still pursuing value-extractive remedies.
Purchase Price Additions. The senior lenders may insist that the purchase price include not only par plus accrued interest but also (a) any breakage costs arising from the early termination of SOFR interest period elections, (b) any prepayment premiums that would be payable under the Senior Credit Agreement upon a voluntary prepayment, and (c) any swap termination amounts under hedging arrangements with the senior lenders or their affiliates.
We recommend the following approach to the purchase price issue:
• Documented breakage costs: We are prepared to concede that the purchase price should include documented breakage costs that are actually incurred as a result of the assignment. These are legitimate costs and their inclusion is reasonable.
• Prepayment premiums: We should resist the inclusion of any prepayment premium in the purchase price. The exercise of the Purchase Option is an assignment of the senior loans, not a prepayment. The senior lenders are being paid in full at par; they are not losing the benefit of their loan. A prepayment premium is economically unjustified in the context of an assignment.
• Swap termination amounts: We should discuss with the Stonefield finance team whether any hedging arrangements are currently in place with members of the senior syndicate. If so, the treatment of swap termination amounts should be addressed separately rather than being bundled into the purchase price.
D. Recommended Position
• Initial Proposal: Broadened triggers (acceleration plus commencement of enforcement plus involuntary bankruptcy filings); purchase price at par plus accrued interest plus documented breakage costs (no prepayment premium); 10-business-day exercise window; mandatory notice to both Borrower and Mezzanine Lender; no consent of individual senior lenders required.
• Fallback: Acceleration-only trigger (if broader triggers are not achievable); par plus accrued interest plus documented breakage costs; 10-business-day exercise window; all other protections as described above.
• Hard Limit: The Intercreditor Agreement must include a Purchase Option. We should not agree to an intercreditor framework that does not provide the Mezzanine Lender with the right to purchase the senior debt. The purchase price must not include any prepayment premium.
VI. Issue 4: Lien Subordination and Sole Collateral Control
A. Lien Priority Framework
The fundamental principle of the Intercreditor Agreement is that the Mezzanine Lender's liens on shared collateral are contractually subordinate and junior in priority to the Senior Agent's liens on the same collateral. This subordination is effected by agreement among the parties and operates regardless of the order of filing of financing statements, the date of attachment of the respective security interests, the method of perfection, or any other circumstance that would otherwise affect lien priority under Article 9 of the Uniform Commercial Code or other applicable law.
The Intercreditor Agreement should include the following express provisions regarding lien priority:
(a) The senior liens on shared collateral are senior in priority to the mezzanine liens on shared collateral in all respects.
(b) The foregoing priority is effective regardless of the order of filing, date of attachment, method of perfection, or any other factor.
(c) If, notwithstanding the Intercreditor Agreement, the Mezzanine Lender receives any proceeds from shared collateral in contravention of the agreed priority (including as a result of avoidance actions or judicial error), the Mezzanine Lender shall hold such proceeds in trust for the benefit of the Senior Agent and shall promptly turn over such proceeds to the Senior Agent for application to the senior obligations.
For purposes of the Intercreditor Agreement, "shared collateral" means substantially all assets of Stonefield and the subsidiary guarantors, including equipment, vehicles, rolling stock, accounts receivable, inventory, intellectual property, equity interests in subsidiaries, deposit accounts, securities accounts, and general intangibles, together with all proceeds thereof. This is the same collateral pool in which both the senior lenders (first-priority) and the Mezzanine Lender (second-priority) hold security interests.
Critically, the Parent Equity Pledge — the pledge by Cascade Ridge SLG Holdings, LLC of 100% of the equity interests in Stonefield Logistics Group Inc. — is not shared collateral. The Parent Equity Pledge is a first-priority lien held exclusively for the benefit of the Mezzanine Lender. The senior lenders do not hold and have never held any security interest in the equity of Stonefield at the parent level, and the Intercreditor Agreement should contain an express provision confirming this exclusion.
B. Sole Control / Collateral Agent Authority
During the standstill period and at all times while any senior obligations remain outstanding, the Senior Agent (acting in its capacity as Collateral Agent for the senior lender syndicate) will have sole and exclusive control over the disposition and enforcement of shared collateral. This means that:
• Only the Senior Agent may direct the time, manner, and method of any enforcement action against shared collateral.
• The Mezzanine Lender has no right to direct the Senior Agent to take any action (or to refrain from taking any action) with respect to shared collateral.
• The Senior Agent may agree to releases of shared collateral in connection with permitted transactions (e.g., asset sales) under the Senior Credit Agreement without the consent of the Mezzanine Lender.
• The Senior Agent may amend or modify the security documents with respect to shared collateral without the consent of the Mezzanine Lender, subject to the limitations discussed in Section VIII.A below.
After the repayment in full of all senior obligations (including the termination of all commitments under the Senior Credit Agreement and the cash collateralization or termination of all letters of credit), the Mezzanine Lender steps into the position of controlling creditor with respect to the shared collateral and assumes full rights to direct the enforcement and disposition thereof.
Similarly, after the expiration of the enforcement standstill period (if the Senior Agent has not commenced enforcement during the standstill), the Mezzanine Lender's enforcement rights are restored, subject to the continuing obligation to apply proceeds of shared collateral first to the senior obligations in accordance with the waterfall described in Section VII.A below.
C. Borrower-Favorable Positions to Pursue
While the basic framework of lien subordination and sole collateral control is dictated by the economic bargain between the senior and mezzanine creditors, there are several areas where the Borrower can and should advocate for protective provisions:
DIP Financing Provisions. In a bankruptcy scenario, the availability of debtor-in-possession ("DIP") financing is often the single most important factor in determining whether the Borrower can reorganize as a going concern or will be forced into a liquidation. The Intercreditor Agreement should address DIP financing as follows:
(a) Mezzanine Lender's right to provide DIP financing. If the senior lenders decline to provide or arrange DIP financing on terms acceptable to the Borrower (as debtor-in-possession), the Mezzanine Lender should have the right to provide DIP financing on a priming basis — that is, secured by liens on shared collateral that are senior in priority to both the senior prepetition liens and the mezzanine prepetition liens. This ensures that the Borrower has a viable DIP financing alternative if the senior lenders are unwilling or unable to provide postpetition funding.
(b) Mezzanine Lender's non-objection obligation. The Mezzanine Lender should agree not to object to senior DIP financing that meets specified parameters, including (i) the provision of adequate protection to the Mezzanine Lender's second-priority liens, (ii) a principal amount that does not exceed a specified cap (e.g., the amount of the prepetition senior commitments plus a reasonable cushion), and (iii) market terms and conditions. This prevents the Mezzanine Lender from blocking necessary postpetition financing and preserves the Borrower's ability to operate during the bankruptcy case.
Stonefield benefits from preserving optionality to obtain DIP financing from either creditor class, and the Intercreditor Agreement should not constrain that optionality.
Release Provisions (Automatic Release Mechanics). If the Senior Agent releases its lien on any item of shared collateral in connection with a permitted asset sale, casualty event, or other disposition under the Senior Credit Agreement, the corresponding mezzanine lien on that same collateral should automatically and simultaneously release, without the need for any separate action, consent, or documentation by the Mezzanine Lender. This "automatic release" mechanic is essential for the efficient execution of asset sales and other transactions, as it ensures that the purchaser receives clean title without the burden of obtaining separate lien releases from both creditor classes.
Insurance Proceeds and Condemnation Awards. Proceeds from insurance claims and condemnation awards relating to shared collateral should be applied in accordance with the intercreditor priority waterfall — that is, first to the senior obligations, and after the satisfaction of the senior obligations, the remainder to the mezzanine obligations. However, Stonefield should seek a reinvestment right: the Borrower should have the right to use insurance or condemnation proceeds to repair, replace, or rebuild the damaged or condemned assets within a specified period (we recommend 180 days from the receipt of proceeds) before such proceeds are required to be applied to debt. This reinvestment right is critical for a logistics company like Stonefield, whose fleet of vehicles, rolling stock, and equipment is essential to its ongoing operations.
Limitation on Senior Collateral Expansion. The Senior Agent should not be able to expand the shared collateral pool beyond what is required under the Senior Credit Agreement as of the date of the Intercreditor Agreement without the Mezzanine Lender's consent. This prevents the senior lenders from unilaterally increasing the asset base subject to their first-priority lien at the expense of the Mezzanine Lender's recovery prospects. Additionally, the Intercreditor Agreement should provide that the Mezzanine Lender's second-priority lien automatically attaches to any after-acquired collateral that becomes subject to the senior first-priority lien, ensuring that the relative lien positions remain in parity.
D. Parent Equity Pledge — Exclusive Mezzanine Collateral
As noted throughout this memorandum, the pledge by Cascade Ridge SLG Holdings, LLC of 100% of the equity interests in Stonefield Logistics Group Inc. is a first-priority security interest held exclusively for the benefit of the Mezzanine Lender. This Parent Equity Pledge is a critical component of Ridgeline's collateral package and is one of the key structural features that differentiates the Mezzanine Facility from the senior facility.
We recommend insisting on the following provisions in the Intercreditor Agreement with respect to the Parent Equity Pledge:
(a) The Intercreditor Agreement should contain an express exclusion of the Parent Equity Pledge from the definition of "shared collateral" and from the Senior Agent's sole control rights. The language should be clear and unambiguous, leaving no room for the Senior Agent to argue that it has any authority over the disposition or enforcement of the Parent Equity Pledge.
(b) The Mezzanine Lender's right to enforce the Parent Equity Pledge — including foreclosure, sale, or other realization — should not be subject to the enforcement standstill. This carve-out is essential because the Parent Equity Pledge is the Mezzanine Lender's primary exclusive remedy, and subjecting it to the standstill would effectively deprive the Mezzanine Lender of its only independent enforcement tool during the standstill period.
(c) Notwithstanding the foregoing, we note an important practical limitation on the exercise of the Parent Equity Pledge: a foreclosure on the equity interests in Stonefield by the Mezzanine Lender would result in a change of ownership of Stonefield that may trigger change of control defaults under the Senior Credit Agreement. This interaction between the Parent Equity Pledge enforcement and the change of control provisions is a complex issue that requires careful analysis. We will address this issue in a separate Change of Control Provisions Analysis Memorandum, which Daniel Obi is currently preparing and which is anticipated to be delivered on or about August 25, 2023.
E. Recommended Position
• Sole Collateral Control: Accept the Senior Agent's sole control over shared collateral during the standstill period and while senior obligations remain outstanding. This is a fundamental element of the intercreditor bargain and is not a point on which we would expend significant negotiating capital.