1012-00002 · Stonefield Logistics Group · Analysis

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Nathaniel Bower, Partner, Calderwood & Harkness LLP

FROM: Gabrielle Moss, Associate, Calderwood & Harkness LLP

REVIEWED BY: Nathan Ikeda, Lead Associate, Calderwood & Harkness LLP

DATE: April 20, 2023

RE: Stonefield Logistics Group Inc. — Analysis of Amendment Mechanics and Consent Thresholds Under the First Lien Credit Agreement and Mezzanine Indenture

MATTER NO.: 1012-00002

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I. Executive Summary and Purpose

The purpose of this memorandum is to analyze the amendment, waiver, and consent provisions under the two principal debt instruments governing Stonefield Logistics Group Inc.'s (the "Company") funded indebtedness in order to identify the consent thresholds and procedural requirements the Company must satisfy to effectuate the contemplated consensual out-of-court restructuring. This analysis has been prepared at your request in connection with our firm's engagement as restructuring counsel to the Company, and it is intended to inform the strategic and tactical decisions surrounding the restructuring process, including the sequencing, documentation, and creditor engagement workstreams.

The two instruments that are the subject of this memorandum are:

(a) The First Lien Credit Agreement, dated as of December 15, 2017 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among Stonefield Logistics Group Inc., as Borrower, Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto; and

(b) The Indenture, dated as of December 15, 2017 (as supplemented or amended from time to time, the "Mezzanine Indenture"), among Stonefield Logistics Group Inc., as Issuer, and Continental Fiduciary Trust Company, as Trustee and Second Lien Collateral Agent, governing the 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes" or "Notes").

Our key findings are summarized as follows:

(i) Amend-and-Extend of TLB and Revolver. The proposed extension of the Term Loan B maturity and certain general amendments to the Credit Agreement are achievable with the consent of the Required Lenders (defined as Lenders holding more than 50% of the aggregate outstanding principal amount of the Term Loans and unfunded Revolving Commitments). Separately, because certain of the proposed amendments implicate "sacred rights" provisions — most significantly, the extension of maturity — each affected Lender whose maturity is being extended must individually consent. The Revolving Credit Facility amendments require the consent of each Revolver Lender, and given the three-lender structure, unanimous Revolver Lender consent is anticipated.

(ii) Mezzanine Equitization via Exchange. The proposed exchange of Mezzanine Notes for preferred and common equity in the reorganized Company requires the consent of holders of not less than 66⅔% in aggregate principal amount of the outstanding Notes. The equitization must be structured as a voluntary exchange offer rather than a mandatory amendment, in order to comply with the protections of Section 316(b) of the Trust Indenture Act of 1939 (to the extent applicable) and the analogous contractual provisions of the Mezzanine Indenture.

(iii) Sacred Rights. Certain amendments under both instruments — including, critically, extension of maturity and reduction of principal — require unanimous or each-affected-lender consent and cannot be overridden by a majority or supermajority vote of creditors.

(iv) Exit Consent Amendments. In connection with the mezzanine exchange, consenting holders may simultaneously deliver exit consents to a supplemental indenture that strips substantially all restrictive covenants, events of default, reporting obligations, and optional redemption provisions from the remaining Notes. This mechanism is designed to incentivize participation by non-consenting holders and to diminish the practical protections afforded by the stripped Notes. However, the exit consent supplemental indenture must be carefully drafted to avoid impairment of the "right to receive payment" under Section 316(b) of the TIA and applicable case law.

Scope. This memorandum addresses amendment mechanics and consent thresholds only. Separate workstreams are underway covering: (a) intercreditor agreement provisions and the accommodation of the contemplated super-priority facility (to be addressed in a forthcoming memorandum); (b) guaranty and security matters, including the perfection, release, and reattachment of liens; and (c) tax consequences of the mezzanine equitization, including cancellation of indebtedness income and the treatment of the preferred equity issuance. Cross-references to those workstreams are made herein where relevant.

II. Overview of the Capital Structure and Relevant Instruments

A. First Lien Credit Agreement

The Credit Agreement was entered into on December 15, 2017, among Stonefield Logistics Group Inc., as Borrower, Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto. The Credit Agreement is governed by the laws of the State of New York.

The Credit Agreement provides for the following facilities:

Term Loan B Facility. The Term Loan B (the "TLB") was originally funded in the principal amount of $310.0 million. As a result of $25.0 million in scheduled amortization payments made through the date of this memorandum, the current outstanding principal balance of the TLB is $285.0 million. The TLB bears interest at a rate per annum equal to the Secured Overnight Financing Rate ("SOFR") plus 425 basis points, subject to a SOFR floor of 75 basis points. The stated maturity date of the TLB is December 15, 2024.

Revolving Credit Facility. The Revolving Credit Facility (the "Revolver") provides for aggregate commitments of $50.0 million. As of the date of this memorandum, $42.0 million in borrowings are outstanding under the Revolver, with an additional $3.5 million in outstanding letters of credit, leaving $4.5 million of undrawn availability. The Revolver bears interest at a rate per annum equal to SOFR plus 375 basis points. The stated maturity date of the Revolver is December 15, 2024, coterminous with the TLB maturity.

The current TLB syndicate is comprised of the following Lenders:

The Revolving Credit Facility is provided by three lenders, as follows:

Counsel to the first lien lenders is Westlake Harden & Cole LLP, with Ramona Quelibo serving as lead partner on the engagement. We anticipate that Westlake Harden & Cole will take an active role in negotiating the amendment documentation on behalf of the Lenders and the Administrative Agent.

B. Mezzanine Indenture

The Mezzanine Indenture was entered into on December 15, 2017, among Stonefield Logistics Group Inc., as Issuer, and Continental Fiduciary Trust Company, as Trustee and Second Lien Collateral Agent. The Mezzanine Indenture governs the 11.50% Senior Secured Second Lien Notes due June 15, 2025 (CUSIP 861537 AA 2). The Mezzanine Indenture is governed by the laws of the State of New York.

The outstanding principal amount of the Mezzanine Notes is $140.0 million. In addition, accrued and unpaid payment-in-kind ("PIK") interest, estimated through the expected closing of the restructuring, totals approximately $8.1 million. The Notes feature a cash/PIK toggle mechanism that has permitted the Company to satisfy a portion of its interest obligations through the issuance of additional Notes in lieu of cash interest, contributing to the growth in aggregate principal outstanding since the original issuance date.

The principal holders of the Mezzanine Notes are as follows:

An ad hoc group of mezzanine holders (the "Ad Hoc Group") was formed informally in February 2023, and the members of the Ad Hoc Group executed a formal cooperation agreement on March 10, 2023. The Ad Hoc Group is represented by Thornbury McCaffrey LLP, with Alan Driscoll serving as lead partner, and is advised by Meridian Veltrian Partners LLC as financial advisor. As discussed in detail below, the Ad Hoc Group's aggregate holdings alone are sufficient to exceed the requisite consent thresholds under the Mezzanine Indenture.

III. Amendment and Consent Mechanics Under the First Lien Credit Agreement

A. Definition of "Required Lenders"

The Credit Agreement defines "Required Lenders" using the standard formulation found in syndicated leveraged loan agreements: Lenders holding more than 50% of the aggregate outstanding principal amount of the Term Loans and unfunded Revolving Commitments, excluding Defaulting Lenders. This definition aggregates both the TLB facility and the Revolving Credit Facility into a single pool for purposes of determining whether the majority consent threshold has been satisfied.

As applied to the current syndicate, the Required Lenders threshold is calculated as follows:

Outstanding TLB principal: $285.0 million

Outstanding Revolver Commitments (unfunded and funded): $50.0 million

Aggregate: $335.0 million

Required Lenders threshold (>50%): more than $167.5 million

It is important to note the distinction between the "Required Lenders" consent threshold — which is calculated across the aggregate of all facilities — and facility-specific consent requirements that apply to certain types of amendments. As discussed in Section III.D below, amendments that affect only one facility, or that implicate "sacred rights" provisions, may require a different consent calculus. In particular, a maturity extension of the TLB is a sacred right requiring each affected TLB Lender's individual consent, a threshold that cannot be satisfied merely by achieving a Required Lenders vote.

The exclusion of Defaulting Lenders from the Required Lenders calculation is also noteworthy. Under most credit agreement formulations, a Defaulting Lender — defined generally as a Lender that has failed to fund its share of a borrowing or that has become the subject of a bankruptcy or insolvency proceeding — is stripped of voting rights and excluded from the denominator. As of the date of this memorandum, we are not aware of any Defaulting Lenders under the Credit Agreement, and accordingly the full $335.0 million denominator applies.

B. General Amendment Provisions (Section 10.01 or Equivalent)

The Credit Agreement contains a general amendment provision (expected to be located in Section 10.01 or a similarly numbered section) that establishes the baseline consent framework for amendments, modifications, waivers, and consents. Under this provision, any amendment, modification, waiver, or consent with respect to the Credit Agreement or any other Loan Document generally requires the written agreement of the Borrower and the Required Lenders.

This general consent provision is subject to several important qualifications:

Facility-Specific Amendments. Depending on the specific drafting of the Credit Agreement, amendments that affect only the Revolving Facility or only the Term Loan may require consent of the requisite percentage of Lenders under the relevant facility, rather than a cross-facility Required Lenders vote. We are in the process of confirming the specific mechanics of the Credit Agreement's facility-specific amendment provisions. In some credit agreements, amendments that affect only the terms of one facility require the consent of a majority of the lenders under that facility (defined as "Required Revolving Lenders" or "Required Term Lenders," as applicable), while in others, all substantive amendments require a Required Lenders vote calculated across all facilities. The distinction is significant because the TLB lenders represent a substantially larger share of the aggregate than the Revolver Lenders, and a cross-facility Required Lenders vote gives TLB lenders effective control over the amendment process.

Administrative Agent Consent. The Administrative Agent's consent is separately required for any amendment that modifies the Agent's rights, duties, obligations, immunities, indemnification protections, or compensation. This is a standard provision in syndicated credit agreements and ensures that the Agent, which is performing a fiduciary-like administrative function, is not subjected to increased obligations or diminished protections without its agreement. We note that Pinnacle National Bank, N.A. serves as both Administrative Agent and Collateral Agent, and its consent will be required for amendments affecting either capacity.

"Snooze-You-Lose" Provisions. We note that certain credit agreements include a provision deeming a Lender's failure to respond to a consent solicitation within a specified period (typically 10 or 15 business days) as a consent to the proposed amendment or waiver. If the Credit Agreement includes such a provision, it could materially affect the consent calculus by effectively converting non-responses into affirmative consents. We are reviewing the specific language of the Credit Agreement to determine whether such a provision exists and, if so, the applicable response period and any conditions or limitations on its operation. We will update this memorandum once the review is complete.

C. Sacred Rights / All-Affected-Lender Provisions

Certain amendments to the Credit Agreement require the consent of each Lender directly and adversely affected, or in some cases the consent of all Lenders (100%), without regard to whether the Required Lenders threshold has been met. These provisions — commonly referred to as "sacred rights" — protect individual Lenders against amendments that would impair their fundamental economic or structural rights. The typical sacred rights provisions found in syndicated credit agreements, and their applicability to the contemplated restructuring, are analyzed below:

1. Extension of Maturity. Extending the maturity date of the TLB or the Revolver, or extending the date of any scheduled amortization or other mandatory payment, requires the consent of each affected Lender (not merely the Required Lenders). This is the single most critical sacred right implicated by the contemplated restructuring. The proposed transaction extends the TLB maturity from December 15, 2024 to December 19, 2028 — a four-year extension — and extends the Revolver maturity from December 15, 2024 to December 19, 2027 (subject to a springing maturity mechanism). Because each TLB Lender must individually consent to the extension of its loan's maturity, the Company cannot rely on a majority vote to override a dissenting minority. Non-consenting TLB Lenders would retain their existing maturity of December 15, 2024, creating a bifurcated maturity structure that the Company must address through alternative mechanics, as discussed in Section III.D below.

2. Reduction of Interest Rates or Fees. Reducing the rate of interest (or the applicable margin or spread), or reducing mandatory commitment fees, letter of credit fees, or other fees payable to any Lender, requires the consent of each affected Lender. This sacred right is not implicated by the contemplated restructuring with respect to the interest rate modification, because the proposed amendments increase the applicable margin on the TLB from SOFR + 425 basis points to SOFR + 500 basis points, and increase the applicable margin on the Revolver from SOFR + 375 basis points to SOFR + 450 basis points. Accordingly, no Lender's interest rate is being reduced. However, we note that to the extent the amended Credit Agreement modifies any existing fee arrangement (such as agent fees, letter of credit fees, or unused line fees), the Company should confirm that no Lender's fee entitlement is being reduced without its consent.

3. Reduction of Principal. Any reduction, forgiveness, or write-down of the principal amount of any Loan, or any forgiveness of accrued and unpaid interest, requires the consent of each affected Lender. The contemplated restructuring does not contemplate any reduction of TLB principal — the $285.0 million outstanding TLB balance remains at par — and accordingly this sacred right is not implicated. If the restructuring were to include any element of principal forgiveness or haircut on the TLB, each affected TLB Lender would be required to consent individually.

4. Reduction of Commitment. Reducing any Lender's Revolving Commitment without its consent is typically a sacred right requiring each affected Lender's consent. The proposed restructuring reduces the aggregate Revolving Credit Facility commitment from $50.0 million to $35.0 million. This reduction requires the consent of each Revolver Lender whose commitment is being reduced. As noted above, the Revolving Credit Facility is provided by three Lenders (Pinnacle National Bank, N.A., Great Basin Commercial Bank, and Tidewater Lending Corporation), all of which are expected to support the restructuring. Assuming each Revolver Lender consents to its pro rata share of the commitment reduction, this sacred right will be satisfied.

5. Amendment of Pro Rata Sharing Provisions. Amendments to the Credit Agreement's pro rata sharing and waterfall provisions — which govern the allocation of payments, prepayments, and collateral proceeds among the Lenders — typically require the consent of all Lenders (100%). The contemplated restructuring does not, on its face, propose to modify the pro rata sharing mechanics within the first lien facility. However, to the extent the consent fee structure (discussed in Section III.E below) or any other element of the restructuring could be characterized as a departure from pro rata sharing — for example, a consent fee payable only to consenting Lenders — the Company should confirm that the Credit Agreement permits such differential treatment. We discuss this issue further in Section III.E below.

6. Amendment of the Definition of "Required Lenders." Modifying the definition of "Required Lenders" — whether by changing the percentage threshold, altering the composition of the denominator, or otherwise — is typically an all-Lender consent item. The contemplated restructuring does not propose to amend this definition.

7. Release of All or Substantially All Collateral. Releasing all or substantially all of the Collateral securing the obligations under the Credit Agreement is typically an all-Lender consent item, although some credit agreements permit collateral releases with the consent of the Required Lenders in connection with dispositions permitted under the Credit Agreement. The contemplated restructuring does not propose a release of first lien collateral; rather, the collateral package securing the first lien obligations is expected to remain intact and, indeed, to be enhanced by the subordination of the second lien claims upon the equitization of the Mezzanine Notes.

8. Release of All or Substantially All Guarantors. Similarly, releasing all or substantially all of the guarantors from their guarantee obligations is typically an all-Lender consent item (or, in some drafting, a Required Lenders consent item). The contemplated restructuring does not propose any guarantor releases.

9. Subordination of Liens. To the extent the contemplated super-priority facility (provided by Belvedere Credit Opportunities Fund LP in a principal amount of $55.0 million) would alter the lien priority of existing first lien Lenders, this could implicate the sacred rights provision relating to subordination or priming of liens. If the super-priority facility is structured to hold a first-priority lien on all or substantially all Collateral, the existing first lien Lenders' liens would be effectively subordinated from first-priority to second-priority (or "first lien second out"). Whether this constitutes a sacred right requiring all-Lender or all-affected-Lender consent depends on the specific drafting of the Credit Agreement's sacred rights provision. However, if the super-priority facility is documented as a separate credit agreement with its own separate security agreements and collateral documents, and the lien priority is governed by an Amended and Restated Intercreditor Agreement (rather than by an amendment to the Credit Agreement itself), the sacred rights provision of the Credit Agreement may not be directly triggered. This structural approach — which is the approach contemplated by the current term sheet — relies on the existing intercreditor agreement's provisions permitting the incurrence of additional senior indebtedness, and is analyzed in greater detail in the separate intercreditor memorandum being prepared by this office.

D. Facility-Specific Consent Requirements

Term Loan B Maturity Extension. As noted in Section III.C.1 above, the extension of the TLB maturity from December 15, 2024 to December 19, 2028 is a sacred right that cannot be accomplished through a Required Lenders vote. Each individual TLB Lender whose loan maturity is being extended must affirmatively consent to the extension. A non-consenting TLB Lender's loan would retain its existing maturity of December 15, 2024, and the Company would be obligated to repay that Lender's share of the TLB on the original maturity date.

Mechanics to Address Non-Consenting TLB Lenders. To the extent any TLB Lenders decline to consent to the maturity extension, the Company has several potential mechanisms to address the resulting bifurcated maturity structure:

(a) Open Market Purchase or Par-Plus-Accrued Buyout. The Company could offer to purchase non-consenting Lenders' TLB loans at par plus accrued interest (or, if the non-consenting Lenders demand it, at a premium to par), using proceeds from the super-priority facility, available cash, or a contribution from the Sponsor. This approach has the advantage of simplicity and certainty, but it requires adequate liquidity and depends on the willingness of non-consenting Lenders to sell at an acceptable price.

(b) "Yank-a-Bank" or Replacement Lender Mechanics. Many syndicated credit agreements include a provision (commonly referred to as a "yank-a-bank" provision) that permits the Borrower or the Administrative Agent to replace a non-consenting Lender with a substitute Lender that is willing to hold on the amended terms, provided that the non-consenting Lender is repaid in full at par plus accrued interest and any breakage costs. We are reviewing the Credit Agreement to confirm whether such a provision exists, and if so, the specific conditions and procedures that must be followed. If available, this mechanic provides a contractual right to remove holdout Lenders and is generally enforceable.

(c) Assignment and Participation. To the extent the Credit Agreement permits assignments without the consent of the Borrower or with the consent of the Administrative Agent (which is controlled by Pinnacle, a supportive Lender), the Company may be able to facilitate the assignment of non-consenting Lenders' positions to willing transferees who would then consent to the amendment.

We recommend that the Company develop a detailed plan for addressing non-consenting TLB Lenders, including identifying potential replacement lenders and estimating the aggregate exposure from holdout positions. Based on the current syndicate composition, we note that the 11 unidentified syndicate members holding an aggregate of $117.0 million in TLB loans represent the primary source of potential holdout risk, and the Company's financial advisor (Hargrove Advisory Group LLC) should be tasked with assessing the likely consent posture of each of these Lenders.

Revolving Credit Facility. The proposed reduction of the Revolving Credit Facility commitment from $50.0 million to $35.0 million and the extension of the Revolver maturity to December 19, 2027 (with a springing maturity mechanism tied to the TLB maturity) require the consent of each Revolver Lender. Given that the Revolving Credit Facility is provided by only three Lenders — Pinnacle National Bank, N.A. ($20.0 million commitment), Great Basin Commercial Bank ($15.0 million commitment), and Tidewater Lending Corporation ($15.0 million commitment) — unanimous consent is a manageable proposition. Based on preliminary discussions, all three Revolver Lenders are expected to support the restructuring, and we do not anticipate holdout issues with respect to the Revolver.

Financial Covenant Additions. The contemplated restructuring adds two new financial covenants to the Credit Agreement: a Total Net Leverage covenant and a Minimum Liquidity covenant. The addition of new financial covenants that are more restrictive than the existing terms constitutes an additional restriction on the Borrower that inures to the benefit of the Lenders. Under most credit agreement formulations, amendments that add covenants or restrictions for the benefit of the Lenders require only Required Lenders consent, because no Lender is adversely affected by the imposition of additional protections. However, we note that certain credit agreements contain an anti-amendment provision that prohibits the addition of new covenants or the tightening of existing covenants without all-Lender consent or the consent of Lenders holding a supermajority threshold. We are reviewing the Credit Agreement to confirm that no such anti-amendment provision exists and that the addition of the proposed financial covenants can be accomplished with Required Lenders consent.

Modification of Mandatory Prepayment Provisions. The contemplated restructuring may modify the existing mandatory prepayment provisions of the Credit Agreement, including by introducing an excess cash flow sweep in connection with the new super-priority facility. To the extent the amendments modify the existing prepayment waterfall — for example, by redirecting excess cash flow that would otherwise be shared pro rata among TLB Lenders to the super-priority facility first — this could implicate the sacred rights provision relating to pro rata sharing or could require each affected Lender's consent. We are reviewing the specific provisions to determine the applicable consent threshold and will update this memorandum accordingly.

E. Consent Fee Mechanics

The current restructuring term sheet contemplates the payment of consent fees to incentivize Lenders to consent to the proposed amendments within the applicable consent period. The proposed consent fees are as follows:

(a) TLB Consent Fee: 50 basis points on the outstanding TLB principal, calculated as $285.0 million × 0.50% = $1,425,000; and

(b) Revolver Consent Fee: 25 basis points on the reduced Revolver commitment, calculated as $35.0 million × 0.25% = $87,500.

The consent fees would be payable only to Lenders that affirmatively consent to the proposed amendments within the applicable consent deadline. This is a standard market incentive mechanism designed to encourage prompt and affirmative consent. The term sheet further contemplates an early consent deadline (as yet to be determined) that would entitle Lenders consenting prior to that date to an enhanced consent fee or priority allocation.

Several issues arise in connection with the consent fee mechanics:

Agent Approval. We need to confirm whether the payment of consent fees to individual Lenders requires the approval or involvement of the Administrative Agent, or whether such payments can be structured as direct Borrower-to-Lender payments outside of the Credit Agreement's payment and waterfall mechanics. Under most credit agreements, payments to Lenders are required to be made through the Agent, but consent fees are frequently structured as direct payments.

Pro Rata Sharing / Equal Treatment. The payment of consent fees only to consenting Lenders raises a potential issue under the Credit Agreement's pro rata sharing provisions. If the Credit Agreement requires that all payments to Lenders be shared pro rata, a consent fee that is paid differentially (i.e., only to consenting Lenders) could be challenged as violating the pro rata sharing requirement. However, consent fees are a well-established market practice, and most credit agreements are interpreted to permit differential consent fees on the theory that the consent itself represents consideration for the fee, distinguishing it from a payment on account of the Loans. We are reviewing the specific pro rata sharing language in the Credit Agreement to assess any risk in this regard.

F. Administrative Agent Role in Amendments

Pinnacle National Bank, N.A. serves as Administrative Agent and Collateral Agent under the Credit Agreement. In its capacity as Administrative Agent, Pinnacle occupies a central role in the amendment process:

Consent Requirement. The Administrative Agent's consent is separately required for any amendment that modifies the Agent's rights, duties, obligations, immunities, indemnification protections, or compensation. This is independent of the Required Lenders consent threshold and applies regardless of whether the Required Lenders have approved the amendment. Given that Pinnacle is also the largest TLB Lender (holding $45.0 million) and the largest Revolver Lender (holding a $20.0 million commitment), and that it is expected to support the restructuring, we do not anticipate that obtaining the Agent's consent will present a practical obstacle.

Execution and Distribution. The Administrative Agent is typically required to execute amendments on behalf of the Lenders once the requisite consents have been obtained, and to distribute consent solicitation materials, notices, and other communications to the Lender group. The Agent will also be responsible for maintaining the register of assignments and participations, which is relevant to confirming the identities and holdings of the current Lenders for purposes of determining whether the Required Lenders threshold has been satisfied.

Agent's Counsel. Westlake Harden & Cole LLP (Ramona Quelibo, lead partner) serves as counsel to the Administrative Agent and the first lien Lenders. We anticipate that Westlake Harden & Cole will review and negotiate the amendment documentation on behalf of the Agent and will coordinate with our office on the terms of the Amended and Restated Credit Agreement. The engagement of Agent's counsel at an early stage is advisable to ensure alignment on the amendment mechanics and to minimize delays in the documentation process.

Agent Fees and Expenses. The Agent's fees and expenses, including the fees of Agent's counsel, are reimbursable by the Borrower under the Credit Agreement. The Company should budget for these costs as part of the overall transaction cost estimate.

G. Current Consent Posture — First Lien

As of the date of this memorandum, the Company has not yet circulated a formal restructuring term sheet to the first lien Lenders. The current target for circulation of the initial term sheet is mid-May 2023, with a formal consent solicitation to follow in connection with the Restructuring Support Agreement process in June 2023.

Based on preliminary discussions conducted by the Company's financial advisor, Hargrove Advisory Group LLC (Elena Voss), with key members of the TLB syndicate, the following Lenders are expected to support the restructuring:

The aggregate TLB holdings of these five expected supporters ($168.0 million) alone exceed the Required Lenders threshold of more than $167.5 million for general amendments. Adding Pinnacle's $20.0 million Revolver Commitment, the aggregate held by expected supporters is $188.0 million, or approximately 56.1% of the $335.0 million aggregate.

However, as emphasized throughout this memorandum, the Required Lenders threshold is insufficient for amendments that implicate sacred rights. The maturity extension — the centerpiece of the first lien restructuring — requires each individual TLB Lender's consent. The Company will need to engage with all 16 TLB Lenders (5 identified expected supporters plus 11 other syndicate members holding an aggregate of $117.0 million) and must be prepared to address non-consenting Lenders through the replacement, buyout, or other mechanics described in Section III.D above.

With respect to the Revolving Credit Facility, all three Revolver Lenders (Pinnacle, Great Basin, and Tidewater) are expected to consent unanimously to the proposed commitment reduction and maturity extension. We do not anticipate holdout risk on the Revolver.

IV. Amendment and Consent Mechanics Under the Mezzanine Indenture

A. Overview of Trust Indenture Act Applicability

An initial threshold question is whether the Mezzanine Notes were issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and whether the Mezzanine Indenture is a "qualified indenture" under the Trust Indenture Act of 1939, as amended (the "TIA").

Based on our preliminary review, the Mezzanine Notes were issued in a private placement exempt from registration under Rule 144A and/or Section 4(a)(2) of the Securities Act. Private placements are generally exempt from the qualification requirements of the TIA, which means that the Mezzanine Indenture is not a "qualified indenture" subject to the mandatory provisions of the TIA. However, it is common market practice for indentures governing privately placed notes to incorporate provisions substantially similar to those mandated by the TIA, including, critically, the protections of TIA Section 316(b) (which prohibits amendments that impair the right of any holder to receive payment of principal and interest without that holder's individual consent). We are reviewing the Mezzanine Indenture to confirm whether it incorporates TIA Section 316(b) protections either by reference or by analogy.

If the Mezzanine Indenture does incorporate Section 316(b) protections — as is virtually certain based on standard market practice — the amendment provisions are subject to the constraints discussed in Sections IV.C and IV.D below. Even if the Indenture does not technically incorporate Section 316(b) (because it is not TIA-qualified), the analogous contractual provisions in the Indenture itself will govern, and we expect those provisions to impose substantially similar constraints.

B. Consent Thresholds for Amendments and Supplements

The Mezzanine Indenture establishes a tiered consent framework for amendments and supplemental indentures, consistent with standard indenture practice:

Supplemental Indentures Without Holder Consent (Section 9.01 or Equivalent). The Issuer and the Trustee may enter into supplemental indentures without the consent of any holder of Notes for certain limited purposes, including:

(i) to cure any ambiguity, defect, or inconsistency in the Indenture or the Notes;

(ii) to add guarantors or to evidence the succession of another person to the Issuer;

(iii) to add covenants or events of default for the benefit of the holders of the Notes;

(iv) to comply with requirements of the Securities and Exchange Commission in order to effect or maintain the qualification of the Indenture under the TIA (if applicable);

(v) to make any other change that does not adversely affect the rights of any holder of the Notes in any material respect.

Supplemental Indentures With Holder Consent (Section 9.02 or Equivalent). Modifications, amendments, supplements, or waivers that adversely affect the rights of holders generally require the consent of holders of a specified percentage in aggregate principal amount of the outstanding Notes. The standard threshold for general amendments is a majority (more than 50%) in principal amount. However, the Mezzanine Indenture is expected to include a heightened consent threshold for amendments affecting certain fundamental terms.

Heightened Threshold for Fundamental Amendments. For any amendment that would:

(i) reduce the principal amount of the Notes (whether by write-down, forgiveness, or otherwise);

(ii) reduce the rate of interest on the Notes or change the time of payment of interest;

(iii) change the stated maturity of the Notes;

(iv) impair the right of any holder to institute suit for the enforcement of any payment due on or after the stated maturity;

(v) reduce the percentage in principal amount of Notes required to consent to any amendment, supplement, or waiver;

(vi) modify certain subordination or intercreditor provisions;

the Indenture typically requires the consent of holders of not less than 66⅔% (two-thirds) in aggregate principal amount of the outstanding Notes. We are confirming the precise threshold in the Mezzanine Indenture, as some indentures use a simple majority threshold for all amendments subject to TIA Section 316(b) protections and reserve the 66⅔% threshold only for the most fundamental modifications.

Application to the Contemplated Equitization. The proposed equitization — pursuant to which holders of Mezzanine Notes would exchange their Notes for a combination of Series A Preferred Equity ($35.0 million in liquidation preference, bearing 10.00% PIK dividends) and 47.5% of the pro forma common equity of the reorganized Company — is effectively a reduction of principal and an elimination of maturity. The exchange converts a $140.0 million fixed-income obligation into equity securities with no stated maturity and no contractual right to repayment of principal. Accordingly, the equitization implicates the heightened consent threshold and requires the consent of holders of at least 66⅔% in principal amount, or $93.3 million, of the outstanding Notes.

We are confirming whether the Indenture uses a "majority" (>50%) threshold for general amendments with the 66⅔% threshold reserved for fundamental amendments, or whether the Indenture imposes the 66⅔% threshold for all substantive amendments. In either case, the Ad Hoc Group's aggregate holdings of $122.0 million (87.1% of outstanding) are well in excess of both thresholds.

C. Sacred Rights Under the Mezzanine Indenture

The most significant constraint on the amendment mechanics is the sacred right protection derived from TIA Section 316(b) or its contractual equivalent. This provision states, in substance, that no amendment, supplement, or waiver may impair the right of any holder to receive payment of principal of, and interest on, the Notes on or after the due dates therefor, or to institute suit for the enforcement of any such payment, without that holder's individual consent.

The critical implication of this provision for the contemplated restructuring is as follows: even if holders of 66⅔% or more in principal amount consent to the equitization, no holder can be compelled to accept the exchange of its Notes for equity without its individual consent. A mandatory amendment that strips the payment obligation from the Notes — effectively converting the Notes into equity by operation of the amendment itself, without each holder's affirmative participation — would violate the Section 316(b) protection and would be unenforceable against non-consenting holders.

Accordingly, the equitization must be structured as a voluntary exchange offer. Under this structure, each holder of Mezzanine Notes is given the opportunity to tender its Notes in exchange for the new equity consideration (Series A Preferred Equity and common equity). Holders who elect to participate tender their Notes, which are then cancelled, and receive the equity consideration in exchange. Holders who decline to participate retain their Notes, which continue to be outstanding obligations of the Issuer with the full right to receive payment of principal and interest on the stated maturity.

This structure preserves the Section 316(b) protections because no holder is compelled to accept the equity exchange without its consent. The mechanism for incentivizing participation by holders who might otherwise decline — namely, the exit consent mechanism — is discussed in Section IV.D below.

D. Exit Consent Mechanics

Strategy. The exit consent mechanism is a well-established technique for incentivizing participation in exchange offers and for addressing the holdout problem inherent in voluntary exchange structures. Under this approach, holders who participate in the exchange (consenting holders) simultaneously deliver their consent (an "exit consent") to a supplemental indenture that strips substantially all of the restrictive covenants, events of default, reporting obligations, and optional redemption provisions from the Mezzanine Notes. The supplemental indenture is executed upon satisfaction of the minimum consent threshold, and its provisions take effect immediately — including with respect to the Notes held by non-consenting holders who did not participate in the exchange.

The effect of the exit consent is to create a stark dichotomy between participating and non-participating holders: participating holders receive the new equity consideration (with its attendant governance rights, upside potential, and preferred equity protections), while non-participating holders retain Notes that are formally still outstanding but have been stripped of virtually all covenant protections. The stripped Notes continue to carry the formal right to receive payment of principal and interest, but they are no longer protected by the restrictive covenants, collateral, reporting obligations, and events of default that gave the Notes their practical enforceability and value.

Consent Threshold for Exit Amendments. The consent threshold for the exit consent supplemental indenture depends on the nature of the amendments being effected. If the exit consent amendments do not directly impair the right to receive principal and interest — that is, if they strip only non-core protective provisions while leaving the payment waterfall and stated maturity intact — they should fall within the general amendment threshold (majority or 66⅔% consent, depending on the Indenture's provisions) rather than requiring individual holder consent under Section 316(b). The key analytical question is whether the particular provisions being stripped constitute "core" payment terms or "protective" terms.

Based on the current analysis, we anticipate that the exit consent supplemental indenture will require consent of holders of 66⅔% in principal amount, which is the heightened threshold applicable to amendments affecting subordination and other fundamental provisions. Even if a lower threshold (majority) were applicable to some of the stripped provisions, the Company should plan around the 66⅔% threshold to provide maximum certainty and minimize litigation risk.

Anticipated Result. Based on the current consent posture, we estimate that the exchange will attract participation from approximately $134.5 million in principal amount of Notes (96.1% of the $140.0 million outstanding), including the $122.0 million held by Ad Hoc Group members plus an additional $12.5 million from non-group holders expected to join during the joinder period. Non-consenting holders are estimated at approximately $5.5 million in principal amount ($140.0 million minus $134.5 million). The exit consent supplemental indenture, executed with the support of the $134.5 million consenting base, would strip the covenant protections from the remaining $5.5 million in outstanding Notes.

Legal Risk Assessment. Exit consent amendments have been the subject of significant and evolving case law. The leading authorities include:

Katz v. Oak Industries Inc., 508 A.2d 873 (Del. Ch. 1986), which upheld exit consents as a legitimate exercise of majority holder rights and rejected the argument that exit consents constituted an impermissible coercion of minority holders;

Ashbury Holdings, 75 F. Supp. 3d 592 (S.D.N.Y. 2014), which initially held that the "right to receive payment" under TIA Section 316(b) encompasses not merely the formal legal right to sue for payment but also the practical ability to receive payment, and that exit consent amendments rendering the remaining Notes practically worthless could constitute an impairment of the right to receive payment;

Ashbury Holdings, 846 F.3d 1 (2d Cir. 2017), which reversed the district court and held that TIA Section 316(b) protects only the formal, legal right to bring suit for payment, and does not extend to the practical ability to recover payment. Under this interpretation, exit consent amendments that strip covenant protections but leave the formal payment right intact do not violate Section 316(b); and

Vireo Holdings, where bondholders challenged a series of asset-stripping transactions that were alleged to have rendered the issuer's Notes practically worthless.

The Second Circuit's decision in Marblegate is favorable to the Company's position, as it endorses a narrow reading of Section 316(b) that permits exit consent amendments stripping covenant protections. However, the Company should be aware that the law in this area continues to evolve, and that aggressive exit consent amendments — particularly those that release collateral, permit asset stripping, or otherwise render the stripped Notes effectively worthless — may attract litigation from non-consenting holders.

Drafting Considerations. To minimize litigation risk and maximize enforceability, the exit consent supplemental indenture should be drafted to:

(i) Eliminate substantially all restrictive covenants, including negative covenants (limitations on indebtedness, liens, investments, restricted payments, asset sales, affiliate transactions) and financial covenants (if any);

(ii) Eliminate most events of default, while retaining events of default for failure to pay principal when due and failure to pay interest when due — these two "core" events of default should be preserved to avoid any argument that the exit consent amendments impair the right to receive payment;

(iii) Eliminate or substantially reduce reporting obligations, including the obligation to deliver annual audited financial statements, quarterly unaudited financial statements, compliance certificates, and other information to holders;

(iv) Release second lien collateral to the extent permissible under the Indenture and the applicable intercreditor agreement — this is the single most impactful exit consent amendment, as it removes the collateral backing from the stripped Notes, but it must be analyzed carefully in light of the Indenture's provisions governing collateral release (which may constitute a sacred right requiring individual holder consent);

(v) Remove change-of-control put rights, if any, that would entitle holders to put their Notes to the Issuer at par (or a premium) upon a change of control of the Company;

(vi) Carefully avoid stripping any provision that would constitute an impairment of the "right to receive payment" under TIA Section 316(b), including the stated maturity, the coupon rate, or the holder's right to institute suit for payment due.

We recommend that the exit consent supplemental indenture be reviewed by litigation counsel experienced in TIA Section 316(b) and exit consent matters before it is finalized, to ensure that the amendments are within the bounds of established precedent and to prepare for any potential challenge by non-consenting holders.

E. Trustee Considerations

Continental Fiduciary Trust Company serves as Trustee and Second Lien Collateral Agent under the Mezzanine Indenture. The Trustee's cooperation is essential to the execution of the exchange and exit consent mechanics, and several practical considerations apply:

Required Documentation. Before executing any supplemental indenture, the Trustee will require:

(i) An officer's certificate from the Issuer certifying that the supplemental indenture complies with the requirements of the Indenture and that all conditions precedent to the execution of the supplemental indenture have been satisfied;

(ii) An opinion of counsel to the Issuer confirming that the supplemental indenture has been duly authorized, executed, and delivered and that it constitutes a valid and binding obligation of the Issuer;

(iii) Written consent or direction from holders of the requisite principal amount of Notes, as required by the applicable amendment provision of the Indenture; and

(iv) A direction letter from the requisite holders directing the Trustee to execute the supplemental indenture.

Trustee Protective Provisions. The Trustee is entitled to rely on the officer's certificate and opinion of counsel, and may decline to act absent satisfactory indemnification against any liability, cost, or expense arising from its actions. The Trustee's fees and expenses (including the fees of Trustee's counsel) are reimbursable by the Issuer under the Indenture. The Trustee may also seek to negotiate additional protections or indemnification in connection with its execution of the supplemental indenture, particularly if the exit consent amendments are expected to generate litigation risk.

Early Engagement. We strongly recommend that the Trustee and its counsel be engaged early in the restructuring process — ideally no later than the execution of the Restructuring Support Agreement — to ensure that the Trustee's requirements and concerns are identified and addressed in advance of the consent solicitation. Delays in obtaining Trustee cooperation can materially impact the restructuring timeline.

Estimated Costs. Filing and administrative fees for Trustee involvement, including the fees of Trustee's counsel and related disbursements, are estimated at approximately $225,000. This amount is included in the overall transaction cost budget being prepared by the Company's financial advisor.

F. Current Consent Posture — Mezzanine

The current consent posture among the mezzanine holder group is favorable to the Company's restructuring objectives. The key data points are as follows:

The Ad Hoc Group was formed informally in February 2023, and its members executed a formal cooperation agreement on March 10, 2023. The Ad Hoc Group is comprised of three funds:

The Ad Hoc Group's aggregate holdings of $122.0 million substantially exceed the 66⅔% consent threshold of $93.3 million (calculated as $140.0 million × 66.67%). The Ad Hoc Group alone is therefore sufficient to deliver the requisite consents for both the exchange and the exit consent supplemental indenture, without the need for any additional holder participation.

Notwithstanding this, the Company expects additional holders to join the exchange during the joinder period. Based on preliminary outreach by the Ad Hoc Group's financial advisor (Meridian Veltrian Partners LLC) and the Company's financial advisor (Hargrove Advisory Group LLC), the forecast total consenting principal is approximately $134.5 million, or 96.1% of the outstanding Notes. This would leave an estimated $5.5 million in principal amount of non-consenting Notes.

The Ad Hoc Group is represented by Thornbury McCaffrey LLP (Alan Driscoll, lead partner) and advised by Meridian Veltrian Partners LLC. The Company's negotiations with the Ad Hoc Group are ongoing, and the principal open issues relate to the valuation of the equity consideration, governance rights of the mezzanine equitization recipients, and the terms of the Series A Preferred Equity.

V. Interaction Between the Two Instruments — Cross-Acceleration and Other Cross-Default Provisions

A. Cross-Default / Cross-Acceleration

The Credit Agreement and the Mezzanine Indenture each contain cross-default and/or cross-acceleration provisions that create interdependencies between the two instruments. These provisions are of critical importance to the sequencing and coordination of the restructuring.

Credit Agreement Cross-Default to Mezzanine Indenture. The Credit Agreement is expected to contain a cross-default event of default provision under which a default or event of default under the Mezzanine Indenture (or any other material indebtedness of the Borrower) constitutes an event of default under the Credit Agreement, subject to customary thresholds and cure periods. We are reviewing the specific language to determine whether the cross-default is triggered by a payment default only, or by any event of default (including covenant defaults) under the Mezzanine Indenture.

Mezzanine Indenture Cross-Default to Credit Agreement. Similarly, the Mezzanine Indenture is expected to contain a cross-default or cross-acceleration provision triggered by a default or event of default under the Credit Agreement or any other material indebtedness. This provision typically requires that the cross-defaulted indebtedness be accelerated (a "cross-acceleration" provision, as distinguished from a mere "cross-default" provision that is triggered by the occurrence of a default, regardless of whether acceleration occurs).

Implications for Restructuring Sequencing. The cross-default provisions create significant risk in the context of the restructuring. If the equitization mechanics under the Mezzanine Indenture involve any period during which the Company fails to make a scheduled interest payment on the Notes — for example, if the Company misses an interest payment as a prelude to launching the exchange offer — this could trigger a payment default under the Mezzanine Indenture, which in turn could trigger a cross-default under the Credit Agreement. An unwaived cross-default under the Credit Agreement would give the first lien Lenders the right to accelerate the Term Loans and Revolver borrowings, demanding immediate repayment of $285.0 million in TLB principal and $42.0 million in Revolver borrowings — a result that would be catastrophic for the restructuring.

Recommendation. To mitigate this risk, the Restructuring Support Agreement should include standstill and forbearance undertakings from consenting first lien Lenders. Specifically, the consenting first lien Lenders should agree that during the period from the execution of the RSA through the closing of the restructuring (or earlier termination of the RSA), they will:

(a) forbear from exercising any rights or remedies arising from any cross-default under the Credit Agreement triggered by a default or event of default under the Mezzanine Indenture in connection with the restructuring;

(b) refrain from directing the Administrative Agent to accelerate the Loans or exercise any enforcement rights;

(d) take such actions as may be necessary to prevent the Administrative Agent from taking any enforcement action during the forbearance period.

The standstill and forbearance should be conditioned on customary milestones and termination events, including compliance with the restructuring timeline and the absence of any material adverse change.

B. Intercreditor Agreement Considerations

The Company's existing capital structure is governed in part by an intercreditor agreement (the "Existing Intercreditor Agreement") between Pinnacle National Bank, N.A., as first lien agent, and Continental Fiduciary Trust Company, as second lien agent. The Existing Intercreditor Agreement establishes the lien priority as between the first lien and second lien facilities, and contains customary standstill, payment subordination, and enforcement provisions governing the rights of the second lien holders vis-à-vis the first lien holders.

The contemplated restructuring introduces a significant new element to the capital structure: a super-priority credit facility in the principal amount of $55.0 million, provided by Belvedere Credit Opportunities Fund LP (the "Super-Priority Facility"), which will hold a first-priority lien on all Collateral, effectively priming both the existing first lien and second lien claims. To accommodate this new layer of priority, the Existing Intercreditor Agreement must be amended and restated (the "Amended and Restated Intercreditor Agreement") to create a three-tier lien priority structure: super-priority first / first lien first-out / first lien second-out (with the second lien being eliminated upon the equitization of the Mezzanine Notes).

Consent to Intercreditor Amendment. The consent required to amend the Existing Intercreditor Agreement must be analyzed under both the Credit Agreement and the Mezzanine Indenture. Under the Credit Agreement, the Administrative Agent's authority to amend the intercreditor agreement on behalf of the first lien Lenders is likely subject to the direction of the Required Lenders, although certain modifications may require a higher consent threshold depending on the specific provisions of the Credit Agreement and the Existing Intercreditor Agreement. Under the Mezzanine Indenture, amendments to the intercreditor agreement that adversely affect the rights of the second lien holders may require the consent of the requisite holders under the Indenture's amendment provisions (66⅔% or majority, as applicable). These issues are being analyzed in detail in the separate intercreditor memorandum.

Post-Equitization Structure. Following the equitization of the Mezzanine Notes, the second lien tranche will be eliminated entirely (subject to any stripped Notes that remain outstanding held by non-consenting holders). The Amended and Restated Intercreditor Agreement will then govern only the super-priority and first lien facilities, creating a simpler two-tier priority structure. To the extent any stripped Notes remain outstanding, the intercreditor provisions applicable to those Notes must be addressed — it is likely that the exit consent supplemental indenture will release the second lien collateral and eliminate the stripped Notes' participation in the intercreditor framework, leaving those Notes as effectively unsecured general obligations of the Company.

C. Change of Control Provisions

Both the Credit Agreement and the Mezzanine Indenture are expected to contain "change of control" provisions that trigger mandatory prepayment obligations, events of default, or holder put rights upon a change of control of the Company. These provisions must be carefully analyzed in light of the post-restructuring equity ownership, which will shift from 100% ownership by Ridgeline Capital Partners (the "Sponsor") to a split ownership structure of approximately 47.5% Ridgeline / 47.5% mezzanine equitization recipients / 5.0% management equity pool.

Credit Agreement Change of Control. The Credit Agreement is expected to define "change of control" as the occurrence of one or more specified trigger events, typically including any person or group (other than the Sponsor and its affiliates) acquiring more than 50% of the voting equity interests of the Borrower. The proposed post-restructuring ownership structure does not result in any single party (other than Ridgeline) holding more than 50% of the voting equity — the mezzanine equitization recipients collectively receive 47.5%, but they are not expected to constitute a "group" for purposes of the change of control definition, and their aggregate holding is below the 50% threshold in any event.

Nevertheless, several risks exist:

(a) The change of control definition may be triggered by the Sponsor ceasing to hold a majority (more than 50%) of the voting equity, regardless of whether any other person or group acquires more than 50%. If the definition is drafted as a "loss of majority" trigger rather than an "acquisition of majority" trigger, the reduction of Ridgeline's stake from 100% to 47.5% could trigger a change of control.

(b) The change of control definition may include a "board control" trigger, under which a change of control occurs if a majority of the board of directors ceases to be composed of directors nominated or approved by the Sponsor. If the mezzanine equitization recipients are entitled to designate board seats under the governance arrangements, this could implicate the board control trigger.

MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Nathaniel Bower, Partner, Calderwood & Harkness LLP
FROM: Gabrielle Moss, Associate, Calderwood & Harkness LLP
REVIEWED BY: Nathan Ikeda, Lead Associate, Calderwood & Harkness LLP
DATE: April 20, 2023
RE: Stonefield Logistics Group Inc. — Analysis of Amendment Mechanics and Consent Thresholds Under the First Lien Credit Agreement and Mezzanine Indenture
MATTER NO.: 1012-00002
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I. Executive Summary and Purpose
The purpose of this memorandum is to analyze the amendment, waiver, and consent provisions under the two principal debt instruments governing Stonefield Logistics Group Inc.'s (the "Company") funded indebtedness in order to identify the consent thresholds and procedural requirements the Company must satisfy to effectuate the contemplated consensual out-of-court restructuring. This analysis has been prepared at your request in connection with our firm's engagement as restructuring counsel to the Company, and it is intended to inform the strategic and tactical decisions surrounding the restructuring process, including the sequencing, documentation, and creditor engagement workstreams.
The two instruments that are the subject of this memorandum are:
(a) The First Lien Credit Agreement, dated as of December 15, 2017 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among Stonefield Logistics Group Inc., as Borrower, Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto; and
(b) The Indenture, dated as of December 15, 2017 (as supplemented or amended from time to time, the "Mezzanine Indenture"), among Stonefield Logistics Group Inc., as Issuer, and Continental Fiduciary Trust Company, as Trustee and Second Lien Collateral Agent, governing the 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes" or "Notes").
Our key findings are summarized as follows:
(i) Amend-and-Extend of TLB and Revolver. The proposed extension of the Term Loan B maturity and certain general amendments to the Credit Agreement are achievable with the consent of the Required Lenders (defined as Lenders holding more than 50% of the aggregate outstanding principal amount of the Term Loans and unfunded Revolving Commitments). Separately, because certain of the proposed amendments implicate "sacred rights" provisions — most significantly, the extension of maturity — each affected Lender whose maturity is being extended must individually consent. The Revolving Credit Facility amendments require the consent of each Revolver Lender, and given the three-lender structure, unanimous Revolver Lender consent is anticipated.
(ii) Mezzanine Equitization via Exchange. The proposed exchange of Mezzanine Notes for preferred and common equity in the reorganized Company requires the consent of holders of not less than 66⅔% in aggregate principal amount of the outstanding Notes. The equitization must be structured as a voluntary exchange offer rather than a mandatory amendment, in order to comply with the protections of Section 316(b) of the Trust Indenture Act of 1939 (to the extent applicable) and the analogous contractual provisions of the Mezzanine Indenture.
(iii) Sacred Rights. Certain amendments under both instruments — including, critically, extension of maturity and reduction of principal — require unanimous or each-affected-lender consent and cannot be overridden by a majority or supermajority vote of creditors.
(iv) Exit Consent Amendments. In connection with the mezzanine exchange, consenting holders may simultaneously deliver exit consents to a supplemental indenture that strips substantially all restrictive covenants, events of default, reporting obligations, and optional redemption provisions from the remaining Notes. This mechanism is designed to incentivize participation by non-consenting holders and to diminish the practical protections afforded by the stripped Notes. However, the exit consent supplemental indenture must be carefully drafted to avoid impairment of the "right to receive payment" under Section 316(b) of the TIA and applicable case law.
Scope. This memorandum addresses amendment mechanics and consent thresholds only. Separate workstreams are underway covering: (a) intercreditor agreement provisions and the accommodation of the contemplated super-priority facility (to be addressed in a forthcoming memorandum); (b) guaranty and security matters, including the perfection, release, and reattachment of liens; and (c) tax consequences of the mezzanine equitization, including cancellation of indebtedness income and the treatment of the preferred equity issuance. Cross-references to those workstreams are made herein where relevant.
II. Overview of the Capital Structure and Relevant Instruments
A. First Lien Credit Agreement
The Credit Agreement was entered into on December 15, 2017, among Stonefield Logistics Group Inc., as Borrower, Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent, and the Lenders from time to time party thereto. The Credit Agreement is governed by the laws of the State of New York.
The Credit Agreement provides for the following facilities:
Term Loan B Facility. The Term Loan B (the "TLB") was originally funded in the principal amount of $310.0 million. As a result of $25.0 million in scheduled amortization payments made through the date of this memorandum, the current outstanding principal balance of the TLB is $285.0 million. The TLB bears interest at a rate per annum equal to the Secured Overnight Financing Rate ("SOFR") plus 425 basis points, subject to a SOFR floor of 75 basis points. The stated maturity date of the TLB is December 15, 2024.
Revolving Credit Facility. The Revolving Credit Facility (the "Revolver") provides for aggregate commitments of $50.0 million. As of the date of this memorandum, $42.0 million in borrowings are outstanding under the Revolver, with an additional $3.5 million in outstanding letters of credit, leaving $4.5 million of undrawn availability. The Revolver bears interest at a rate per annum equal to SOFR plus 375 basis points. The stated maturity date of the Revolver is December 15, 2024, coterminous with the TLB maturity.
The current TLB syndicate is comprised of the following Lenders:
The Revolving Credit Facility is provided by three lenders, as follows:
Counsel to the first lien lenders is Westlake Harden & Cole LLP, with Ramona Quelibo serving as lead partner on the engagement. We anticipate that Westlake Harden & Cole will take an active role in negotiating the amendment documentation on behalf of the Lenders and the Administrative Agent.
B. Mezzanine Indenture
The Mezzanine Indenture was entered into on December 15, 2017, among Stonefield Logistics Group Inc., as Issuer, and Continental Fiduciary Trust Company, as Trustee and Second Lien Collateral Agent. The Mezzanine Indenture governs the 11.50% Senior Secured Second Lien Notes due June 15, 2025 (CUSIP 861537 AA 2). The Mezzanine Indenture is governed by the laws of the State of New York.
The outstanding principal amount of the Mezzanine Notes is $140.0 million. In addition, accrued and unpaid payment-in-kind ("PIK") interest, estimated through the expected closing of the restructuring, totals approximately $8.1 million. The Notes feature a cash/PIK toggle mechanism that has permitted the Company to satisfy a portion of its interest obligations through the issuance of additional Notes in lieu of cash interest, contributing to the growth in aggregate principal outstanding since the original issuance date.
The principal holders of the Mezzanine Notes are as follows:
An ad hoc group of mezzanine holders (the "Ad Hoc Group") was formed informally in February 2023, and the members of the Ad Hoc Group executed a formal cooperation agreement on March 10, 2023. The Ad Hoc Group is represented by Thornbury McCaffrey LLP, with Alan Driscoll serving as lead partner, and is advised by Meridian Veltrian Partners LLC as financial advisor. As discussed in detail below, the Ad Hoc Group's aggregate holdings alone are sufficient to exceed the requisite consent thresholds under the Mezzanine Indenture.
III. Amendment and Consent Mechanics Under the First Lien Credit Agreement
A. Definition of "Required Lenders"
The Credit Agreement defines "Required Lenders" using the standard formulation found in syndicated leveraged loan agreements: Lenders holding more than 50% of the aggregate outstanding principal amount of the Term Loans and unfunded Revolving Commitments, excluding Defaulting Lenders. This definition aggregates both the TLB facility and the Revolving Credit Facility into a single pool for purposes of determining whether the majority consent threshold has been satisfied.
As applied to the current syndicate, the Required Lenders threshold is calculated as follows:
Outstanding TLB principal: $285.0 million
Outstanding Revolver Commitments (unfunded and funded): $50.0 million
Aggregate: $335.0 million
Required Lenders threshold (>50%): more than $167.5 million
It is important to note the distinction between the "Required Lenders" consent threshold — which is calculated across the aggregate of all facilities — and facility-specific consent requirements that apply to certain types of amendments. As discussed in Section III.D below, amendments that affect only one facility, or that implicate "sacred rights" provisions, may require a different consent calculus. In particular, a maturity extension of the TLB is a sacred right requiring each affected TLB Lender's individual consent, a threshold that cannot be satisfied merely by achieving a Required Lenders vote.
The exclusion of Defaulting Lenders from the Required Lenders calculation is also noteworthy. Under most credit agreement formulations, a Defaulting Lender — defined generally as a Lender that has failed to fund its share of a borrowing or that has become the subject of a bankruptcy or insolvency proceeding — is stripped of voting rights and excluded from the denominator. As of the date of this memorandum, we are not aware of any Defaulting Lenders under the Credit Agreement, and accordingly the full $335.0 million denominator applies.
B. General Amendment Provisions (Section 10.01 or Equivalent)
The Credit Agreement contains a general amendment provision (expected to be located in Section 10.01 or a similarly numbered section) that establishes the baseline consent framework for amendments, modifications, waivers, and consents. Under this provision, any amendment, modification, waiver, or consent with respect to the Credit Agreement or any other Loan Document generally requires the written agreement of the Borrower and the Required Lenders.
This general consent provision is subject to several important qualifications:
Facility-Specific Amendments. Depending on the specific drafting of the Credit Agreement, amendments that affect only the Revolving Facility or only the Term Loan may require consent of the requisite percentage of Lenders under the relevant facility, rather than a cross-facility Required Lenders vote. We are in the process of confirming the specific mechanics of the Credit Agreement's facility-specific amendment provisions. In some credit agreements, amendments that affect only the terms of one facility require the consent of a majority of the lenders under that facility (defined as "Required Revolving Lenders" or "Required Term Lenders," as applicable), while in others, all substantive amendments require a Required Lenders vote calculated across all facilities. The distinction is significant because the TLB lenders represent a substantially larger share of the aggregate than the Revolver Lenders, and a cross-facility Required Lenders vote gives TLB lenders effective control over the amendment process.
Administrative Agent Consent. The Administrative Agent's consent is separately required for any amendment that modifies the Agent's rights, duties, obligations, immunities, indemnification protections, or compensation. This is a standard provision in syndicated credit agreements and ensures that the Agent, which is performing a fiduciary-like administrative function, is not subjected to increased obligations or diminished protections without its agreement. We note that Pinnacle National Bank, N.A. serves as both Administrative Agent and Collateral Agent, and its consent will be required for amendments affecting either capacity.
"Snooze-You-Lose" Provisions. We note that certain credit agreements include a provision deeming a Lender's failure to respond to a consent solicitation within a specified period (typically 10 or 15 business days) as a consent to the proposed amendment or waiver. If the Credit Agreement includes such a provision, it could materially affect the consent calculus by effectively converting non-responses into affirmative consents. We are reviewing the specific language of the Credit Agreement to determine whether such a provision exists and, if so, the applicable response period and any conditions or limitations on its operation. We will update this memorandum once the review is complete.
C. Sacred Rights / All-Affected-Lender Provisions
Certain amendments to the Credit Agreement require the consent of each Lender directly and adversely affected, or in some cases the consent of all Lenders (100%), without regard to whether the Required Lenders threshold has been met. These provisions — commonly referred to as "sacred rights" — protect individual Lenders against amendments that would impair their fundamental economic or structural rights. The typical sacred rights provisions found in syndicated credit agreements, and their applicability to the contemplated restructuring, are analyzed below:
1. Extension of Maturity. Extending the maturity date of the TLB or the Revolver, or extending the date of any scheduled amortization or other mandatory payment, requires the consent of each affected Lender (not merely the Required Lenders). This is the single most critical sacred right implicated by the contemplated restructuring. The proposed transaction extends the TLB maturity from December 15, 2024 to December 19, 2028 — a four-year extension — and extends the Revolver maturity from December 15, 2024 to December 19, 2027 (subject to a springing maturity mechanism). Because each TLB Lender must individually consent to the extension of its loan's maturity, the Company cannot rely on a majority vote to override a dissenting minority. Non-consenting TLB Lenders would retain their existing maturity of December 15, 2024, creating a bifurcated maturity structure that the Company must address through alternative mechanics, as discussed in Section III.D below.
2. Reduction of Interest Rates or Fees. Reducing the rate of interest (or the applicable margin or spread), or reducing mandatory commitment fees, letter of credit fees, or other fees payable to any Lender, requires the consent of each affected Lender. This sacred right is not implicated by the contemplated restructuring with respect to the interest rate modification, because the proposed amendments increase the applicable margin on the TLB from SOFR + 425 basis points to SOFR + 500 basis points, and increase the applicable margin on the Revolver from SOFR + 375 basis points to SOFR + 450 basis points. Accordingly, no Lender's interest rate is being reduced. However, we note that to the extent the amended Credit Agreement modifies any existing fee arrangement (such as agent fees, letter of credit fees, or unused line fees), the Company should confirm that no Lender's fee entitlement is being reduced without its consent.
3. Reduction of Principal. Any reduction, forgiveness, or write-down of the principal amount of any Loan, or any forgiveness of accrued and unpaid interest, requires the consent of each affected Lender. The contemplated restructuring does not contemplate any reduction of TLB principal — the $285.0 million outstanding TLB balance remains at par — and accordingly this sacred right is not implicated. If the restructuring were to include any element of principal forgiveness or haircut on the TLB, each affected TLB Lender would be required to consent individually.
4. Reduction of Commitment. Reducing any Lender's Revolving Commitment without its consent is typically a sacred right requiring each affected Lender's consent. The proposed restructuring reduces the aggregate Revolving Credit Facility commitment from $50.0 million to $35.0 million. This reduction requires the consent of each Revolver Lender whose commitment is being reduced. As noted above, the Revolving Credit Facility is provided by three Lenders (Pinnacle National Bank, N.A., Great Basin Commercial Bank, and Tidewater Lending Corporation), all of which are expected to support the restructuring. Assuming each Revolver Lender consents to its pro rata share of the commitment reduction, this sacred right will be satisfied.
5. Amendment of Pro Rata Sharing Provisions. Amendments to the Credit Agreement's pro rata sharing and waterfall provisions — which govern the allocation of payments, prepayments, and collateral proceeds among the Lenders — typically require the consent of all Lenders (100%). The contemplated restructuring does not, on its face, propose to modify the pro rata sharing mechanics within the first lien facility. However, to the extent the consent fee structure (discussed in Section III.E below) or any other element of the restructuring could be characterized as a departure from pro rata sharing — for example, a consent fee payable only to consenting Lenders — the Company should confirm that the Credit Agreement permits such differential treatment. We discuss this issue further in Section III.E below.
6. Amendment of the Definition of "Required Lenders." Modifying the definition of "Required Lenders" — whether by changing the percentage threshold, altering the composition of the denominator, or otherwise — is typically an all-Lender consent item. The contemplated restructuring does not propose to amend this definition.
7. Release of All or Substantially All Collateral. Releasing all or substantially all of the Collateral securing the obligations under the Credit Agreement is typically an all-Lender consent item, although some credit agreements permit collateral releases with the consent of the Required Lenders in connection with dispositions permitted under the Credit Agreement. The contemplated restructuring does not propose a release of first lien collateral; rather, the collateral package securing the first lien obligations is expected to remain intact and, indeed, to be enhanced by the subordination of the second lien claims upon the equitization of the Mezzanine Notes.
8. Release of All or Substantially All Guarantors. Similarly, releasing all or substantially all of the guarantors from their guarantee obligations is typically an all-Lender consent item (or, in some drafting, a Required Lenders consent item). The contemplated restructuring does not propose any guarantor releases.
9. Subordination of Liens. To the extent the contemplated super-priority facility (provided by Belvedere Credit Opportunities Fund LP in a principal amount of $55.0 million) would alter the lien priority of existing first lien Lenders, this could implicate the sacred rights provision relating to subordination or priming of liens. If the super-priority facility is structured to hold a first-priority lien on all or substantially all Collateral, the existing first lien Lenders' liens would be effectively subordinated from first-priority to second-priority (or "first lien second out"). Whether this constitutes a sacred right requiring all-Lender or all-affected-Lender consent depends on the specific drafting of the Credit Agreement's sacred rights provision. However, if the super-priority facility is documented as a separate credit agreement with its own separate security agreements and collateral documents, and the lien priority is governed by an Amended and Restated Intercreditor Agreement (rather than by an amendment to the Credit Agreement itself), the sacred rights provision of the Credit Agreement may not be directly triggered. This structural approach — which is the approach contemplated by the current term sheet — relies on the existing intercreditor agreement's provisions permitting the incurrence of additional senior indebtedness, and is analyzed in greater detail in the separate intercreditor memorandum being prepared by this office.
D. Facility-Specific Consent Requirements
Term Loan B Maturity Extension. As noted in Section III.C.1 above, the extension of the TLB maturity from December 15, 2024 to December 19, 2028 is a sacred right that cannot be accomplished through a Required Lenders vote. Each individual TLB Lender whose loan maturity is being extended must affirmatively consent to the extension. A non-consenting TLB Lender's loan would retain its existing maturity of December 15, 2024, and the Company would be obligated to repay that Lender's share of the TLB on the original maturity date.
Mechanics to Address Non-Consenting TLB Lenders. To the extent any TLB Lenders decline to consent to the maturity extension, the Company has several potential mechanisms to address the resulting bifurcated maturity structure:
(a) Open Market Purchase or Par-Plus-Accrued Buyout. The Company could offer to purchase non-consenting Lenders' TLB loans at par plus accrued interest (or, if the non-consenting Lenders demand it, at a premium to par), using proceeds from the super-priority facility, available cash, or a contribution from the Sponsor. This approach has the advantage of simplicity and certainty, but it requires adequate liquidity and depends on the willingness of non-consenting Lenders to sell at an acceptable price.
(b) "Yank-a-Bank" or Replacement Lender Mechanics. Many syndicated credit agreements include a provision (commonly referred to as a "yank-a-bank" provision) that permits the Borrower or the Administrative Agent to replace a non-consenting Lender with a substitute Lender that is willing to hold on the amended terms, provided that the non-consenting Lender is repaid in full at par plus accrued interest and any breakage costs. We are reviewing the Credit Agreement to confirm whether such a provision exists, and if so, the specific conditions and procedures that must be followed. If available, this mechanic provides a contractual right to remove holdout Lenders and is generally enforceable.
(c) Assignment and Participation. To the extent the Credit Agreement permits assignments without the consent of the Borrower or with the consent of the Administrative Agent (which is controlled by Pinnacle, a supportive Lender), the Company may be able to facilitate the assignment of non-consenting Lenders' positions to willing transferees who would then consent to the amendment.
We recommend that the Company develop a detailed plan for addressing non-consenting TLB Lenders, including identifying potential replacement lenders and estimating the aggregate exposure from holdout positions. Based on the current syndicate composition, we note that the 11 unidentified syndicate members holding an aggregate of $117.0 million in TLB loans represent the primary source of potential holdout risk, and the Company's financial advisor (Hargrove Advisory Group LLC) should be tasked with assessing the likely consent posture of each of these Lenders.
Revolving Credit Facility. The proposed reduction of the Revolving Credit Facility commitment from $50.0 million to $35.0 million and the extension of the Revolver maturity to December 19, 2027 (with a springing maturity mechanism tied to the TLB maturity) require the consent of each Revolver Lender. Given that the Revolving Credit Facility is provided by only three Lenders — Pinnacle National Bank, N.A. ($20.0 million commitment), Great Basin Commercial Bank ($15.0 million commitment), and Tidewater Lending Corporation ($15.0 million commitment) — unanimous consent is a manageable proposition. Based on preliminary discussions, all three Revolver Lenders are expected to support the restructuring, and we do not anticipate holdout issues with respect to the Revolver.
Financial Covenant Additions. The contemplated restructuring adds two new financial covenants to the Credit Agreement: a Total Net Leverage covenant and a Minimum Liquidity covenant. The addition of new financial covenants that are more restrictive than the existing terms constitutes an additional restriction on the Borrower that inures to the benefit of the Lenders. Under most credit agreement formulations, amendments that add covenants or restrictions for the benefit of the Lenders require only Required Lenders consent, because no Lender is adversely affected by the imposition of additional protections. However, we note that certain credit agreements contain an anti-amendment provision that prohibits the addition of new covenants or the tightening of existing covenants without all-Lender consent or the consent of Lenders holding a supermajority threshold. We are reviewing the Credit Agreement to confirm that no such anti-amendment provision exists and that the addition of the proposed financial covenants can be accomplished with Required Lenders consent.
Modification of Mandatory Prepayment Provisions. The contemplated restructuring may modify the existing mandatory prepayment provisions of the Credit Agreement, including by introducing an excess cash flow sweep in connection with the new super-priority facility. To the extent the amendments modify the existing prepayment waterfall — for example, by redirecting excess cash flow that would otherwise be shared pro rata among TLB Lenders to the super-priority facility first — this could implicate the sacred rights provision relating to pro rata sharing or could require each affected Lender's consent. We are reviewing the specific provisions to determine the applicable consent threshold and will update this memorandum accordingly.
E. Consent Fee Mechanics
The current restructuring term sheet contemplates the payment of consent fees to incentivize Lenders to consent to the proposed amendments within the applicable consent period. The proposed consent fees are as follows:
(a) TLB Consent Fee: 50 basis points on the outstanding TLB principal, calculated as $285.0 million × 0.50% = $1,425,000; and
(b) Revolver Consent Fee: 25 basis points on the reduced Revolver commitment, calculated as $35.0 million × 0.25% = $87,500.
The consent fees would be payable only to Lenders that affirmatively consent to the proposed amendments within the applicable consent deadline. This is a standard market incentive mechanism designed to encourage prompt and affirmative consent. The term sheet further contemplates an early consent deadline (as yet to be determined) that would entitle Lenders consenting prior to that date to an enhanced consent fee or priority allocation.
Several issues arise in connection with the consent fee mechanics:
Agent Approval. We need to confirm whether the payment of consent fees to individual Lenders requires the approval or involvement of the Administrative Agent, or whether such payments can be structured as direct Borrower-to-Lender payments outside of the Credit Agreement's payment and waterfall mechanics. Under most credit agreements, payments to Lenders are required to be made through the Agent, but consent fees are frequently structured as direct payments.
Pro Rata Sharing / Equal Treatment. The payment of consent fees only to consenting Lenders raises a potential issue under the Credit Agreement's pro rata sharing provisions. If the Credit Agreement requires that all payments to Lenders be shared pro rata, a consent fee that is paid differentially (i.e., only to consenting Lenders) could be challenged as violating the pro rata sharing requirement. However, consent fees are a well-established market practice, and most credit agreements are interpreted to permit differential consent fees on the theory that the consent itself represents consideration for the fee, distinguishing it from a payment on account of the Loans. We are reviewing the specific pro rata sharing language in the Credit Agreement to assess any risk in this regard.
F. Administrative Agent Role in Amendments
Pinnacle National Bank, N.A. serves as Administrative Agent and Collateral Agent under the Credit Agreement. In its capacity as Administrative Agent, Pinnacle occupies a central role in the amendment process:
Consent Requirement. The Administrative Agent's consent is separately required for any amendment that modifies the Agent's rights, duties, obligations, immunities, indemnification protections, or compensation. This is independent of the Required Lenders consent threshold and applies regardless of whether the Required Lenders have approved the amendment. Given that Pinnacle is also the largest TLB Lender (holding $45.0 million) and the largest Revolver Lender (holding a $20.0 million commitment), and that it is expected to support the restructuring, we do not anticipate that obtaining the Agent's consent will present a practical obstacle.
Execution and Distribution. The Administrative Agent is typically required to execute amendments on behalf of the Lenders once the requisite consents have been obtained, and to distribute consent solicitation materials, notices, and other communications to the Lender group. The Agent will also be responsible for maintaining the register of assignments and participations, which is relevant to confirming the identities and holdings of the current Lenders for purposes of determining whether the Required Lenders threshold has been satisfied.
Agent's Counsel. Westlake Harden & Cole LLP (Ramona Quelibo, lead partner) serves as counsel to the Administrative Agent and the first lien Lenders. We anticipate that Westlake Harden & Cole will review and negotiate the amendment documentation on behalf of the Agent and will coordinate with our office on the terms of the Amended and Restated Credit Agreement. The engagement of Agent's counsel at an early stage is advisable to ensure alignment on the amendment mechanics and to minimize delays in the documentation process.
Agent Fees and Expenses. The Agent's fees and expenses, including the fees of Agent's counsel, are reimbursable by the Borrower under the Credit Agreement. The Company should budget for these costs as part of the overall transaction cost estimate.
G. Current Consent Posture — First Lien
As of the date of this memorandum, the Company has not yet circulated a formal restructuring term sheet to the first lien Lenders. The current target for circulation of the initial term sheet is mid-May 2023, with a formal consent solicitation to follow in connection with the Restructuring Support Agreement process in June 2023.
Based on preliminary discussions conducted by the Company's financial advisor, Hargrove Advisory Group LLC (Elena Voss), with key members of the TLB syndicate, the following Lenders are expected to support the restructuring:
The aggregate TLB holdings of these five expected supporters ($168.0 million) alone exceed the Required Lenders threshold of more than $167.5 million for general amendments. Adding Pinnacle's $20.0 million Revolver Commitment, the aggregate held by expected supporters is $188.0 million, or approximately 56.1% of the $335.0 million aggregate.
However, as emphasized throughout this memorandum, the Required Lenders threshold is insufficient for amendments that implicate sacred rights. The maturity extension — the centerpiece of the first lien restructuring — requires each individual TLB Lender's consent. The Company will need to engage with all 16 TLB Lenders (5 identified expected supporters plus 11 other syndicate members holding an aggregate of $117.0 million) and must be prepared to address non-consenting Lenders through the replacement, buyout, or other mechanics described in Section III.D above.
With respect to the Revolving Credit Facility, all three Revolver Lenders (Pinnacle, Great Basin, and Tidewater) are expected to consent unanimously to the proposed commitment reduction and maturity extension. We do not anticipate holdout risk on the Revolver.
IV. Amendment and Consent Mechanics Under the Mezzanine Indenture
A. Overview of Trust Indenture Act Applicability
An initial threshold question is whether the Mezzanine Notes were issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and whether the Mezzanine Indenture is a "qualified indenture" under the Trust Indenture Act of 1939, as amended (the "TIA").
Based on our preliminary review, the Mezzanine Notes were issued in a private placement exempt from registration under Rule 144A and/or Section 4(a)(2) of the Securities Act. Private placements are generally exempt from the qualification requirements of the TIA, which means that the Mezzanine Indenture is not a "qualified indenture" subject to the mandatory provisions of the TIA. However, it is common market practice for indentures governing privately placed notes to incorporate provisions substantially similar to those mandated by the TIA, including, critically, the protections of TIA Section 316(b) (which prohibits amendments that impair the right of any holder to receive payment of principal and interest without that holder's individual consent). We are reviewing the Mezzanine Indenture to confirm whether it incorporates TIA Section 316(b) protections either by reference or by analogy.
If the Mezzanine Indenture does incorporate Section 316(b) protections — as is virtually certain based on standard market practice — the amendment provisions are subject to the constraints discussed in Sections IV.C and IV.D below. Even if the Indenture does not technically incorporate Section 316(b) (because it is not TIA-qualified), the analogous contractual provisions in the Indenture itself will govern, and we expect those provisions to impose substantially similar constraints.
B. Consent Thresholds for Amendments and Supplements
The Mezzanine Indenture establishes a tiered consent framework for amendments and supplemental indentures, consistent with standard indenture practice:
Supplemental Indentures Without Holder Consent (Section 9.01 or Equivalent). The Issuer and the Trustee may enter into supplemental indentures without the consent of any holder of Notes for certain limited purposes, including:
(i) to cure any ambiguity, defect, or inconsistency in the Indenture or the Notes;
(ii) to add guarantors or to evidence the succession of another person to the Issuer;
(iii) to add covenants or events of default for the benefit of the holders of the Notes;
(iv) to comply with requirements of the Securities and Exchange Commission in order to effect or maintain the qualification of the Indenture under the TIA (if applicable);
(v) to make any other change that does not adversely affect the rights of any holder of the Notes in any material respect.
Supplemental Indentures With Holder Consent (Section 9.02 or Equivalent). Modifications, amendments, supplements, or waivers that adversely affect the rights of holders generally require the consent of holders of a specified percentage in aggregate principal amount of the outstanding Notes. The standard threshold for general amendments is a majority (more than 50%) in principal amount. However, the Mezzanine Indenture is expected to include a heightened consent threshold for amendments affecting certain fundamental terms.
Heightened Threshold for Fundamental Amendments. For any amendment that would:
(i) reduce the principal amount of the Notes (whether by write-down, forgiveness, or otherwise);
(ii) reduce the rate of interest on the Notes or change the time of payment of interest;
(iii) change the stated maturity of the Notes;
(iv) impair the right of any holder to institute suit for the enforcement of any payment due on or after the stated maturity;
(v) reduce the percentage in principal amount of Notes required to consent to any amendment, supplement, or waiver;
(vi) modify certain subordination or intercreditor provisions;
the Indenture typically requires the consent of holders of not less than 66⅔% (two-thirds) in aggregate principal amount of the outstanding Notes. We are confirming the precise threshold in the Mezzanine Indenture, as some indentures use a simple majority threshold for all amendments subject to TIA Section 316(b) protections and reserve the 66⅔% threshold only for the most fundamental modifications.
Application to the Contemplated Equitization. The proposed equitization — pursuant to which holders of Mezzanine Notes would exchange their Notes for a combination of Series A Preferred Equity ($35.0 million in liquidation preference, bearing 10.00% PIK dividends) and 47.5% of the pro forma common equity of the reorganized Company — is effectively a reduction of principal and an elimination of maturity. The exchange converts a $140.0 million fixed-income obligation into equity securities with no stated maturity and no contractual right to repayment of principal. Accordingly, the equitization implicates the heightened consent threshold and requires the consent of holders of at least 66⅔% in principal amount, or $93.3 million, of the outstanding Notes.
We are confirming whether the Indenture uses a "majority" (>50%) threshold for general amendments with the 66⅔% threshold reserved for fundamental amendments, or whether the Indenture imposes the 66⅔% threshold for all substantive amendments. In either case, the Ad Hoc Group's aggregate holdings of $122.0 million (87.1% of outstanding) are well in excess of both thresholds.
C. Sacred Rights Under the Mezzanine Indenture
The most significant constraint on the amendment mechanics is the sacred right protection derived from TIA Section 316(b) or its contractual equivalent. This provision states, in substance, that no amendment, supplement, or waiver may impair the right of any holder to receive payment of principal of, and interest on, the Notes on or after the due dates therefor, or to institute suit for the enforcement of any such payment, without that holder's individual consent.
The critical implication of this provision for the contemplated restructuring is as follows: even if holders of 66⅔% or more in principal amount consent to the equitization, no holder can be compelled to accept the exchange of its Notes for equity without its individual consent. A mandatory amendment that strips the payment obligation from the Notes — effectively converting the Notes into equity by operation of the amendment itself, without each holder's affirmative participation — would violate the Section 316(b) protection and would be unenforceable against non-consenting holders.
Accordingly, the equitization must be structured as a voluntary exchange offer. Under this structure, each holder of Mezzanine Notes is given the opportunity to tender its Notes in exchange for the new equity consideration (Series A Preferred Equity and common equity). Holders who elect to participate tender their Notes, which are then cancelled, and receive the equity consideration in exchange. Holders who decline to participate retain their Notes, which continue to be outstanding obligations of the Issuer with the full right to receive payment of principal and interest on the stated maturity.
This structure preserves the Section 316(b) protections because no holder is compelled to accept the equity exchange without its consent. The mechanism for incentivizing participation by holders who might otherwise decline — namely, the exit consent mechanism — is discussed in Section IV.D below.
D. Exit Consent Mechanics
Strategy. The exit consent mechanism is a well-established technique for incentivizing participation in exchange offers and for addressing the holdout problem inherent in voluntary exchange structures. Under this approach, holders who participate in the exchange (consenting holders) simultaneously deliver their consent (an "exit consent") to a supplemental indenture that strips substantially all of the restrictive covenants, events of default, reporting obligations, and optional redemption provisions from the Mezzanine Notes. The supplemental indenture is executed upon satisfaction of the minimum consent threshold, and its provisions take effect immediately — including with respect to the Notes held by non-consenting holders who did not participate in the exchange.
The effect of the exit consent is to create a stark dichotomy between participating and non-participating holders: participating holders receive the new equity consideration (with its attendant governance rights, upside potential, and preferred equity protections), while non-participating holders retain Notes that are formally still outstanding but have been stripped of virtually all covenant protections. The stripped Notes continue to carry the formal right to receive payment of principal and interest, but they are no longer protected by the restrictive covenants, collateral, reporting obligations, and events of default that gave the Notes their practical enforceability and value.
Consent Threshold for Exit Amendments. The consent threshold for the exit consent supplemental indenture depends on the nature of the amendments being effected. If the exit consent amendments do not directly impair the right to receive principal and interest — that is, if they strip only non-core protective provisions while leaving the payment waterfall and stated maturity intact — they should fall within the general amendment threshold (majority or 66⅔% consent, depending on the Indenture's provisions) rather than requiring individual holder consent under Section 316(b). The key analytical question is whether the particular provisions being stripped constitute "core" payment terms or "protective" terms.
Based on the current analysis, we anticipate that the exit consent supplemental indenture will require consent of holders of 66⅔% in principal amount, which is the heightened threshold applicable to amendments affecting subordination and other fundamental provisions. Even if a lower threshold (majority) were applicable to some of the stripped provisions, the Company should plan around the 66⅔% threshold to provide maximum certainty and minimize litigation risk.
Anticipated Result. Based on the current consent posture, we estimate that the exchange will attract participation from approximately $134.5 million in principal amount of Notes (96.1% of the $140.0 million outstanding), including the $122.0 million held by Ad Hoc Group members plus an additional $12.5 million from non-group holders expected to join during the joinder period. Non-consenting holders are estimated at approximately $5.5 million in principal amount ($140.0 million minus $134.5 million). The exit consent supplemental indenture, executed with the support of the $134.5 million consenting base, would strip the covenant protections from the remaining $5.5 million in outstanding Notes.
Legal Risk Assessment. Exit consent amendments have been the subject of significant and evolving case law. The leading authorities include:
Katz v. Oak Industries Inc., 508 A.2d 873 (Del. Ch. 1986), which upheld exit consents as a legitimate exercise of majority holder rights and rejected the argument that exit consents constituted an impermissible coercion of minority holders;
Ashbury Holdings, 75 F. Supp. 3d 592 (S.D.N.Y. 2014), which initially held that the "right to receive payment" under TIA Section 316(b) encompasses not merely the formal legal right to sue for payment but also the practical ability to receive payment, and that exit consent amendments rendering the remaining Notes practically worthless could constitute an impairment of the right to receive payment;
Ashbury Holdings, 846 F.3d 1 (2d Cir. 2017), which reversed the district court and held that TIA Section 316(b) protects only the formal, legal right to bring suit for payment, and does not extend to the practical ability to recover payment. Under this interpretation, exit consent amendments that strip covenant protections but leave the formal payment right intact do not violate Section 316(b); and
Vireo Holdings, where bondholders challenged a series of asset-stripping transactions that were alleged to have rendered the issuer's Notes practically worthless.
The Second Circuit's decision in Marblegate is favorable to the Company's position, as it endorses a narrow reading of Section 316(b) that permits exit consent amendments stripping covenant protections. However, the Company should be aware that the law in this area continues to evolve, and that aggressive exit consent amendments — particularly those that release collateral, permit asset stripping, or otherwise render the stripped Notes effectively worthless — may attract litigation from non-consenting holders.
Drafting Considerations. To minimize litigation risk and maximize enforceability, the exit consent supplemental indenture should be drafted to:
(i) Eliminate substantially all restrictive covenants, including negative covenants (limitations on indebtedness, liens, investments, restricted payments, asset sales, affiliate transactions) and financial covenants (if any);
(ii) Eliminate most events of default, while retaining events of default for failure to pay principal when due and failure to pay interest when due — these two "core" events of default should be preserved to avoid any argument that the exit consent amendments impair the right to receive payment;
(iii) Eliminate or substantially reduce reporting obligations, including the obligation to deliver annual audited financial statements, quarterly unaudited financial statements, compliance certificates, and other information to holders;
(iv) Release second lien collateral to the extent permissible under the Indenture and the applicable intercreditor agreement — this is the single most impactful exit consent amendment, as it removes the collateral backing from the stripped Notes, but it must be analyzed carefully in light of the Indenture's provisions governing collateral release (which may constitute a sacred right requiring individual holder consent);
(v) Remove change-of-control put rights, if any, that would entitle holders to put their Notes to the Issuer at par (or a premium) upon a change of control of the Company;
(vi) Carefully avoid stripping any provision that would constitute an impairment of the "right to receive payment" under TIA Section 316(b), including the stated maturity, the coupon rate, or the holder's right to institute suit for payment due.
We recommend that the exit consent supplemental indenture be reviewed by litigation counsel experienced in TIA Section 316(b) and exit consent matters before it is finalized, to ensure that the amendments are within the bounds of established precedent and to prepare for any potential challenge by non-consenting holders.
E. Trustee Considerations
Continental Fiduciary Trust Company serves as Trustee and Second Lien Collateral Agent under the Mezzanine Indenture. The Trustee's cooperation is essential to the execution of the exchange and exit consent mechanics, and several practical considerations apply:
Required Documentation. Before executing any supplemental indenture, the Trustee will require:
(i) An officer's certificate from the Issuer certifying that the supplemental indenture complies with the requirements of the Indenture and that all conditions precedent to the execution of the supplemental indenture have been satisfied;
(ii) An opinion of counsel to the Issuer confirming that the supplemental indenture has been duly authorized, executed, and delivered and that it constitutes a valid and binding obligation of the Issuer;
(iii) Written consent or direction from holders of the requisite principal amount of Notes, as required by the applicable amendment provision of the Indenture; and
(iv) A direction letter from the requisite holders directing the Trustee to execute the supplemental indenture.
Trustee Protective Provisions. The Trustee is entitled to rely on the officer's certificate and opinion of counsel, and may decline to act absent satisfactory indemnification against any liability, cost, or expense arising from its actions. The Trustee's fees and expenses (including the fees of Trustee's counsel) are reimbursable by the Issuer under the Indenture. The Trustee may also seek to negotiate additional protections or indemnification in connection with its execution of the supplemental indenture, particularly if the exit consent amendments are expected to generate litigation risk.
Early Engagement. We strongly recommend that the Trustee and its counsel be engaged early in the restructuring process — ideally no later than the execution of the Restructuring Support Agreement — to ensure that the Trustee's requirements and concerns are identified and addressed in advance of the consent solicitation. Delays in obtaining Trustee cooperation can materially impact the restructuring timeline.
Estimated Costs. Filing and administrative fees for Trustee involvement, including the fees of Trustee's counsel and related disbursements, are estimated at approximately $225,000. This amount is included in the overall transaction cost budget being prepared by the Company's financial advisor.
F. Current Consent Posture — Mezzanine
The current consent posture among the mezzanine holder group is favorable to the Company's restructuring objectives. The key data points are as follows:
The Ad Hoc Group was formed informally in February 2023, and its members executed a formal cooperation agreement on March 10, 2023. The Ad Hoc Group is comprised of three funds:
The Ad Hoc Group's aggregate holdings of $122.0 million substantially exceed the 66⅔% consent threshold of $93.3 million (calculated as $140.0 million × 66.67%). The Ad Hoc Group alone is therefore sufficient to deliver the requisite consents for both the exchange and the exit consent supplemental indenture, without the need for any additional holder participation.
Notwithstanding this, the Company expects additional holders to join the exchange during the joinder period. Based on preliminary outreach by the Ad Hoc Group's financial advisor (Meridian Veltrian Partners LLC) and the Company's financial advisor (Hargrove Advisory Group LLC), the forecast total consenting principal is approximately $134.5 million, or 96.1% of the outstanding Notes. This would leave an estimated $5.5 million in principal amount of non-consenting Notes.
The Ad Hoc Group is represented by Thornbury McCaffrey LLP (Alan Driscoll, lead partner) and advised by Meridian Veltrian Partners LLC. The Company's negotiations with the Ad Hoc Group are ongoing, and the principal open issues relate to the valuation of the equity consideration, governance rights of the mezzanine equitization recipients, and the terms of the Series A Preferred Equity.
V. Interaction Between the Two Instruments — Cross-Acceleration and Other Cross-Default Provisions
A. Cross-Default / Cross-Acceleration
The Credit Agreement and the Mezzanine Indenture each contain cross-default and/or cross-acceleration provisions that create interdependencies between the two instruments. These provisions are of critical importance to the sequencing and coordination of the restructuring.
Credit Agreement Cross-Default to Mezzanine Indenture. The Credit Agreement is expected to contain a cross-default event of default provision under which a default or event of default under the Mezzanine Indenture (or any other material indebtedness of the Borrower) constitutes an event of default under the Credit Agreement, subject to customary thresholds and cure periods. We are reviewing the specific language to determine whether the cross-default is triggered by a payment default only, or by any event of default (including covenant defaults) under the Mezzanine Indenture.
Mezzanine Indenture Cross-Default to Credit Agreement. Similarly, the Mezzanine Indenture is expected to contain a cross-default or cross-acceleration provision triggered by a default or event of default under the Credit Agreement or any other material indebtedness. This provision typically requires that the cross-defaulted indebtedness be accelerated (a "cross-acceleration" provision, as distinguished from a mere "cross-default" provision that is triggered by the occurrence of a default, regardless of whether acceleration occurs).
Implications for Restructuring Sequencing. The cross-default provisions create significant risk in the context of the restructuring. If the equitization mechanics under the Mezzanine Indenture involve any period during which the Company fails to make a scheduled interest payment on the Notes — for example, if the Company misses an interest payment as a prelude to launching the exchange offer — this could trigger a payment default under the Mezzanine Indenture, which in turn could trigger a cross-default under the Credit Agreement. An unwaived cross-default under the Credit Agreement would give the first lien Lenders the right to accelerate the Term Loans and Revolver borrowings, demanding immediate repayment of $285.0 million in TLB principal and $42.0 million in Revolver borrowings — a result that would be catastrophic for the restructuring.
Recommendation. To mitigate this risk, the Restructuring Support Agreement should include standstill and forbearance undertakings from consenting first lien Lenders. Specifically, the consenting first lien Lenders should agree that during the period from the execution of the RSA through the closing of the restructuring (or earlier termination of the RSA), they will:
(a) forbear from exercising any rights or remedies arising from any cross-default under the Credit Agreement triggered by a default or event of default under the Mezzanine Indenture in connection with the restructuring;
(b) refrain from directing the Administrative Agent to accelerate the Loans or exercise any enforcement rights;
(c) not consent to the acceleration of the Loans or the exercise of remedies against the Collateral; and
(d) take such actions as may be necessary to prevent the Administrative Agent from taking any enforcement action during the forbearance period.
The standstill and forbearance should be conditioned on customary milestones and termination events, including compliance with the restructuring timeline and the absence of any material adverse change.
B. Intercreditor Agreement Considerations
The Company's existing capital structure is governed in part by an intercreditor agreement (the "Existing Intercreditor Agreement") between Pinnacle National Bank, N.A., as first lien agent, and Continental Fiduciary Trust Company, as second lien agent. The Existing Intercreditor Agreement establishes the lien priority as between the first lien and second lien facilities, and contains customary standstill, payment subordination, and enforcement provisions governing the rights of the second lien holders vis-à-vis the first lien holders.
The contemplated restructuring introduces a significant new element to the capital structure: a super-priority credit facility in the principal amount of $55.0 million, provided by Belvedere Credit Opportunities Fund LP (the "Super-Priority Facility"), which will hold a first-priority lien on all Collateral, effectively priming both the existing first lien and second lien claims. To accommodate this new layer of priority, the Existing Intercreditor Agreement must be amended and restated (the "Amended and Restated Intercreditor Agreement") to create a three-tier lien priority structure: super-priority first / first lien first-out / first lien second-out (with the second lien being eliminated upon the equitization of the Mezzanine Notes).
Consent to Intercreditor Amendment. The consent required to amend the Existing Intercreditor Agreement must be analyzed under both the Credit Agreement and the Mezzanine Indenture. Under the Credit Agreement, the Administrative Agent's authority to amend the intercreditor agreement on behalf of the first lien Lenders is likely subject to the direction of the Required Lenders, although certain modifications may require a higher consent threshold depending on the specific provisions of the Credit Agreement and the Existing Intercreditor Agreement. Under the Mezzanine Indenture, amendments to the intercreditor agreement that adversely affect the rights of the second lien holders may require the consent of the requisite holders under the Indenture's amendment provisions (66⅔% or majority, as applicable). These issues are being analyzed in detail in the separate intercreditor memorandum.
Post-Equitization Structure. Following the equitization of the Mezzanine Notes, the second lien tranche will be eliminated entirely (subject to any stripped Notes that remain outstanding held by non-consenting holders). The Amended and Restated Intercreditor Agreement will then govern only the super-priority and first lien facilities, creating a simpler two-tier priority structure. To the extent any stripped Notes remain outstanding, the intercreditor provisions applicable to those Notes must be addressed — it is likely that the exit consent supplemental indenture will release the second lien collateral and eliminate the stripped Notes' participation in the intercreditor framework, leaving those Notes as effectively unsecured general obligations of the Company.
C. Change of Control Provisions
Both the Credit Agreement and the Mezzanine Indenture are expected to contain "change of control" provisions that trigger mandatory prepayment obligations, events of default, or holder put rights upon a change of control of the Company. These provisions must be carefully analyzed in light of the post-restructuring equity ownership, which will shift from 100% ownership by Ridgeline Capital Partners (the "Sponsor") to a split ownership structure of approximately 47.5% Ridgeline / 47.5% mezzanine equitization recipients / 5.0% management equity pool.
Credit Agreement Change of Control. The Credit Agreement is expected to define "change of control" as the occurrence of one or more specified trigger events, typically including any person or group (other than the Sponsor and its affiliates) acquiring more than 50% of the voting equity interests of the Borrower. The proposed post-restructuring ownership structure does not result in any single party (other than Ridgeline) holding more than 50% of the voting equity — the mezzanine equitization recipients collectively receive 47.5%, but they are not expected to constitute a "group" for purposes of the change of control definition, and their aggregate holding is below the 50% threshold in any event.
Nevertheless, several risks exist:
(a) The change of control definition may be triggered by the Sponsor ceasing to hold a majority (more than 50%) of the voting equity, regardless of whether any other person or group acquires more than 50%. If the definition is drafted as a "loss of majority" trigger rather than an "acquisition of majority" trigger, the reduction of Ridgeline's stake from 100% to 47.5% could trigger a change of control.
(b) The change of control definition may include a "board control" trigger, under which a change of control occurs if a majority of the board of directors ceases to be composed of directors nominated or approved by the Sponsor. If the mezzanine equitization recipients are entitled to designate board seats under the governance arrangements, this could implicate the board control trigger.
(c) The mezzanine equitization recipients may be deemed a "group" for purposes of the

MEMORANDUM

MATTER NO.: 1012-00002

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