PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022
MEMORANDUM
TO: Nathaniel Bower, Partner, Bankruptcy & Restructuring
FROM: Nathan Ikeda, Associate, Bankruptcy & Restructuring
DATE: May 15, 2023
RE: Stonefield Logistics Group Inc. — Negotiation Strategy, Positions, and Fallback Analysis
MATTER NO.: 1012-00002
CC: Colette Whitman (Billing Partner); Gabrielle Moss (Working Associate)
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I. Purpose and Executive Summary
The purpose of this memorandum is to set forth the recommended negotiation strategy for Stonefield Logistics Group Inc. ("SLG" or the "Company") in connection with the consensual out-of-court restructuring of approximately $485 million in funded debt obligations. As detailed in Section II below, total funded debt actually stands at $475.1 million, inclusive of $8.1 million of accrued payment-in-kind ("PIK") interest on the Company's outstanding mezzanine notes. This memorandum analyzes the positions and expected demands of each principal counterparty, identifies the concessions the Company should be prepared to offer at each stage of the negotiations, outlines our recommended fallback positions, and assesses the viability and consequences of a Chapter 11 filing as the Company's best alternative to a negotiated agreement ("BATNA").
The restructuring involves three principal counterparties with whom the Company must simultaneously negotiate:
(1) First Lien Lender Group. The administrative agent is Pinnacle National Bank, N.A. ("Pinnacle"), represented by Westlake Harden & Cole LLP, with lead partner Ramona Quelibo. The first lien lender group holds claims under both the revolving credit facility and the first lien term loan B facility.
(2) Mezzanine Ad Hoc Group. The ad hoc group of mezzanine noteholders is comprised of three institutional investors — Graystone Mezzanine Capital Fund II LP, Ashland Structured Credit LLC, and Dunmore Special Situations Fund LP — collectively holding $122.0 million of the $140.0 million outstanding mezzanine notes (87.1%). The ad hoc group is represented by Thornbury McCaffrey LLP, with lead partner Alan Driscoll and working partner Monica Firth, and is advised by Meridian Veltrian Partners LLC as financial advisor.
(3) Belvedere Credit Opportunities Fund LP. Belvedere is the prospective new-money provider, led by Managing Partner Christopher Hartigan. Belvedere also holds $32.0 million of the existing first lien term loan B, creating a dual position that is both a source of alignment and a potential point of leverage in the negotiations.
The Calderwood & Harkness engagement team for this matter consists of Nathaniel Bower (Responsible Partner), Colette Whitman (Billing Partner), Nathan Ikeda (Lead Associate), Gabrielle Moss (Working Associate), and Sylvia Hartwell (Tax Specialist Partner). The Company's financial advisor is Hargrove Advisory Group LLC ("Hargrove"), led by Managing Director Elena Voss, which has been engaged since March 15, 2023 and has been responsible for the preparation of management projections and the 13-week cash flow model that underpin much of the analysis discussed herein.
Summary Recommendation. We recommend that the Company pursue a three-pronged consensual restructuring consisting of: (a) an amend-and-extend of the existing first lien credit facilities, extending the maturity of the term loan B and revolving credit facility by approximately four years; (b) a new-money super-priority facility of $55.0 million to be provided by Belvedere Credit Opportunities Fund LP, structured as a "first-out" super-priority term loan; and (c) an equitization of the $140.0 million mezzanine notes (plus $8.1 million in accrued PIK interest) in exchange for a combination of preferred equity and common equity in the reorganized Company. A credible Chapter 11 filing should be maintained as the BATNA in all discussions to create urgency and demonstrate to each constituency that the out-of-court alternative provides a materially superior outcome to a contested or even a pre-packaged bankruptcy.
Target Timeline. We recommend circulating the initial restructuring term sheet to all creditor constituencies by May 19, 2023. The target date for execution of a restructuring support agreement ("RSA") is late June 2023, with definitive documentation and closing expected in the fourth quarter of 2023. This timeline is designed to complete the restructuring well in advance of the December 15, 2024 first lien maturity wall, providing ample runway for the Company to execute on its revised business plan without the overhang of near-term maturities.
II. Current Posture and Context
A. Prior Meetings and Status of Discussions
Calderwood & Harkness was formally engaged on April 3, 2023, when the engagement letter was executed by the Company's General Counsel, Howard Kessler. Since that date, the engagement team has conducted extensive diligence on the Company's capital structure, financial condition, and contractual obligations, and has participated in the following key meetings with the principal counterparties.
April 14, 2023 — First Lien Lender Group Meeting. The Company, accompanied by Calderwood & Harkness and Hargrove, held an introductory meeting with the first lien lender group and Pinnacle National Bank, N.A. Daniel Wexford, Managing Director of Pinnacle's Loan Restructuring Group, attended as the lead representative for the administrative agent. The Company presented a comprehensive financial overview, including a summary of recent operating performance, the 13-week cash flow model prepared by Hargrove, and a candid acknowledgment of the near-term maturity risk presented by the December 15, 2024 maturity date of the first lien facilities. The Company also disclosed the trajectory of declining Adjusted EBITDA, which has fallen from $58.7 million in FY 2022 to a last-twelve-months ("LTM") figure of $41.2 million as of Q1 2023.
The first lien lenders expressed a general willingness to discuss an amend-and-extend transaction, which we view as a constructive opening position. However, the lender group signaled clearly that it would not accept any maturity extension without receiving tighter financial maintenance covenants and a meaningful increase to the applicable credit spread. Several lenders also raised questions regarding the status of the mezzanine notes and whether the Company intended to seek any reduction or equitization of the junior debt. We responded at a high level by indicating that the Company was exploring all options to right-size the capital structure and that a comprehensive proposal would be forthcoming. No term sheet was circulated at this meeting.
April 28, 2023 — Mezzanine Ad Hoc Group Meeting. The Company, Calderwood & Harkness, and Hargrove held a separate introductory meeting with the mezzanine ad hoc group and its advisors. The ad hoc group consists of Graystone Mezzanine Capital Fund II LP (holding $52.0 million), Ashland Structured Credit LLC (holding $40.0 million), and Dunmore Special Situations Fund LP (holding $30.0 million), which collectively hold $122.0 million of the $140.0 million in outstanding mezzanine notes, representing 87.1% of the issue. The ad hoc group was represented by Alan Driscoll of Thornbury McCaffrey LLP and accompanied by its financial advisor, Meridian Veltrian Partners LLC.
The mezzanine group acknowledged that its position is impaired given the Company's current financial profile and leverage, but the group demanded meaningful recovery in any restructuring. The ad hoc group indicated a strong preference for an equity conversion, but at a valuation that would imply near-par recovery on the mezzanine claims — a position that we view as aspirational and that we intend to negotiate down significantly. Meridian Veltrian Partners LLC presented its own preliminary valuation analysis at the meeting, which we are in the process of reviewing and which Hargrove is preparing to rebut.
Hargrove Advisory Group LLC. As noted above, the Company retained Hargrove Advisory Group LLC on March 15, 2023, prior to Calderwood & Harkness's formal engagement. Elena Voss, Managing Director, has been leading the Hargrove team and has been instrumental in preparing the management projections, 13-week cash flow model, and preliminary valuation analysis that form the foundation of the restructuring proposal. Hargrove was formally retained by the Board of Directors of SLG, although we note that Ridgeline Capital Partners Fund III, L.P. ("Ridgeline"), as the Company's 100% equity owner, has significant influence over the Board's decisions regarding advisory engagements.
B. Company Financial Snapshot
The following summarizes the Company's key financial metrics as of the most recent reporting period, which inform both the restructuring proposal and the negotiation dynamics with each constituency.
Revenue. FY 2022 revenue was $612.3 million. Projected FY 2023 revenue is $545.0 million, reflecting a decline of approximately 11.0%. The revenue decline is attributable to three primary factors: (i) the ongoing freight recession, which has depressed spot and contract rates across the less-than-truckload ("LTL") and truckload segments in which SLG operates; (ii) excess carrier capacity in the market, which has intensified pricing pressure; and (iii) the loss of several significant customer contracts during Q4 2022 and Q1 2023, the details of which are set forth in the Hargrove management projections.
EBITDA. FY 2022 Adjusted EBITDA was $58.7 million. LTM Q1 2023 Adjusted EBITDA has declined to $41.2 million, reflecting continued margin compression driven by lower revenue, relatively fixed terminal and labor costs, and elevated fuel costs. The Company projects FY 2023 Adjusted EBITDA of $38.5 million, which represents a further decline from the LTM figure and implies continued operating pressure through the remainder of the fiscal year. The FY 2024 projection of $52.0 million, upon which the post-restructuring leverage analysis is based, assumes the realization of cost savings initiatives and revenue stabilization that have not yet been implemented.
Cash Burn and Liquidity. The Company is burning cash at approximately $2.5 million per month as of Q1 2023, principally due to the gap between operating cash flow and the combined burden of interest expense and maintenance capital expenditures. Total liquidity as of March 31, 2023, was $15.8 million, consisting of $11.3 million in unrestricted cash on hand and $4.5 million of availability under the revolving credit facility (after giving effect to $42.0 million in drawn borrowings and $3.5 million in outstanding letters of credit against a $50.0 million total commitment). At the current rate of cash consumption, and absent a restructuring or other liquidity event, the Company projects that it will exhaust available liquidity by the third quarter of 2024.
Operations. The Company operates approximately 3,800 employees across 26 terminal locations in 14 states. The operational footprint is significant and represents both a source of value and a significant fixed-cost base that exacerbates the impact of revenue declines on EBITDA margins.
C. Pre-Restructuring Capital Structure Summary
The Company's pre-restructuring capital structure is summarized in detail below. All credit facilities are governed by New York law and were entered into in connection with the original leveraged buyout by Ridgeline Capital Partners Fund III, L.P., which closed on December 15, 2017.
Revolving Credit Facility.
• Outstanding: $42.0 million drawn of $50.0 million total commitment (plus $3.5 million in outstanding letters of credit)
• Applicable Rate: SOFR + 375 basis points
• Maturity: December 15, 2024
• Security: First lien on substantially all assets, pari passu with the Term Loan B
• Lenders: Pinnacle National Bank, N.A. ($20.0 million commitment), Great Basin Commercial Bank ($15.0 million commitment), Tidewater Lending Corporation ($15.0 million commitment)
First Lien Term Loan B.
• Outstanding: $285.0 million (original principal of $310.0 million less $25.0 million of scheduled amortization payments)
• Applicable Rate: SOFR + 425 basis points, with a 75 basis point SOFR floor
• Maturity: December 15, 2024
• Security: First lien on substantially all assets, pari passu with the Revolving Credit Facility
• Key Syndicate Members:
• Pinnacle National Bank, N.A.: $45.0 million
• Tralvendo CLO 2018-I Ltd. (managed by Tralvendo Asset Management LLC): $38.5 million
• Belvedere Credit Opportunities Fund LP: $32.0 million
• Kelvantis Capital Partners LLC: $28.0 million
• Kingsway Institutional Investors LLC: $24.5 million
• Eleven additional lenders: $117.0 million (aggregate)
Mezzanine Notes.
• Outstanding Principal: $140.0 million
• Accrued PIK Interest: $8.1 million
• Total Claims: $148.1 million
• Coupon: 11.50% (cash/PIK toggle)
• Maturity: June 15, 2025
• Security: Second lien on substantially all assets
• CUSIP: 861537 AA 2
• Indenture Trustee: Continental Fiduciary Trust Company
Summary Leverage Statistics.
Equity.
• Ridgeline Capital Partners Fund III, L.P.: 100% of outstanding common equity
• Original Investment: $210.0 million (December 2017 LBO)
• Current Status: Significantly impaired; at current enterprise value levels, the equity is deeply out of the money
III. Negotiation Strategy — First Lien Lender Group
A. Objectives
The Company's primary objectives in negotiating with the first lien lender group are as follows:
(i) Obtain consent from the "Required Lenders" — defined under the existing credit agreement as holders of more than 50% of outstanding term loan B loans (i.e., more than $142.5 million of the $285.0 million outstanding) — for an amendment to the first lien credit agreement effectuating the amend-and-extend transaction.
(ii) Extend the maturity of the term loan B from December 15, 2024 to approximately December 19, 2028, representing a four-year extension from the projected closing date of the restructuring.
(iii) Extend the maturity of the revolving credit facility to approximately December 19, 2027, with a springing maturity provision that would accelerate the revolver maturity to 91 days prior to the term loan B maturity in the event the term loan B is not refinanced or repaid by that date.
(iv) Reduce the aggregate revolving credit commitments from $50.0 million to $35.0 million, in order to reduce the Company's unused commitment fee burden and to reflect the reduced borrowing base capacity resulting from the Company's lower revenue profile. This commitment reduction will require the consent of each revolver lender being reduced, and we anticipate negotiating this point directly with Pinnacle, Great Basin Commercial Bank, and Tidewater Lending Corporation.
(v) Preserve the first lien lenders' recovery prospects — we believe that the first lien debt is likely covered on a secured basis (i.e., recoveries at or near par) — while simultaneously achieving manageable debt service levels that the Company can sustain under its revised business plan projections.
B. Key Concessions to Offer
To incentivize the first lien lender group to consent to the amend-and-extend transaction, the Company should be prepared to offer the following concessions, which we view as reasonable and market-standard for transactions of this nature:
Spread Increases. We recommend offering a spread increase on the term loan B from SOFR + 425 basis points to SOFR + 500 basis points, representing a 75 basis point increase. Additionally, we recommend increasing the SOFR floor from the current 75 basis points to 100 basis points. On the revolving credit facility, we recommend a spread increase from SOFR + 375 basis points to SOFR + 450 basis points, also representing a 75 basis point increase. These spread increases are designed to compensate the lenders for the additional credit risk associated with the maturity extension and the Company's deteriorated financial profile.
Financial Maintenance Covenants. The existing credit agreement is "covenant-lite" and does not contain financial maintenance covenants (only a springing revolver covenant, which has not been triggered). We recommend offering the addition of two financial maintenance covenants to the amended credit agreement:
(a) Total Net Leverage Covenant: Starting at a maximum permitted Total Net Leverage of 6.50x as of the fiscal quarter ending December 31, 2025, stepping down to 6.25x by Q2 2026, 6.00x by Q4 2026, and ultimately to 5.75x by Q4 2027. These step-downs are calibrated to the Company's projected EBITDA recovery trajectory as modeled in the Hargrove projections and provide meaningful cushion above the projected leverage levels while still providing the lenders with a credible enforcement tool.
(b) Minimum Liquidity Covenant: A minimum liquidity requirement of not less than $20.0 million, tested monthly and defined as the sum of unrestricted cash on hand plus available revolving credit facility commitments.
Consent Fees. We recommend offering the following consent fees to incentivize early and broad-based lender participation:
(a) A consent fee of 50 basis points of outstanding term loan B principal to each consenting term loan lender, payable at closing of the amendment. At $285.0 million outstanding, this equates to $1,425,000 in the aggregate.
(b) A consent fee of 25 basis points of the revised revolving credit commitment amount to each consenting revolver lender, payable at closing. At the proposed $35.0 million commitment, this equates to $87,500 in the aggregate.
The total consent fee outlay of approximately $1.5 million is within the Company's transaction cost budget and is consistent with market practice for amend-and-extend transactions involving comparably distressed credits.
Intercreditor Benefits. As part of the restructuring, the first lien lenders will benefit from a super-priority / first lien intercreditor agreement that will establish their position as "second-out" behind the Belvedere super-priority facility but ahead of any remaining junior claims. This structural enhancement, while subordinating the first lien lenders to the new super-priority debt, still significantly improves their relative position by eliminating the mezzanine notes from the capital structure through equitization. Post-restructuring total first lien and super-priority debt of approximately $375.0 million (Belvedere $55.0M + TLB $285.0M + Revolver $35.0M) will represent leverage of approximately 7.2x on FY 2024E EBITDA of $52.0 million — a meaningful improvement from the current 11.5x total leverage.
C. Anticipated First Lien Pushback and Responses
Based on the April 14 meeting and our experience in comparable transactions, we anticipate the following areas of pushback from the first lien lender group:
Higher Spread Demands. Certain first lien lenders may demand a higher credit spread, potentially SOFR + 550 basis points or more. Our response should emphasize that the Company cannot sustain additional cash interest expense given projected FY 2023 Adjusted EBITDA of $38.5 million. The proposed 75 basis point increase to SOFR + 500 already adds approximately $2.1 million of annual cash interest cost to the Company's debt service burden (calculated as $285.0 million × 0.75% = approximately $2.1 million). Any spread above SOFR + 500 would require the Company to revisit its liquidity projections and could jeopardize the viability of the business plan that underpins the lenders' own recovery. We should present this analysis to the lender group with supporting cash flow projections prepared by Hargrove.
Shorter Extension Period. Some lenders may resist a full four-year extension and advocate for a shorter extension of two to three years. Our response should emphasize that a four-year extension is reasonable given the Company's business plan horizon and the time required for the freight market to recover and for the Company's cost optimization initiatives to generate results. A shorter extension would leave the Company facing another maturity wall before EBITDA has recovered to levels that support a refinancing, increasing the risk of a future restructuring and reducing the ultimate recovery for all stakeholders. Moreover, without the proposed extension, the Company faces an imminent filing that would yield worse recovery for first lien lenders due to administrative costs, business disruption, and delay.
Revolver Commitment Reduction Resistance. The revolving credit lenders may resist the proposed reduction in commitments from $50.0 million to $35.0 million, as this reduces their earning asset base and associated fee income. Our response should highlight that the Company's borrowing needs have contracted in line with the revenue decline, and that a $35.0 million commitment is adequate to support the Company's working capital needs under the revised business plan. Maintaining a larger commitment that the Company does not need would impose unnecessary unused commitment fees and create an artificially inflated liquidity figure that does not reflect the Company's actual operating requirements.
Higher Consent Fee Demands. Some lenders may seek a higher consent fee, potentially 100 basis points or more. Our response should be that 50 basis points is squarely within market-standard parameters for amend-and-extend transactions and that the total consent fee payout of approximately $1.5 million already represents a meaningful expenditure given the Company's limited liquidity resources. We should note that the consent fee is being funded from new money proceeds and Ridgeline's equity contribution, and that increasing the consent fee reduces the residual liquidity available to the Company post-closing — which in turn increases credit risk for the lenders themselves.
Key Dynamic — Belvedere and Pinnacle Alignment. A critical dynamic in the first lien negotiations is the dual role of Belvedere Credit Opportunities Fund LP, which holds $32.0 million of the term loan B and is simultaneously the prospective new-money provider. Belvedere's interest in protecting its existing TLB position and in earning attractive new-money economics creates a natural alignment with the Company's restructuring objectives. Similarly, Pinnacle National Bank, N.A. holds $45.0 million of the term loan B plus $20.0 million of revolver commitments and serves as administrative agent, giving it outsized influence over the lender group's posture. Cultivating early alignment with both Belvedere and Pinnacle is essential to our consent strategy.
D. Consent Strategy
Our recommended consent strategy is designed to build early momentum by securing commitments from the largest and most aligned holders, then leveraging that momentum to bring additional lenders into the transaction.
Phase 1 — Anchor Commitments. We should target early commitments from the following three holders, whose combined positions represent 40.7% of the outstanding term loan B:
• Pinnacle National Bank, N.A.: $45.0 million (15.8% of TLB)
• Belvedere Credit Opportunities Fund LP: $32.0 million (11.2% of TLB)
• Tralvendo CLO 2018-I Ltd.: $38.5 million (13.5% of TLB)
• Combined total: $115.5 million (40.5% of TLB)
Pinnacle is the administrative agent and has a strong institutional interest in facilitating a consensual resolution. Belvedere's dual position as new-money provider and existing TLB holder creates powerful alignment. Tralvendo CLO 2018-I Ltd., managed by Tralvendo Asset Management LLC, is a CLO vehicle that is likely motivated to avoid a distressed or defaulted position in its portfolio and should be receptive to a par-recovery, spread-increase outcome.
Phase 2 — Building to Required Lenders. Following the anchor commitments, we should approach Kelvantis Capital Partners LLC ($28.0 million) and Kingsway Institutional Investors LLC ($24.5 million) for an additional $52.5 million in commitments. If these lenders consent, the combined total with Phase 1 commitments would be approximately $168.0 million, or 58.9% of the outstanding TLB — well above the 50% Required Lenders threshold.
Phase 3 — Broad-Based Support. After crossing the Required Lenders threshold, we should open the consent solicitation to the remaining eleven lenders holding an aggregate of approximately $117.0 million. Our target is to achieve overall consent of 80% or more of the outstanding TLB to ensure broad-based support and to minimize the risk of hold-out issues or litigation from non-consenting lenders.
Revolver Consent. For the revolving credit facility, we should seek unanimous consent from all three lenders (Pinnacle, Great Basin Commercial Bank, and Tidewater Lending Corporation). Given the relatively small individual commitments, the offered spread increase, and the fact that a failed restructuring would result in a potential Chapter 11 filing that could impair revolver recovery, we believe unanimous revolver consent is achievable.
IV. Negotiation Strategy — Mezzanine Ad Hoc Group
A. Objectives
The Company's objectives in the mezzanine negotiation are as follows:
(i) Achieve the full equitization of the $140.0 million mezzanine note principal plus $8.1 million of accrued PIK interest, for total claims of $148.1 million, in exchange for a package of preferred equity, common equity, and governance rights as described below.
(ii) Eliminate all mezzanine debt from the Company's capital structure, thereby reducing total funded debt by approximately $148.1 million (or $100.1 million net of the $48.0 million equitization value attributed to the preferred equity and common equity consideration).
(iii) Obtain consent from holders of more than 66⅔% of the outstanding mezzanine notes (i.e., more than approximately $93.3 million of $140.0 million outstanding principal) as required under Section 9.02 of the Indenture for an exchange transaction.
(iv) Incentivize non-consenting holders to participate in the exchange through the use of exit consent amendments that strip substantially all restrictive covenants from the remaining notes, making a hold-out position economically unattractive.
B. Proposed Equitization Package
The equitization consideration to be offered to mezzanine noteholders consists of the following components:
Series A Preferred Equity. The consenting mezzanine holders would receive, in the aggregate, Series A Preferred Equity in the reorganized Company with a $35.0 million aggregate liquidation preference. The Series A Preferred would carry a 10.00% PIK dividend rate and would be senior to all common equity in the distribution waterfall upon any liquidation, sale, or change of control. The Series A Preferred provides the mezzanine holders with a fixed-value senior claim in the reorganized Company's equity capital structure, offering downside protection in the event that the Company's post-restructuring performance falls below projections.
Pro Forma Common Equity. Consenting mezzanine holders would receive, in the aggregate, 47.5% of the pro forma common equity of the reorganized Company, providing meaningful upside participation in the event of a successful operational turnaround.
Ridgeline Dilution. Ridgeline Capital Partners Fund III, L.P. would be diluted from its current 100% common equity ownership to 47.5% of the pro forma common equity.
Management Incentive Plan. A management incentive plan ("MIP") pool of 5.0% of the pro forma common equity would be reserved for key members of the Company's management team, as discussed further in Section VI.C below.
Implied Recovery Analysis. Based on the Hargrove Advisory Group's preliminary valuation analysis, the total implied recovery for mezzanine holders under this proposal is estimated at approximately 40 to 55 cents on the dollar, depending on the equity valuation assumptions employed. The recovery from the Series A Preferred alone represents a cash-equivalent recovery of approximately 23.6% ($35.0 million liquidation preference ÷ $148.1 million total mezzanine claims). The incremental recovery from the 47.5% common equity allocation depends on the total enterprise value and the residual equity value after satisfying the super-priority and first lien debt.
PIK Interest Waiver. As part of the settlement consideration, the $8.1 million in accrued PIK interest would be waived by the consenting holders. The waiver of PIK is a standard feature of mezzanine equitization transactions and reflects the deeply impaired nature of the mezzanine claims.
C. Key Mezzanine Group Positions and Responses
Based on the April 28 meeting and the positions articulated by Alan Driscoll of Thornbury McCaffrey LLP and Meridian Veltrian Partners LLC, we anticipate the following key areas of contention:
Higher Equity Allocation. The mezzanine group will almost certainly argue for a higher allocation of pro forma common equity — likely in the range of 55% to 65% — and a correspondingly lower allocation for Ridgeline. The group may also argue for a higher face value for the Series A Preferred.
Our response: The proposed 47.5% / 47.5% split between the mezzanine holders and Ridgeline reflects the fact that Ridgeline is contributing $12.5 million in fresh equity capital and is maintaining its operational sponsorship of the Company. Ridgeline's continued involvement provides management continuity, board-level oversight, and institutional support that are critical to the Company's operational stability and post-restructuring performance. The mezzanine holders are receiving substantial equity upside from a position that is deeply out of the money — at current leverage levels, the mezzanine notes sit behind approximately $327.0 million of first lien debt on an enterprise that generates only $41.2 million of LTM EBITDA, implying zero recovery for the mezzanine absent a restructuring. The proposed package represents a meaningful recovery that is achievable only because Ridgeline is contributing fresh capital and the first lien lenders are agreeing to extend maturities rather than enforce their rights.
Furthermore, Ridgeline's $12.5 million new equity contribution directly funds transaction costs and provides a post-closing liquidity cushion. Without Ridgeline's continued sponsorship and board presence, operational transition risk increases significantly, which would impair the very equity value that the mezzanine holders would be receiving.
Board Control. The mezzanine group may demand board control, arguing that as the largest equity constituency post-restructuring (when combined with the Preferred), they should have the ability to direct the Company's strategic decisions.
Our response: We propose a balanced seven-member board consisting of three Ridgeline designees (Julian Voight, Serena Chu, and one additional designee to be identified), three mezzanine holder designees, and one independent director. This structure gives neither side unilateral control over the Board, while the independent director serves as a tiebreaker on contested matters. This governance framework is consistent with market practice in sponsor-led restructurings where the sponsor retains a meaningful equity position and operational involvement, and it protects both constituencies against overreach by the other. We should be prepared to discuss director qualification requirements and the process for selecting the independent director.
Cash Consideration. The mezzanine group may demand cash consideration in lieu of, or as a supplement to, the equity package — for example, a partial cash-out of their claims or a cash consent fee.
Our response: The Company has insufficient liquidity to fund any material cash distribution to the mezzanine holders. Total liquidity as of March 31, 2023 is $15.8 million and declining at approximately $2.5 million per month. The equity-only consideration is driven by necessity, not by choice. Any cash distributed to the mezzanine holders would come directly out of the Company's operational liquidity and would increase the risk of a liquidity crisis during or after the restructuring process. We should present the 13-week cash flow model to demonstrate the Company's constrained cash position and the absence of any realistic mechanism to fund cash consideration.
Valuation Dispute. Meridian Veltrian Partners LLC, as financial advisor to the ad hoc group, will likely present a total enterprise value analysis that yields a higher implied equity value than the Hargrove analysis, and will argue that the mezzanine holders' recovery should be calculated on the basis of this higher valuation.
Our response: We should engage Hargrove to prepare a robust rebuttal to the Meridian analysis, emphasizing that conservative revenue and EBITDA assumptions are warranted given the current freight market conditions. The freight recession shows no near-term signs of abating, customer contract losses continue, and the Company's FY 2023E EBITDA projection of $38.5 million may itself prove optimistic. We should stress-test the Hargrove projections and present downside scenarios to demonstrate that the proposed equitization package represents a fair recovery under realistic assumptions, and that the Meridian analysis likely relies on overly aggressive revenue recovery assumptions that are not supported by market data.
D. Consent Mechanics and Exit Consent Strategy
The ad hoc group consisting of Graystone ($52.0 million), Ashland ($40.0 million), and Dunmore ($30.0 million) holds $122.0 million of the $140.0 million outstanding mezzanine notes, representing 87.1% of the issue. This is well above the 66⅔% threshold required under the Indenture for the exchange transaction.
RSA and Joinder Strategy. The primary strategy is to lock in the ad hoc group's support through the RSA, which will include binding commitments from each ad hoc group member to tender their notes in the exchange offer and to deliver exit consents. After execution of the RSA, we will open a joinder period (targeted for July 3–21, 2023) during which additional mezzanine holders may join the RSA and receive the same treatment as the initial signatories.
Exit Consent Amendments. Upon the exchange, consenting holders will deliver exit consent votes authorizing the execution of a supplemental indenture that strips substantially all restrictive covenants, events of default, reporting obligations, and other protective provisions from the remaining notes. The exit consent amendments are designed to make the hold-out position economically unattractive — a holder who declines to participate in the exchange will be left holding stripped notes with no covenant protection, no reporting rights, and no practical ability to enforce the indenture terms.
Residual Non-Consenting Holders. Of the $18.0 million held outside the ad hoc group, we expect that a meaningful portion will elect to join the exchange during the joinder period. Our estimate is that the residual non-consenting position will be approximately $5.5 million, representing holders who are either unable to participate (due to internal investment restrictions or other constraints) or who are pursuing a hold-out strategy in the hope of receiving preferential treatment. Non-consenting holders will receive substantially identical treatment to consenting holders through the exchange offer, but will face stripped notes if they decline to participate.
Consent Solicitation Timeline. We propose the following timeline for the consent solicitation:
• Launch of consent solicitation and exchange offer: October 2023
• Early consent deadline (with early consent fee, if applicable): approximately two weeks after launch
• Final consent and exchange deadline: approximately four weeks after launch
• Continental Fiduciary Trust Company to serve as exchange agent, information agent, and tabulation agent
V. Negotiation Strategy — New Money Provider (Belvedere)
A. Objectives
The Company's objectives in negotiating with Belvedere Credit Opportunities Fund LP are as follows:
(i) Secure a $55.0 million super-priority first-out term loan to provide the Company with fresh liquidity for ongoing operations, transaction costs associated with the restructuring, and a post-closing liquidity cushion.
(ii) Structure the facility as $45.0 million funded at closing and a $10.0 million delayed-draw term loan ("DDTL") available for a specified draw period post-closing, providing the Company with additional flexibility to address unforeseen liquidity needs without immediately incurring the full cost of the facility.
(iii) Negotiate terms that appropriately compensate Belvedere for the super-priority risk and the Company's distressed credit profile while remaining within the Company's capacity to service the debt under the revised business plan projections.
Belvedere's dual position as both an existing TLB holder ($32.0 million) and the prospective new-money lender creates both alignment and potential leverage. On the one hand, Belvedere benefits from the broader restructuring insofar as it protects the value of Belvedere's existing TLB position through the maturity extension and the equitization of the mezzanine debt. On the other hand, Belvedere's willingness to provide new money is a critical ingredient of the restructuring, and Christopher Hartigan is likely to use this leverage to extract favorable terms on the super-priority facility.
B. Proposed Terms
We recommend proposing the following terms for the super-priority facility:
Applicable Rate. SOFR + 700 basis points with a 100 basis point SOFR floor. This represents a premium to the amended first lien term loan B rate (SOFR + 500 basis points) that reflects the super-priority position, the Company's distressed profile, and the new-money risk. Based on our review of comparable super-priority facilities in recent out-of-court restructurings, SOFR + 700 basis points is within the range of market for transactions of this nature, though at the lower end.
Original Issue discount. 2.00% on the full $55.0 million commitment amount, equating to $1.1 million in OID. Net funded proceeds at closing would be $45.0 million less $1.1 million OID, or approximately $43.9 million. The DDTL would also be subject to the 2.00% OID upon draw.
Maturity. December 19, 2027, representing a four-year tenor from the projected closing date. The super-priority maturity is inside the amended TLB maturity of December 19, 2028, which is the standard structure for super-priority / first lien facilities.
Call Protection. A declining call premium schedule of 103 / 102 / 101 / par — i.e., non-call during the first year at a premium of 103% of par, declining to 102% in Year 2, 101% in Year 3, and callable at par thereafter. This provides Belvedere with yield protection while preserving the Company's flexibility to refinance the facility as its credit profile improves.
Mandatory Prepayment. 75% excess cash flow sweep, tested annually, with a minimum liquidity threshold of $20.0 million below which no sweep payment is required. This sweep mechanism aligns with first lien lender expectations and provides Belvedere with a mechanism to receive accelerated repayment if the Company's cash flow exceeds projections.
Commitment Fee on DDTL. 1.00% per annum on the undrawn DDTL commitment, accruing from closing until drawn or the expiration of the draw period. This is consistent with market practice for delayed-draw facilities.
Security. First-priority super-priority lien on substantially all assets of the Borrower and the Guarantors, which include Stonefield Logistics Holdings LLC, Stonefield Freight Services LLC, Stonefield Last Mile Inc., and Stonefield Warehousing LLC. The lien will be documented through a new security agreement and will be subject to the intercreditor agreement described below.
Intercreditor Agreement. A super-priority / first lien "first-out / second-out" intercreditor agreement will be entered into among Belvedere (as super-priority agent), Pinnacle National Bank, N.A. (as first lien agent), and the Company. The intercreditor agreement will establish a payment and enforcement waterfall in which the super-priority obligations are satisfied in full before any distribution is made to the first lien lenders. The intercreditor agreement will also include customary standstill provisions governing the first lien lenders' ability to exercise remedies during a period in which the super-priority obligations remain outstanding, as well as provisions addressing DIP financing, adequate protection, and asset sale proceeds in a bankruptcy scenario.
C. Anticipated Belvedere Positions and Responses
Higher OID or Upfront Fee. Belvedere may push for a higher OID, potentially 3.00% or more, or may request an additional upfront commitment fee separate from the OID. Our response should emphasize that the 2.00% OID is appropriate given Belvedere's super-priority position, which affords it the highest level of credit protection in the capital structure. We should also highlight that the Company's transaction cost budget is constrained — as detailed in the sources and uses analysis below — and that increasing the OID would reduce net funded proceeds available for the Company's operational liquidity. Importantly, Belvedere's existing TLB position of $32.0 million benefits significantly from the restructuring through the maturity extension and the higher credit spread, and these benefits should be viewed as part of Belvedere's overall return profile from the transaction.
Tighter Covenants. Belvedere may demand the inclusion of financial maintenance covenants specific to the super-priority credit agreement that are more restrictive than those in the amended first lien credit agreement. Our response should be that the financial covenants in the amended first lien credit agreement (Total Net Leverage and Minimum Liquidity, as described in Section III.B above) will apply on a cross-default basis to the super-priority facility, providing Belvedere with effective covenant protection without the complexity and potential for conflicting obligations that would arise from duplicative covenant structures. We should, however, be prepared to discuss reasonable modifications to the covenant levels or step-downs as applied to the super-priority facility if Belvedere insists.
Thornbury McCaffrey Ethical Wall. An important procedural issue arises from the fact that Thornbury McCaffrey LLP represents both the mezzanine ad hoc group (through Alan Driscoll and Monica Firth) and Belvedere on the new-money facility. While the use of ethical walls to manage such dual representations is accepted in market practice, it presents potential complexity and conflicts that must be monitored carefully throughout the negotiations.
Recommendation: We should formally request and verify Thornbury McCaffrey's ethical wall protocols in writing, including confirmation of the identity of the personnel on each side of the wall, the information barrier procedures in place, and the firm's written conflict waiver from each client. We should consider whether it is appropriate to raise an objection to the arrangement or to accept it as consistent with market practice. Our preliminary assessment is that the dual representation is manageable provided that robust ethical wall protocols are in place and that we receive satisfactory written assurances. However, if at any point during the negotiations we observe evidence of information leakage or coordination between the two representation teams, we should escalate the issue immediately.
D. Sources and Uses at Closing (Preliminary)
The following preliminary sources and uses analysis summarizes the expected flow of funds at closing of the restructuring:
Sources:
Uses:
We note that no paydowns of existing first lien debt from new money proceeds are contemplated. The full net proceeds, less transaction costs, are intended to remain on the Company's balance sheet to provide the operational liquidity cushion necessary to support the business through and beyond the restructuring.
VI. Equity Allocation and Sponsor Dynamics
A. Proposed Pro Forma Equity Split
The proposed pro forma equity allocation following the completion of the restructuring is as follows:
Ridgeline's current 100% common equity position reflects its original $210.0 million investment in the December 2017 LBO. Post-restructuring, Ridgeline's ownership will be diluted to 47.5% of pro forma common equity. While this represents a dramatic impairment of Ridgeline's original investment, the 47.5% common equity position retains meaningful upside in the event of a successful operational turnaround and eventual exit. Without the restructuring, Ridgeline's equity is worthless — the total funded debt of $475.1 million significantly exceeds the Company's enterprise value under any reasonable set of assumptions — and a Chapter 11 filing would almost certainly result in complete equitization or cancellation of Ridgeline's interest.
B. Ridgeline Contribution and Rationale
Ridgeline's $12.5 million fresh cash equity contribution serves two functions: (i) it provides a concrete source of funding for transaction costs and the post-closing liquidity cushion, and (ii) it demonstrates Ridgeline's continued commitment to the Company, which strengthens the Company's negotiating position with both the first lien and mezzanine constituencies.
Ridgeline's motivation for making the contribution is straightforward. Without a contribution, Ridgeline would lose its board representation, its operational control over the Company, and any realistic chance of recovering a portion of its $210.0 million investment. The $12.5 million contribution, while a fraction of the original investment, buys Ridgeline continued sponsorship and a 47.5% equity stake in a de-levered company with a viable business plan. Julian Voight (Managing Director) and Serena Chu (Principal) will retain their seats on the Board of Directors, and Ridgeline will designate three of seven Board members, preserving its ability to influence the Company's strategic direction.
We note that Hargrove Advisory Group LLC was formally retained by the Board of Directors, but given Ridgeline's current 100% ownership of the Company, Ridgeline has significant influence over the Board's engagement of advisors and over the direction of the restructuring process more generally. This dynamic should be managed carefully to ensure that the restructuring process is conducted in a manner consistent with the Board's fiduciary duties to all stakeholders, not solely to Ridgeline's interests.
C. Management Considerations
The retention and alignment of the Company's senior management team is a critical element of the restructuring. The key members of the management team are:
• Marcus Delano, Chief Executive Officer — Mr. Delano has served as CEO since 2019 and has extensive experience in the logistics industry. His continued leadership is essential to operational continuity and to the execution of the cost savings initiatives outlined in the business plan.
• Priya Sundaram, Chief Financial Officer — Ms. Sundaram has served as CFO since 2020 and has been instrumental in managing the Company's liquidity position and financial reporting through the current period of distress.
• Howard Kessler, General Counsel — Mr. Kessler has served as GC since the LBO closing in 2017 and has deep familiarity with the Company's credit documents, vendor contracts, and regulatory obligations.
The proposed 5.0% MIP pool is designed to align management incentives with the interests of the post-restructuring equity holders and to provide a meaningful retention tool. We recommend that the MIP be structured with a four-year vesting schedule, subject to a one-year cliff, and with exit-based acceleration provisions that would vest 100% of unvested awards upon a change of control or qualified IPO. The specific terms of the MIP — including allocation among individual executives, performance metrics (if any), and good leaver / bad leaver provisions — should be negotiated as part of the broader equity documentation and should be the subject of a separate memorandum.
Management retention is a key negotiating point across all constituencies. Both the first lien lender group and the mezzanine ad hoc group have recognized that management continuity is essential to preserving the Company's value and to executing the business plan that underpins the restructuring proposal. We should leverage this consensus to support the proposed 5.0% MIP allocation and to resist any efforts by the mezzanine group to reduce or condition the management equity pool.
VII. Fallback Analysis — Chapter 11 Filing
A. Overview of Chapter 11 Alternative
In the event that the consensual out-of-court restructuring fails — whether due to the inability to achieve required lender consents, the lapse or termination of the RSA, or a fundamental breakdown in negotiations with any of the three principal counterparties — the Company would need to file a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code.
The most likely filing venues would be the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, given that the Company's principal place of business and headquarters is located at 4200 Commerce Street, Suite 1500, Dallas, Texas 75201, or the United States Bankruptcy Court for the District of Delaware, given the Company's state of incorporation. Both venues have well-developed bankruptcy practices and experienced judges, and the ultimate venue selection would depend on range factors, including the preferences of the DIP financing provider, the composition of the creditor body, and the anticipated posture of the United States Trustee.
If the Chapter 11 filing were to occur following a failed out-of-court process, the filing would likely be a "freefall" filing without a pre-negotiated plan of reorganization, unless the Company is able to salvage a pre-packaged or pre-arranged plan from the failed out-of-court negotiations. A "pre-pack" filing would require that the Company have already solicited and obtained sufficient creditor votes to confirm a plan prior to filing, which would be feasible only if the negotiation failure occurred at a late stage and the principal creditor constituencies remained willing to support a modified plan structure.
B. Comparative Analysis — Out-of-Court vs. Chapter 11
The following analysis compares the key dimensions of the proposed out-of-court restructuring and a Chapter 11 filing:
Timeline.
The out-of-court restructuring is expected to take approximately 6 to 9 months from engagement (April 2023) through projected closing (Q4 2023). A Chapter 11 pre-packaged case, if one could be assembled from a failed out-of-court process, would add a minimum of 3 to 4 months to the timeline for the bankruptcy case itself, including first-day motions, plan solicitation (if not already completed), confirmation hearing, and the effective date. A freefall Chapter 11 case, without pre-negotiated plan support, could take 12 to 18 months from filing to emergence, depending on the complexity of the case, the extent of creditor disputes, and the need for any litigation (including potential adversary proceedings or contested plan confirmation).
Cost.
The out-of-court restructuring has an estimated total transaction cost of approximately $12.8 million, as detailed in Section V.D above. A Chapter 11 filing would likely cost $25 to $35 million or more, reflecting the significantly higher professional fees associated with a bankruptcy case, including debtor's counsel fees, debtor's financial advisor fees, fees for any professionals retained by the official committee of unsecured creditors (which would likely be formed and would retain its own legal counsel and financial advisor), United States Trustee quarterly fees, and additional administrative claims that arise in the ordinary course of a bankruptcy case. The incremental cost of Chapter 11 — potentially $15 to $20 million or more above the out-of-court alternative — directly reduces the value available for distribution to creditors.
Business Disruption.
A Chapter 11 filing creates significant business disruption risk in the logistics industry. Customers may redirect freight volumes to competitors out of concern about service reliability, contractual uncertainty, or reputational risk associated with doing business with a bankrupt carrier. Carrier partners and vendors may demand cash-on-delivery or cash-in-advance payment terms, increasing working capital requirements. Employee attrition typically accelerates during bankruptcy proceedings, particularly among skilled operational personnel who may be recruited by competitors. Each of these effects is magnified in the logistics industry, where customer relationships, carrier networks, and human capital are the primary sources of enterprise value.
Liquidity.
The Company's current liquidity of $15.8 million (declining at approximately $2.5 million per month) is insufficient to sustain an extended Chapter 11 case without debtor-in-possession ("DIP") financing. A DIP facility would likely be provided at super-priority terms similar to or worse than the proposed Belvedere facility, with additional controls, reporting requirements, and milestones that would constrain the Company's operational flexibility. The DIP facility market for logistics companies is limited, and the Company's distressed profile and declining EBITDA trajectory may make it difficult to secure DIP financing on commercially reasonable terms.
Recovery Outcomes.
First lien recovery in Chapter 11 is likely comparable to the out-of-court scenario — approximately par or near-par — given the first lien lenders' secured position and the likelihood that the Company's enterprise value exceeds the first lien claims. However, the additional costs, delays, and business disruption associated with Chapter 11 would erode value and could push first lien recovery below par in a downside scenario.
Mezzanine recovery in Chapter 11 would be materially worse than in the out-of-court scenario. Based on our analysis, mezzanine recovery in Chapter 11 would likely range from 5 to 15 cents on the dollar — far less than the 40 to 55 cents implied by the proposed equitization package. The reduced recovery reflects the value destruction caused by the bankruptcy process, the higher professional fees, and the likely contested nature of any plan involving mezzanine recovery.