PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressee and may not be disclosed, copied, or distributed without the prior written consent of Calderwood & Harkness LLP.
MEMORANDUM
TO: Nathaniel Bower, Partner, Bankruptcy & Restructuring, Calderwood & Harkness LLP
FROM: Gabrielle Moss, Associate, and Nathan Ikeda, Lead Associate, Bankruptcy & Restructuring, Calderwood & Harkness LLP
DATE: April 10, 2023
RE: Stonefield Logistics Group Inc. — Preliminary Capital Structure and Liquidity Analysis
MATTER NO.: 1012-00002
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I. Executive Summary
The purpose of this memorandum is to provide an initial analysis of the pre-restructuring capital structure, leverage profile, and liquidity position of Stonefield Logistics Group Inc. ("Stonefield," "SLG," or the "Company"), a Delaware corporation headquartered at 4200 Commerce Street, Suite 1500, Dallas, TX 75201. This analysis is intended to inform restructuring strategy recommendations for Nathaniel Bower and the broader engagement team as the firm prepares to advise the Company on liability management options and potential restructuring alternatives.
Stonefield is a mid-market freight brokerage and last-mile logistics platform that operates across 26 terminals in 14 states. The Company is a portfolio company of Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or "RCP III"), which acquired the Company via leveraged buyout on December 15, 2017. Ridgeline invested approximately $210 million of equity in the acquisition, funded alongside substantial third-party debt financing.
As of the date of this memorandum, the Company has approximately $475.1 million in total funded debt against LTM Q1 2023 Adjusted EBITDA of $41.2 million, resulting in a total leverage ratio of approximately 11.5x. This leverage level is unsustainable by any standard applicable to a mid-market logistics company and substantially exceeds sector norms, which typically range from 3.0x to 5.0x total leverage. The Company's financial performance has deteriorated significantly over the past twelve months, with Adjusted EBITDA declining approximately 30% from $58.7 million in FY 2022 to $41.2 million on an LTM Q1 2023 basis. Revenue has contracted as well, reflecting broad-based headwinds in the freight brokerage sector, including excess carrier capacity and the loss of certain customer contracts.
Of critical concern, the Company faces a near-term maturity wall: $327.0 million of first lien debt — comprising the revolving credit facility and the First Lien Term Loan B — matures on December 15, 2024, approximately 20 months from the date of this memorandum. An additional $140.0 million in mezzanine notes (plus approximately $8.1 million of accrued PIK interest) matures on June 15, 2025. In effect, the Company's entire funded capital structure matures within the next 20 to 26 months, and there is no realistic prospect of refinancing the existing indebtedness in the capital markets at current leverage and EBITDA levels.
Current total liquidity stands at $15.8 million, comprising $11.3 million of unrestricted cash on hand and $4.5 million of undrawn availability under the revolving credit facility. The Company is experiencing negative free cash flow and is currently burning cash at a rate of approximately $2.5 million per month. At this burn rate, and absent a restructuring, new capital infusion, or material improvement in operating performance, the Company is projected to exhaust available liquidity by approximately Q3 2024 (roughly October 2024). Moreover, well before actual liquidity exhaustion, the approaching maturity date will create a "springing" liquidity crisis as trade creditors, operating counterparties, and customers reassess their exposure to the Company.
Conclusion: Based on our preliminary analysis, the Company's capital structure requires a comprehensive restructuring to extend maturities, reduce leverage to sustainable levels, and provide additional liquidity to support ongoing operations. We recommend that a consensual out-of-court solution — potentially involving an amend-and-extend of the first lien facilities coupled with partial or full equitization of the mezzanine notes — be explored as the primary path, with a prepackaged or prearranged Chapter 11 filing held in reserve as a fallback alternative. A more detailed analysis of restructuring alternatives, consent thresholds, and fiduciary considerations will follow in subsequent memoranda as outlined in Section X below.
II. Background and Business Overview
A. Company Description
Stonefield Logistics Group Inc. is a Delaware corporation (EIN: 83-2457109; DE File No.: 6341872) with its principal place of business at 4200 Commerce Street, Suite 1500, Dallas, TX 75201. The Company's registered agent in the State of Delaware is Capitol Registered Agents, Inc., located at 1209 Orange Street, Wilmington, DE 19801.
Stonefield operates in the transportation and logistics industry, with business lines spanning freight brokerage, last-mile delivery services, and warehousing operations. The Company connects shippers with a network of independent carriers and provides last-mile logistics solutions for e-commerce and retail customers in metropolitan and suburban markets. Stonefield's warehousing division operates distribution and cross-dock facilities in key logistics hubs across the central and southern United States.
The Company employs approximately 3,800 individuals across 26 terminals located in 14 states, with the greatest concentration of operations in Texas, Georgia, Florida, Tennessee, and the Midwest. The workforce includes terminal operations managers, freight brokers, dispatchers, warehouse personnel, and corporate staff.
Key members of the Company's senior management team include the following:
• Marcus Delano, Chief Executive Officer, age 54, who joined the Company in 2019 following a 20-year career in the transportation and logistics industry. Mr. Delano was recruited by Ridgeline to lead the Company through a period of anticipated growth, which has since been disrupted by macroeconomic headwinds.
• Priya Sundaram, Chief Financial Officer, age 46, CPA, who joined the Company in 2020. Ms. Sundaram was previously a vice president of finance at a publicly traded trucking company and brings significant experience in financial reporting, treasury management, and capital markets for transportation issuers.
• Howard Kessler, General Counsel, age 51, who has served as the Company's in-house counsel since 2018. Mr. Kessler manages all legal affairs, regulatory compliance, and litigation matters for the Company and its operating subsidiaries.
B. Corporate Structure
The Company's corporate structure is organized as follows:
• Stonefield Logistics Holdings LLC ("SLG Holdings") — the direct parent entity, organized as a limited liability company under the laws of the State of Delaware. SLG Holdings owns 100% of the outstanding common stock of Stonefield Logistics Group Inc.
• Stonefield Logistics Group Inc. — the primary borrower entity under all existing credit facilities and the issuer of the mezzanine notes described in this memorandum.
• Operating Subsidiaries — the Company conducts its operations through three wholly owned operating subsidiaries:
(i) Stonefield Freight Services LLC, a Texas limited liability company, which operates the Company's freight brokerage business;
(ii) Stonefield Last Mile Inc., a Delaware corporation, which operates the Company's last-mile delivery platform; and
(iii) Stonefield Warehousing LLC, a Texas limited liability company, which operates the Company's warehousing and distribution facilities.
Each of the operating subsidiaries is a guarantor of the Company's obligations under the First Lien Credit Agreement and the Mezzanine Indenture, and has granted security interests in substantially all of its assets to collateral agents for the benefit of the applicable secured parties.
The ultimate equity sponsor is Ridgeline Capital Partners Fund III, L.P., a Delaware limited partnership. The general partner of RCP III is Ridgeline Capital Management III LLC, a Delaware limited liability company with its principal office located at 300 Park Avenue, 28th Floor, New York, NY 10022. Ridgeline designates two members to the Company's Board of Directors: Julian Voight, a Managing Director at Ridgeline, and Serena Chu, a Principal at the firm. Mr. Voight and Ms. Chu serve alongside the Company's CEO, Marcus Delano, and two independent directors on the five-member board.
C. Acquisition History
Ridgeline Capital Partners Fund III, L.P. acquired Stonefield Logistics Group Inc. in a leveraged buyout transaction that closed on December 15, 2017. The acquisition was structured as a purchase of 100% of the outstanding equity interests of SLG Holdings from the prior ownership group, which consisted of the Company's founders and several minority financial investors.
Ridgeline invested total equity of $210 million in connection with the acquisition, representing the entirety of the purchase price not funded through third-party debt. The LBO financing consisted of a first lien revolving credit facility ($50.0 million committed), a First Lien Term Loan B ($310.0 million), and second lien mezzanine notes ($140.0 million), as described in detail in Section III below.
For context, Ridgeline Capital Partners is a middle-market private equity firm focused on business services, logistics, and industrials. Ridgeline's fund-wide assets under management total approximately $4.8 billion across multiple fund vintages. Fund III, which made the Stonefield investment, has total committed capital of $1.6 billion. The Stonefield investment represents a significant position within the Fund III portfolio.
D. Financial Performance Summary
The Company's recent financial performance reflects a deteriorating trajectory that has been driven by macroeconomic headwinds in the freight and logistics sector, including a protracted freight recession, excess carrier capacity, declining spot rates, and the loss of certain key customer contracts.
FY 2022 (Audited): The Company reported revenue of $612.3 million for the fiscal year ended December 31, 2022. The FY 2022 financial statements were audited by Whitfield & Pryce LLP, with Todd Ashburn, CPA, serving as the engagement partner. Whitfield & Pryce's offices are located at 2100 Ross Avenue, Suite 2800, Dallas, TX 75201. Adjusted EBITDA for FY 2022 was $58.7 million, representing an Adjusted EBITDA margin of approximately 9.6%. At the FY 2022 EBITDA level, total leverage was approximately 8.1x — already elevated relative to industry norms, but more manageable than the current leverage position.
LTM Q1 2023: On a last-twelve-months basis through the first quarter of 2023, Adjusted EBITDA has declined to $41.2 million, representing a decline of approximately 30% from the FY 2022 level. This sharp margin compression is attributable to a combination of declining revenue (as freight volumes and spot rates have fallen), increased cost per load due to network inefficiencies, and fixed cost absorption challenges as the Company's terminal footprint has remained largely static despite volume declines.
FY 2023 Projected: Management projects FY 2023 revenue of approximately $545.0 million, representing a decline of approximately 11% from the $612.3 million reported in FY 2022. FY 2023 Adjusted EBITDA is projected at $38.5 million, reflecting continued deterioration from the LTM Q1 2023 level. The Company's management team has communicated these projections to its financial advisor, Hargrove Advisory Group LLC, and they are being used as the basis for restructuring analyses.
The revenue decline from $612.3 million in FY 2022 to a projected $545.0 million in FY 2023 underscores the severity of the freight recession and its direct impact on the Company's top line. The EBITDA decline — from $58.7 million in FY 2022 to $41.2 million on an LTM Q1 2023 basis, and projected to decline further to $38.5 million for FY 2023 — is even more pronounced on a percentage basis and reflects both revenue compression and operating deleverage as fixed costs absorb a larger share of a shrinking gross margin contribution.
III. Pre-Restructuring Capital Structure
A. Overview Table
The following table summarizes the Company's pre-restructuring capital structure as of March 31, 2023:
As reflected in the table, the Company's capital structure consists of two tiers of secured debt — a first lien facility and a second lien mezzanine tranche — with equity held by the private equity sponsor. There is no unsecured bond debt or other meaningful unencumbered indebtedness in the capital structure. The total funded debt figure of $475.1 million includes the drawn revolver, the outstanding term loan principal, the mezzanine note principal, and accrued PIK interest on the mezzanine notes. Each component is described in further detail below.
B. Revolving Credit Facility — Detail
The revolving credit facility is governed by the First Lien Credit Agreement dated December 15, 2017 (the "Credit Agreement"), among Stonefield Logistics Group Inc., as Borrower, Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent (200 Liberty Street, New York, NY 10281; contact: Daniel Wexford, Managing Director, Loan Restructuring Group), and the Lenders party thereto from time to time. The revolving credit facility was provided as part of the original acquisition financing and has been the Company's primary source of working capital liquidity since the closing of the LBO.
The key terms of the revolving credit facility are as follows:
• Total Commitment: $50.0 million.
• Drawn Amount (as of March 31, 2023): $42.0 million.
• Outstanding Letters of Credit: $3.5 million, issued under a letter of credit sub-facility within the revolving credit facility, primarily in support of the Company's workers' compensation self-insurance program and certain lease obligations.
• Available Undrawn Capacity: $4.5 million, calculated as $50.0 million (total commitment) less $42.0 million (drawn amount) less $3.5 million (outstanding letters of credit).
• Interest Rate: SOFR + 375 basis points.
• Maturity: December 15, 2024.
• Lien Priority: First lien on substantially all assets of the Borrower and the Guarantors, held pari passu with the Term Loan B under the Credit Agreement.
The revolver lenders and their respective commitments are as follows:
The limited remaining availability of $4.5 million under the revolver underscores the constrained nature of the Company's current liquidity position. The Company has drawn down the revolver aggressively over the past twelve months to fund operating cash shortfalls, and further meaningful draws are not available absent a commitment increase, which would require lender consent and is unlikely to be forthcoming given the Company's current financial condition.
C. First Lien Term Loan B — Detail
The First Lien Term Loan B (the "TLB") is governed by the same Credit Agreement dated December 15, 2017, referenced above in connection with the revolving credit facility. The TLB was incurred to fund the majority of the debt-financed portion of the acquisition purchase price and constitutes the single largest tranche of funded debt in the Company's capital structure.
The key terms of the TLB are as follows:
• Original Principal Amount: $310.0 million, funded at closing on December 15, 2017.
• Amortization Paid to Date: $25.0 million in scheduled quarterly amortization payments (representing approximately 1% per annum of original principal, consistent with standard market terms for institutional term loan B facilities).
• Current Outstanding Principal (as of March 31, 2023): $285.0 million ($310.0 million less $25.0 million of amortization paid to date).
• Interest Rate: SOFR + 425 basis points, with a 75 basis point SOFR floor.
• Maturity: December 15, 2024.
• Lien Priority: First lien on substantially all assets of the Borrower and the Guarantors, held pari passu with the revolving credit facility under the Credit Agreement.
The TLB syndicate is composed of a diverse group of institutional lenders, including banks, CLO vehicles, credit funds, and other institutional investors. Based on information available to us through preliminary lender identification efforts, the key syndicate members and their approximate holdings are as follows:
The first lien lender group has engaged outside legal counsel: Westlake Harden & Cole LLP (787 Seventh Avenue, 34th Floor, New York, NY 10019), with Ramona Quelibo serving as lead partner and Gregory Noll as the lead associate on the engagement. The engagement of lender-side counsel is a significant development and suggests that the first lien lender group is actively monitoring the Company's financial condition and preparing for potential restructuring discussions. We understand that the formal retention was effectuated in early March 2023.
It bears noting that Belvedere Credit Opportunities Fund LP holds a $32.0 million position in the TLB and is a credit-focused fund with experience participating in distressed situations and new-money transactions. As discussed in Section IX.B below, Belvedere may represent a potential source of new money capital in connection with a restructuring.
The composition of the TLB syndicate — with a meaningful concentration among five holders totaling $168.0 million (approximately 58.9% of outstanding principal) and 11 additional holders comprising the remaining $117.0 million — suggests that building consensus among a relatively manageable group of core holders may be achievable, though the dispersed tail of the syndicate will need to be managed.
D. Mezzanine Notes (Second Lien) — Detail
The Company's subordinated debt consists of $140.0 million in 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes" or "Notes"). The Notes were issued as part of the original LBO financing to provide the subordinated layer of the acquisition capital structure.
The Mezzanine Notes are governed by the Mezzanine Indenture dated December 15, 2017 (the "Indenture"), among Stonefield Logistics Group Inc., as Issuer, the Guarantors party thereto, and Continental Fiduciary Trust Company (100 Wall Street, 15th Floor, New York, NY 10005), as Trustee and Second Lien Collateral Agent.
The key terms of the Mezzanine Notes are as follows:
• CUSIP: 861537 AA 2.
• Principal Amount Outstanding: $140.0 million.
• Interest Rate: 11.50%, with a cash/PIK toggle structure. Under the toggle mechanism, the Company has the option, subject to certain conditions, to pay interest in kind by issuing additional Notes (or increasing the accrued principal) rather than paying in cash. In practice, the Company has elected PIK treatment for a portion of interest payments during recent periods as a cash preservation measure.
• Accrued and Unpaid PIK Interest (estimated through projected close of any restructuring): approximately $8.1 million.
• Maturity: June 15, 2025.
• Lien Priority: Second lien on substantially all assets of the Borrower and the Guarantors, subordinated to the first lien of the revolving credit facility and TLB pursuant to an Intercreditor Agreement dated December 15, 2017.
The following table summarizes the known holders and their approximate positions in the Mezzanine Notes:
An ad hoc mezzanine group was formed informally among the three largest holders in February 2023. The group formalized its arrangement through a cooperation agreement signed on March 10, 2023, among Graystone Mezzanine Capital Fund II LP, Ashland Structured Credit LLC, and Dunmore Special Situations Fund LP. Collectively, these three holders hold $122.0 million in principal amount of the Mezzanine Notes, representing approximately 87.1% of the outstanding mezzanine principal.
The ad hoc mezzanine group has retained the following advisors:
• Legal counsel: Thornbury McCaffrey LLP, 375 Park Avenue, 25th Floor, New York, NY 10152. Lead partner: Alan Driscoll. Lead associate: Monica Firth.
• Financial advisor: Meridian Veltrian Partners LLC, 660 Fifth Avenue, 18th Floor, New York, NY 10103.
The formation and formalization of the ad hoc group, and the retention of experienced restructuring counsel and a financial advisor, indicate that the mezzanine holders are preparing actively for restructuring negotiations. Given that the ad hoc group holds 87.1% of the mezzanine principal — substantially in excess of the 66⅔% consent threshold under the Indenture for most material amendments — the ad hoc group has the ability to effectively control the direction of any mezzanine restructuring outcome. This dynamic will be important to consider in formulating the Company's negotiating strategy.
E. Total Funded Debt Reconciliation
For clarity, the Company's total funded debt as of March 31, 2023 is reconciled as follows:
This figure does not include the $3.5 million of outstanding letters of credit, which represent contingent obligations but are included in the calculation of revolver availability. It also does not include any unfunded commitments, trade payables, or other operating liabilities, which will need to be analyzed separately in connection with any restructuring analysis.
F. Sponsor Equity
Ridgeline Capital Partners Fund III, L.P. holds 100% of the outstanding common equity of SLG Holdings (and, indirectly, 100% of the common stock of Stonefield Logistics Group Inc.) through its $210.0 million equity investment made in connection with the December 2017 leveraged buyout.
Given the Company's total funded debt of $475.1 million, total leverage of 11.5x, declining EBITDA, constrained liquidity, and approaching maturities, the sponsor's equity position is significantly impaired. Under most reasonable valuation scenarios based on current and projected EBITDA, the Company's enterprise value is unlikely to cover the full amount of first lien claims, let alone the mezzanine notes or equity. The degree to which the equity is "out of the money" will be a key factor in determining the sponsor's willingness to engage constructively in restructuring discussions and to contribute additional capital.
Notwithstanding the impairment, the sponsor retains significant influence by virtue of its board representation and its relationship with Company management. Additionally, the sponsor may have strategic reasons to contribute capital in exchange for a continued equity stake in a post-restructuring entity — for example, to protect its reputation in the market, to maintain its relationship with fund limited partners, or to retain optionality on a future recovery in the freight market.
IV. Leverage Analysis
A. Total Leverage
The Company's total leverage ratio is calculated as follows:
Total Funded Debt: $475.1 million
LTM Q1 2023 Adjusted EBITDA: $41.2 million
Total Leverage Ratio: $475.1M ÷ $41.2M = 11.5x
A leverage ratio of 11.5x is profoundly unsustainable for a mid-market logistics platform. For context, comparable publicly traded and privately held mid-market logistics companies — including freight brokerages, last-mile delivery platforms, and asset-light transportation businesses — typically operate at total leverage ratios in the range of 3.0x to 5.0x. At the upper end of the range (5.0x), companies are generally considered highly levered; at 11.5x, the Company's leverage is more than double the upper boundary of what the capital markets and rating agencies would consider acceptable for the sector.
Moreover, if the Company's FY 2023 Adjusted EBITDA projection of $38.5 million materializes (representing further deterioration from the LTM Q1 2023 figure), pro forma total leverage would rise to approximately 12.3x ($475.1M ÷ $38.5M). This figure assumes no incremental debt paydown, which is realistic given the Company's negative free cash flow position.
The severity of the Company's leverage position effectively precludes any refinancing of the existing capital structure in the institutional loan or high-yield bond markets. No arranger would be willing to underwrite and syndicate a credit at these leverage levels, and no institutional investor — whether a CLO fund, direct lending fund, or credit opportunity fund — would be willing to commit capital on a refinancing basis at these multiples without substantial deleveraging occurring simultaneously.
B. First Lien Leverage
Focusing solely on the Company's first lien indebtedness:
First Lien Debt: Revolver drawn ($42.0M) + TLB ($285.0M) = $327.0 million
LTM Q1 2023 Adjusted EBITDA: $41.2 million
First Lien Leverage Ratio: $327.0M ÷ $41.2M = 7.9x
The first lien leverage ratio of 7.9x is itself higher than the total leverage ratio for most comparable logistics companies. This is a significant finding because it suggests that the first lien creditors face potential impairment risk under stress scenarios. If the Company's EBITDA were to decline further — for example, to $35.0 million or below — and if a distressed sale or liquidation were required, there is a meaningful risk that the first lien claims would not be satisfied in full, particularly after accounting for professional fees, transaction costs, and value leakage associated with a distressed process.
This dynamic has important implications for the restructuring strategy. First lien lenders who face potential impairment are typically more motivated to negotiate constructively and to agree to maturity extensions and other accommodations in order to avoid a default scenario that could result in an enforcement action or bankruptcy filing in a declining market environment. At the same time, first lien lenders in this position may demand enhanced protections — such as tighter financial covenants, cash sweep mechanisms, or priority liens — as a condition to any extension.
The 7.9x first lien leverage level also makes a market refinancing of the first lien debt impossible. Institutional first lien term loan facilities for logistics companies are typically underwritten at 3.0x to 4.5x first lien leverage. The Company would need to reduce first lien leverage by approximately half before a refinancing would be feasible.
C. Interest Coverage
The Company's interest coverage position is precarious. Based on currently prevailing SOFR rates (assumed at approximately 5.0% for purposes of this analysis) and the applicable credit spreads, the Company's estimated annual cash interest expense is calculated as follows:
The range for total estimated annual cash interest expense reflects uncertainty around the Company's PIK election on the mezzanine notes. If the Company elects full PIK treatment, cash interest expense would be at the lower end of the range (approximately $38.1 million); if the Company is required to pay all interest in cash, the expense would be approximately $46.2 million.
The resulting interest coverage ratio is calculated as follows:
Interest Coverage Ratio (LTM EBITDA ÷ Estimated Cash Interest) = $41.2M ÷ $38.1M–$46.2M ≈ 0.9x to 1.1x
An interest coverage ratio at or below 1.0x indicates that the Company's operating cash flow is insufficient to cover its cash interest obligations, let alone fund capital expenditures, working capital needs, or debt amortization. This is a clear indicator of financial distress. Even at the more favorable end of the range (1.1x, assuming maximum PIK treatment), the Company has virtually no cushion for operating underperformance, capital expenditure needs, or unexpected cash demands.
This analysis underscores the fundamental unsustainability of the current capital structure. The Company is, in practical terms, unable to service its debt from current operations and is relying on revolver draws and cash reserves to fund ongoing shortfalls — resources that, as discussed in Section V below, are rapidly depleting.
V. Liquidity Analysis
A. Current Liquidity Position (as of March 31, 2023)
The Company's total available liquidity as of March 31, 2023 is summarized as follows:
Total liquidity of $15.8 million is dangerously low for a business of the Company's scale (approximately $545 million in projected annual revenue and 3,800 employees across 26 terminals). As a general benchmark, companies in the logistics sector typically maintain minimum liquidity of at least 30 to 60 days of operating expenses. For Stonefield, with estimated monthly operating expenses of approximately $45 million (before interest expense), $15.8 million of total liquidity represents less than two weeks of operating runway — an inadequate margin that leaves the Company highly vulnerable to any adverse operational development, customer loss, or acceleration demand from creditors.
B. Cash Burn Rate
The Company is currently experiencing negative free cash flow and is burning cash at an estimated rate of approximately $2.5 million per month during Q1 2023. This figure is derived from the Company's internal treasury reporting as reviewed by Hargrove Advisory Group LLC and shared with our team.
The principal drivers of the Company's cash burn are:
(i) Aggregate interest expense significantly exceeds operating cash flow. As demonstrated in Section IV.C, the Company's cash interest burden of $38.1 million to $46.2 million per annum compares to LTM Adjusted EBITDA of $41.2 million, leaving little to no cash available after debt service. After accounting for working capital movements, taxes, and non-EBITDA cash items, the Company is cash flow negative on a monthly basis.
(ii) Ongoing capital expenditure requirements. The Company's operations require ongoing maintenance capital expenditure for terminal facilities, warehouse equipment, fleet vehicles, and technology infrastructure. Estimated maintenance capex is approximately $8 million to $10 million per annum, or approximately $700,000 to $850,000 per month. While the Company has deferred certain discretionary capex, minimum maintenance spending is required to sustain operations.
(iii) Revenue decline reducing gross margin contribution. As revenue has fallen from $612.3 million in FY 2022 toward a projected $545.0 million in FY 2023, gross margin dollars have contracted faster than the Company has been able to reduce its cost base. The Company's terminal network and corporate overhead represent largely fixed costs that do not scale down proportionally with revenue declines, creating operating deleverage that compounds the cash burn problem.
At the current burn rate of $2.5 million per month, the Company's liquidity trajectory is steeply negative and accelerating. If EBITDA continues to decline toward the $38.5 million FY 2023E projection — or below — the monthly cash burn rate could worsen, further compressing the available liquidity runway.
C. Projected Liquidity Exhaustion Timeline
Based on the Company's current liquidity and estimated cash burn rate, we have prepared a preliminary liquidity exhaustion analysis:
Starting Liquidity (March 31, 2023): $15.8 million
Monthly Net Cash Burn: approximately $2.5 million
Available Liquidity Runway: $15.8M ÷ $2.5M/month ≈ 6.3 months
This analysis projects that, absent a restructuring, new capital infusion, or material improvement in operating performance, the Company will exhaust its available liquidity by approximately Q3 2024 — roughly October 2024. This estimate takes into account that the liquidity trajectory is not perfectly linear; seasonal fluctuations in freight volumes (typically stronger in Q3 and Q4) may temporarily slow the burn rate, while the limited remaining revolver availability ($4.5 million) provides a small additional cushion. However, these mitigating factors are modest relative to the magnitude of the cash drain.
Several important caveats apply to this analysis:
First, this projection is conservative in that it assumes a constant $2.5 million monthly burn rate. If the Company's EBITDA continues to decline toward the $38.5 million FY 2023E projection, or if macroeconomic conditions in the freight sector deteriorate further, the cash burn rate could accelerate, potentially pulling the liquidity exhaustion date forward by several months.
Second, and critically, the approaching December 15, 2024 maturity date on the first lien debt will create a "springing" liquidity crisis well before the actual exhaustion of the Company's cash reserves. As the maturity date approaches without a clear refinancing or restructuring plan in place, the Company's ability to maintain normal trade relationships will deteriorate. Specifically:
• Carriers and freight providers may demand prepayment or accelerated payment terms, increasing working capital requirements.
• Customers may diversify their freight brokerage relationships away from Stonefield, further reducing revenue and cash flow.
• Vendors and service providers may impose cash-in-advance or reduced-credit terms.
• Insurance carriers may reassess coverage terms or increase premiums.
• Going concern audit qualifications may be triggered, further damaging commercial relationships.
These "springing" effects are likely to begin manifesting 6 to 12 months before the maturity date — meaning that the practical liquidity crisis window could begin as early as Q4 2023 or Q1 2024, even if the Company's cash reserves are not technically exhausted until later.
Third, the analysis does not account for potential acceleration of debt obligations, which could be triggered by covenant defaults or other events of default under the Credit Agreement or the Indenture. Any acceleration event would immediately crystallize the Company's liquidity crisis and likely necessitate an emergency filing or consensual standstill.
The liquidity analysis strongly supports the conclusion that the Company must begin restructuring discussions with its creditor constituencies promptly. A detailed monthly liquidity forecast is attached as Appendix C to this memorandum.
VI. Maturity Wall Analysis
A. Near-Term Maturities
The Company's capital structure is characterized by a concentrated and imminent maturity wall that presents the most acute financial challenge facing the business. The maturity schedule is as follows:
December 15, 2024 (approximately 20 months from the date of this memorandum):
Both the Revolving Credit Facility ($50.0 million committed / $42.0 million drawn) and the First Lien Term Loan B ($285.0 million outstanding) mature. Combined first lien maturity: $327.0 million. On this date, all outstanding revolving credit facility borrowings, term loan principal, and accrued and unpaid interest will become due and payable in full. The letters of credit sub-facility ($3.5 million) will also expire on this date, requiring either termination or replacement.
June 15, 2025 (approximately 26 months from the date of this memorandum):
The Mezzanine Notes ($140.0 million in principal, plus approximately $8.1 million of accrued PIK interest) mature. All outstanding principal and accrued interest will become due and payable in full.
In sum, $475.1 million of funded debt — representing the entirety of the Company's capital structure — matures within a window of approximately 20 to 26 months from the date of this memorandum. There is no long-dated debt in the capital structure that would survive the maturity wall and provide ongoing financing for the business.
The concentrated maturity profile creates significant urgency. The Company cannot afford to wait until the maturities are imminent to begin addressing the capital structure; as discussed in Section V.C above, the "springing" effects of an approaching unaddressed maturity will begin to manifest well in advance of December 2024 and will accelerate the Company's deterioration if no restructuring plan is communicated to the market and to operating counterparties.
B. Refinancing Prospects
We have assessed the Company's ability to refinance its existing debt in the capital markets on a standalone basis — that is, without a simultaneous deleveraging or restructuring transaction. Our conclusion is that a market refinancing is not feasible under current conditions. The basis for this conclusion is as follows:
Leverage Levels. At 11.5x total leverage and 7.9x first lien leverage, the Company's credit profile is well outside the range at which institutional loan and high-yield bond arrangers can successfully underwrite and syndicate new issuances. Market appetite for institutional term loans and leveraged finance facilities in the logistics sector is generally limited to credits with total leverage of 5.0x or below (and first lien leverage of 3.5x to 4.5x). The Company's leverage is approximately two to three times the maximum level at which a financing could be executed.
EBITDA Trajectory. Even if leverage were the sole impediment, the Company's declining EBITDA trajectory — down 30% year-over-year and projected to decline further — would make arrangers and investors deeply skeptical of the Company's ability to service new debt. Institutional lenders and bond investors in the current market environment are highly focused on EBITDA stability and growth; a deteriorating earnings profile would prevent the Company from accessing the capital markets regardless of pricing.
Spread and Pricing. To the extent that any market financing could theoretically be arranged at these leverage levels (which we do not believe to be the case), the required credit spread would be prohibitively high — likely well in excess of SOFR + 800 to 1,000 basis points for first lien debt and correspondingly higher for subordinated debt. At such spread levels, the Company's interest burden would only increase, further compressing cash flow and exacerbating the leverage problem.
CLO and Institutional Investor Market. The CLO and broadly syndicated loan (BSL) market, which historically absorbed the majority of institutional term loan issuance in the leveraged finance market, is effectively closed to credits with the Company's leverage and financial profile. CLO managers are constrained by portfolio-level concentration limits, CCC bucket limitations, and weighted average spread and rating requirements that would prevent most CLO vehicles from participating in a refinancing at this credit quality.
Given that a market refinancing is not available, the Company's realistic options are limited to:
(i) A consensual restructuring involving an amend-and-extend of existing facilities, coupled with deleveraging (most likely through equitization of the mezzanine notes and potentially a portion of the first lien debt), and potentially accompanied by a new money injection to provide post-restructuring liquidity;
(ii) A sale process (in whole or in parts) to a strategic or financial buyer willing to acquire the business at a price that provides some recovery to creditors; or
(iii) A Chapter 11 filing, either prepackaged or prearranged, to accomplish the same restructuring objectives under court supervision if a consensual deal cannot be reached.
A Chapter 11 filing remains a viable fallback alternative but should be viewed as a last resort. A filing would be disruptive to the Company's operations, as carriers and customers may flee to competing platforms upon learning of a bankruptcy filing. The logistics industry is characterized by relatively low switching costs for customers and carriers alike, and the Company's relationships — its core competitive asset — are fragile in a distressed environment. Additionally, a Chapter 11 filing would generate significant professional fees (estimated at $15 million to $30 million or more for a case of this size and complexity), further eroding value available for creditor recoveries. For these reasons, a consensual out-of-court restructuring is strongly preferred as the primary path.
VII. Financial Advisor Engagement and Management Projections
On March 15, 2023, the Board of Directors of Stonefield Logistics Group Inc. formally retained Hargrove Advisory Group LLC (1345 Avenue of the Americas, 38th Floor, New York, NY 10105) as financial advisor to the Company. The lead contact at Hargrove is Elena Voss, Managing Director. Hargrove has been engaged to provide liability management advisory services, capital structure analysis, and restructuring support, including the development of financial models, projected cash flow analyses, and valuation work to support restructuring negotiations with creditor constituencies.
Hargrove is an experienced restructuring advisory firm with a strong track record in the transportation and logistics sector. Their retention was recommended by the Company's CFO, Priya Sundaram, and approved by the Board following a competitive selection process involving three shortlisted firms.
In connection with the engagement, the Company's management team, led by Ms. Sundaram, has prepared financial projections that have been reviewed and refined with input from Hargrove. The key elements of the management projections are as follows:
The FY 2023E projections reflect continued revenue contraction (approximately 11% decline from FY 2022) driven by the ongoing freight recession, excess carrier capacity in the truckload and LTL markets, and the loss of certain customer contracts. The projected Adjusted EBITDA of $38.5 million represents a further decline from the LTM Q1 2023 level and implies a full-year EBITDA margin of approximately 7.1%, compared to 9.6% in FY 2022.
The FY 2024E projection of $52.0 million in Adjusted EBITDA reflects management's expectation that the freight market will begin to recover in the latter half of 2024, combined with the anticipated benefits of cost savings initiatives that management has identified and begun to implement, including terminal consolidation, headcount reduction, and renegotiation of certain vendor contracts. If achieved, the FY 2024E EBITDA of $52.0 million would represent a meaningful improvement from the FY 2023E trough and would bring total leverage (assuming no change in funded debt) to approximately 9.1x — still elevated, but directionally improving.
However, the FY 2024E EBITDA recovery projection should be viewed with appropriate skepticism and must be stress-tested rigorously. The freight market recovery assumed in management's FY 2024E projections is uncertain; industry forecasters and freight indices present a mixed outlook, and a prolonged freight recession extending through 2024 is a plausible downside scenario. Furthermore, cost savings initiatives are subject to execution risk, and the Company's ability to consolidate terminals and reduce headcount while maintaining service levels and customer relationships has not been demonstrated. If the FY 2024E recovery fails to materialize, the Company's financial position will worsen materially, accelerating the liquidity crisis and narrowing the window for a restructuring.
We recommend that Hargrove be asked to develop multiple scenarios — base case, upside case, and downside case — and that the restructuring strategy be designed to be resilient across all scenarios, including a downside case in which EBITDA remains flat or declines further in FY 2024.
VIII. D&O Insurance Coverage
The Company currently maintains directors' and officers' liability insurance coverage in the aggregate amount of $15.0 million. The policy is provided by Northgate Specialty Insurance Company, a Connecticut-domiciled insurance carrier, under Policy No. NSI-DOL-2023-07721. The policy is structured as a Side A DIC (difference in conditions) and ABC (Side A, Side B, Side C) program, which provides:
• Side A coverage for individual directors and officers when the Company is unable to indemnify them (e.g., in bankruptcy);
• Side B coverage reimbursing the Company for indemnification payments made to directors and officers; and
• Side C entity coverage for securities claims brought against the Company itself.
The DIC component provides additional protection for individual directors and officers in circumstances where the primary ABC policy is exhausted, subject to an insolvency exclusion, or otherwise unavailable.
The current policy includes a tail coverage provision with a duration of 6 years from the closing of any restructuring transaction. This tail provision is important because it will provide ongoing protection for directors and officers for claims arising from pre-restructuring conduct. In many restructuring situations, D&O tail coverage is a critical gating item, as current directors — particularly independent directors and sponsor-designated directors — may refuse to continue serving on the Board or to approve restructuring transactions without assurance that adequate D&O insurance will remain in place.
Note: Maintaining D&O coverage, including adequate tail provisions, will be an essential component of any restructuring transaction. We recommend that the D&O insurance program be reviewed by a specialist broker to ensure that coverage limits are adequate in light of the Company's financial distress and the increased litigation risk that typically accompanies restructuring situations. Additionally, the cost and availability of D&O tail coverage should be confirmed well in advance of any restructuring closing, as insurance carriers frequently increase premiums or seek to narrow coverage terms for companies in distressed situations.
IX. Preliminary Observations and Restructuring Considerations
A. Key Challenges
Based on the analysis presented in this memorandum, the Company faces five principal challenges that must be addressed through a restructuring:
1. Unsustainable leverage. Total leverage of 11.5x (and potentially rising to 12.3x or higher) is far in excess of sustainable levels for a mid-market logistics platform. The Company's capital structure must be substantially deleveraged to bring total leverage within the range of 3.0x to 5.0x and enable the business to operate on a going-concern basis.
2. Imminent maturity wall. The first lien debt maturity of $327.0 million on December 15, 2024 is approximately 20 months away. This maturity cannot be satisfied through repayment at maturity, and a refinancing is not available in the capital markets. The maturity must be extended through a consensual amendment or a bankruptcy process.
3. Deteriorating EBITDA and revenue. Adjusted EBITDA has declined approximately 30% from FY 2022 ($58.7 million) to LTM Q1 2023 ($41.2 million), with further decline projected to $38.5 million for FY 2023. Revenue contraction, driven by macroeconomic headwinds in the freight sector, is ongoing and may persist through 2024.
4. Constrained liquidity. Total liquidity of $15.8 million, with ongoing cash burn of approximately $2.5 million per month, provides a runway of only approximately 6 months before liquidity is exhausted. This timeline is further compressed by the "springing" effects of the approaching maturity on trade credit and counterparty relationships.
5. Interest coverage at or below breakeven. With an interest coverage ratio of approximately 0.9x to 1.1x, the Company is unable to service its debt from current operations. This condition is unsustainable and, if uncorrected, will accelerate the depletion of remaining liquidity.
B. Potential Restructuring Paths
Based on our preliminary assessment, four potential restructuring paths warrant further analysis and discussion:
1. Consensual Amend-and-Extend with Deleveraging
The preferred path would involve a consensual out-of-court restructuring negotiated among the Company, the first lien lenders, the mezzanine noteholders, and the equity sponsor. The key elements of such a transaction could include:
• Negotiation with the first lien lenders to extend the maturity of the TLB and revolver by two to three years (to December 2026 or December 2027), potentially with an increase in the applicable credit spread and the addition of financial maintenance covenants (e.g., minimum EBITDA, maximum leverage ratio, minimum liquidity) to provide lenders with enhanced monitoring and enforcement rights.
• Simultaneous negotiation with the mezzanine noteholders to convert (equitize) all or a substantial portion of the $140.0 million in mezzanine notes into equity of the reorganized Company. This equitization would reduce total funded debt by up to $148.1 million (including accrued PIK), bringing total leverage down to approximately 7.9x at current EBITDA levels (or lower if FY 2024E EBITDA recovery materializes). If the full $148.1 million of mezzanine claims were equitized, total funded debt would decline to approximately $327.0 million, and total leverage at LTM EBITDA of $41.2 million would be approximately 7.9x — still elevated but substantially improved.
• A new money injection from the equity sponsor (Ridgeline) and/or third-party investors to fund restructuring transaction costs (estimated at $8 million to $15 million, including advisor fees, legal costs, lender consent fees, and trustee expenses) and to provide a post-restructuring liquidity cushion of $15 million to $25 million.
• In exchange for their contribution, new money providers would receive priority or super-priority claims (ahead of existing first lien debt) and potentially equity warrants or other equity-linked consideration.