Ramona, Daniel,
Thank you both for taking the time to meet with us today to discuss Stonefield Logistics Group Inc.'s current financial position and the Company's restructuring objectives. We found the meeting to be productive, and the Company very much appreciates the first lien group's willingness to engage constructively at this early stage.
As you know, Calderwood & Harkness LLP serves as restructuring counsel to Stonefield Logistics Group Inc. and its affiliated debtors (Matter No. 1012-00002; engagement opened April 3, 2023). I wanted to follow up with a summary of the key topics covered during today's discussion and outline the anticipated next steps.
**1. Overview of Stonefield's Financial Condition**
As reviewed during the meeting, Stonefield reported FY 2022 revenue of $612.3 million, with LTM Q1 2023 Adjusted EBITDA of $41.2 million, reflecting significant margin compression attributable to the ongoing freight recession, excess carrier capacity in the Company's core markets, and the loss of several key customer contracts. Revenue is projected to decline to approximately $545.0 million for FY 2023E, with FY 2023E Adjusted EBITDA projected at $38.5 million.
As of March 31, 2023, the Company's total liquidity stood at $15.8 million, consisting of $11.3 million in unrestricted cash and $4.5 million of revolver availability (net of $3.5 million in outstanding letters of credit, on a $50.0 million committed revolving credit facility with $42.0 million currently drawn). Monthly cash burn averaged approximately $2.5 million during Q1 2023, driven primarily by interest expense and ongoing capital expenditure requirements. Absent a restructuring, the Company projects liquidity exhaustion by Q3 2024.
**2. Capital Structure Overview**
We reviewed the Company's capital structure in detail, which I summarize below for reference:
- *First Lien Debt:* $285.0 million outstanding under the Term Loan B (original principal of $310.0 million, with $25.0 million amortized to date), plus $42.0 million drawn on the revolving credit facility, for total first lien debt of $327.0 million. Both facilities mature on December 15, 2024, and are governed by the First Lien Credit Agreement dated December 15, 2017, with Pinnacle National Bank, N.A. serving as Administrative Agent and Collateral Agent. The TLB bears interest at SOFR + 425 bps (with a 75 bps SOFR floor), and the revolver bears interest at SOFR + 375 bps.
- *Second Lien / Mezzanine Debt:* $140.0 million in 11.50% Senior Secured Second Lien Notes due June 15, 2025, plus approximately $8.1 million in accrued PIK interest, issued under the Mezzanine Indenture dated December 15, 2017, with Continental Fiduciary Trust Company as Trustee.
- *Total Funded Debt:* Approximately $475.1 million.
- *Leverage:* Total leverage of approximately 11.5x and first lien leverage of approximately 7.9x, in each case based on LTM Q1 2023 Adjusted EBITDA of $41.2 million.
- *Near-Term Maturity Wall:* $327.0 million in first lien debt maturing December 15, 2024.
**3. Restructuring Objectives**
As discussed, Stonefield is pursuing a consensual out-of-court restructuring with the goal of avoiding a bankruptcy filing. The key pillars of the restructuring framework presented today include: (a) an amend-and-extend of the first lien term loan and revolving credit facility to address the December 2024 maturity wall; (b) a new-money super-priority facility to bolster near-term liquidity; and (c) an equitization of the mezzanine debt to meaningfully delever the balance sheet.
The Company's financial advisor, Hargrove Advisory Group LLC (Elena Voss, Managing Director), was engaged by the Board on March 15, 2023 and is currently conducting a comprehensive liability management analysis to support the development of a detailed restructuring proposal.
Additionally, the Company's PE sponsor, Ridgeline Capital Partners Fund III, L.P. — which acquired Stonefield via leveraged buyout in December 2017 with approximately $210.0 million in equity — is supportive of a consensual process and is expected to contribute new equity as part of the restructuring.
**4. Creditor Engagement Timeline**
We noted during the meeting that the Company plans to hold a separate initial meeting with the mezzanine ad hoc group, which is represented by Thornbury McCaffrey LLP (Alan Driscoll) and advised by Meridian Veltrian Partners LLC. That meeting has been scheduled for April 28, 2023.
The Company's objective is to circulate an initial restructuring term sheet to all creditor constituencies in May. We expressed our hope — and the Company's — for continued dialogue with the first lien group and Westlake Harden & Cole in the coming weeks as the specific terms are developed.
**Next Steps**
We propose the following next steps:
- *Financial Materials:* Calderwood & Harkness will circulate the Company's updated financial projections and the preliminary Hargrove Advisory Group analysis to Westlake Harden & Cole LLP under the existing NDA and the confidentiality provisions of the Credit Agreement. The presentation materials shared during today's meeting (prepared jointly by Hargrove Advisory Group and Stonefield management) are being finalized in clean form and will be circulated shortly, along with the Whitfield & Pryce LLP audited FY 2022 financial statements, to the extent not previously provided.
- *Syndicate Coordination:* We would ask that Ramona coordinate with Daniel and the broader syndicate regarding the formation of any informal lender group and any additional information requests the group may have. We understand that the key holders in the first lien syndicate include Pinnacle National Bank at $45.0 million, Tralvendo CLO 2018-I, Ltd. at $38.5 million, Belvedere Credit Opportunities Fund LP at $32.0 million, Kelvantis Capital Partners LLC at $28.0 million, and Kingsway Institutional Investors LLC at $24.5 million, with 11 additional syndicate members holding approximately $117.0 million in the aggregate.
- *Follow-Up Call:* We would propose a follow-up call in approximately two weeks to continue the dialogue. Please let us know your availability, and we will coordinate scheduling.
As you both appreciate, the Company is mindful of the urgency given its current liquidity trajectory and the approaching December 2024 maturity, and we are committed to maintaining momentum in these discussions.
Stonefield remains firmly committed to reaching a consensual, out-of-court resolution that preserves value for all stakeholders, and we look forward to working collaboratively with you and the first lien group toward that objective. Please do not hesitate to reach out to me with any questions in the interim. Nathaniel Bower, our responsible partner on the matter, and Howard Kessler, General Counsel of Stonefield, are copied here and are also available for any additional discussion.
Best regards,
Nathan Ikeda Associate, Bankruptcy & Restructuring Calderwood & Harkness LLP 599 Lexington Avenue New York, NY 10022 T: (212) 555-4138 E: nikeda@calderwoodharkness.com