Matter Reference: Calderwood & Harkness Matter No. 1012-00002
Alan,
Thank you, and please extend our thanks to Monica Firth and the rest of your team at Thornbury McCaffrey, for making the time to meet with us earlier today. We appreciated the opportunity to sit down with counsel and advisors to the ad hoc group for an initial discussion regarding Stonefield Logistics Group Inc. (the "Company"). We also want to acknowledge the participation of the team from Meridian Veltrian Partners LLC, financial advisor to the ad hoc group, whose engagement in the discussion was helpful.
As you know, the ad hoc group currently comprises Graystone Mezzanine Capital Fund II LP, Ashland Structured Credit LLC, and Dunmore Special Situations Fund LP, which collectively hold approximately $122.0 million in aggregate principal amount of the Company's 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes"), representing approximately 87.1% of the $140.0 million in outstanding mezzanine principal. We understand that the cooperation agreement among these holders was executed on March 10, 2023. Also participating on behalf of the Company today were Nathaniel Bower, the responsible partner on this matter at Calderwood & Harkness, and Howard Kessler, General Counsel of Stonefield.
I wanted to follow up with a summary of the topics covered and the items we discussed as next steps, so that we have a shared record as we move forward.
**I. Company Overview and Financial Condition**
The Company's management team, drawing on information prepared in coordination with Priya Sundaram, CFO, presented an overview of Stonefield's current financial position. Key points included the following:
- FY 2022 revenue of $612.3 million and Adjusted EBITDA of $58.7 million (audited by Whitfield & Pryce LLP). - Significant deterioration in operating performance, with LTM Q1 2023 Adjusted EBITDA declining to $41.2 million, reflecting sharp margin compression driven by the ongoing freight recession, excess carrier capacity in the market, and customer contract losses. - FY 2023E revenue projected at approximately $545.0 million, with FY 2023E Adjusted EBITDA projected at $38.5 million. - Current liquidity as of March 31, 2023 of $15.8 million in total, 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, against the $50.0 million committed revolving credit facility with $42.0 million currently drawn). - Monthly cash burn of approximately $2.5 million during Q1 2023. - Projected liquidity exhaustion by Q3 2024 absent a restructuring.
**II. Pre-Restructuring Capital Structure**
The Company's current capital structure was presented in full:
- **Revolving Credit Facility:** $42.0 million drawn ($50.0 million committed), first lien, maturing December 15, 2024. - **First Lien Term Loan B:** $285.0 million outstanding (original principal of $310.0 million, with $25.0 million amortized), bearing interest at SOFR + 425 bps, first lien, maturing December 15, 2024. - **Mezzanine Notes:** $140.0 million outstanding plus approximately $8.1 million in accrued and unpaid PIK interest, second lien, maturing June 15, 2025. These were issued under the Indenture dated December 15, 2017, with Continental Fiduciary Trust Company as Trustee (CUSIP 861537 AA 2). - **Total Funded Debt:** Approximately $475.1 million. - **Leverage:** Total leverage of approximately 11.5x LTM Adjusted EBITDA; first lien leverage of approximately 7.9x. - **Near-Term Maturity Wall:** $327.0 million of first lien debt maturing December 15, 2024.
**III. Restructuring Objectives and Proposed Equitization**
We discussed the Company's (and its sponsor, Ridgeline Capital Partners Fund III, L.P.'s) strong preference for a consensual out-of-court restructuring. The principal terms discussed were as follows:
- **Equitization of Mezzanine Notes:** The $140.0 million in outstanding Mezzanine Notes (plus waiver of the $8.1 million in accrued PIK interest) would be exchanged for a combination of (a) Series A Preferred Equity with a $35.0 million aggregate liquidation preference bearing a 10.00% PIK dividend rate, and (b) 47.5% of pro forma common equity. - **Sponsor Dilution and New Money:** Ridgeline would be diluted from 100% to 47.5% of pro forma common equity, with a 5.0% management incentive plan (MIP) allocation. Ridgeline would contribute $12.5 million in new cash equity to fund transaction costs and provide a post-closing liquidity cushion. - **First Lien Amendments:** An amend-and-extend of the First Lien Term Loan B (extending maturity, with an increased spread to SOFR + 500 bps) and the revolving credit facility (reduced commitment, extended maturity). - **New Super-Priority Facility:** A new $55.0 million super-priority first-out term loan to provide additional liquidity, with Belvedere Credit Opportunities Fund LP as the prospective lead arranger. - **Deleveraging Impact:** Post-restructuring total funded debt of approximately $375.0 million, representing a $100.1 million reduction through equitization. Post-restructuring leverage estimated at approximately 7.2x based on projected FY 2024E Adjusted EBITDA of $52.0 million. - **Implied Recovery:** Implied recovery to mezzanine holders in the range of approximately 40–55 cents on the dollar, subject to equity valuation assumptions. This analysis is being prepared by Hargrove Advisory Group LLC, the Company's financial advisor (Elena Voss, Managing Director).
**IV. Consent Thresholds and Exchange Mechanics**
We discussed the amendment and exchange mechanics under the Mezzanine Indenture, including the requirement that the exchange receive the consent of holders of more than 66⅔% in principal amount of the outstanding Mezzanine Notes. Exit consent amendments would be utilized to strip covenants from any remaining notes held by non-consenting holders. We noted that the ad hoc group's $122.0 million position alone exceeds the 66⅔% threshold, which positions this process favorably for a consensual resolution. A formal consent solicitation process would be launched at the appropriate stage.
**V. Board and Governance**
We discussed the proposed post-restructuring board composition: three (3) seats for Ridgeline designees, three (3) seats for mezzanine holder designees, and one (1) independent director, for a total of seven (7) board seats.
**VI. Discussion Points and Preliminary Feedback from the Ad Hoc Group**
We appreciate that you and your team raised a number of important questions during the meeting, including the following:
- The valuation methodology underpinning the implied recovery range for the mezzanine holders and the basis for the proposed allocation of pro forma equity. - A request for access to management's financial projections and the Hargrove Advisory Group financial model. - Interest in understanding the detailed terms and pricing of the proposed super-priority facility and the intercreditor arrangements that would govern the relationship among the various lien tranches. - Questions regarding the treatment of the $8.1 million in accrued PIK interest and whether any cash consideration would be available to mezzanine holders as part of the exchange. - Board representation mechanics and protective provisions for mezzanine holder designees, including customary consent rights and veto protections. - Information rights and governance protections to be addressed in a post-restructuring stockholders' agreement.
We understand that Meridian Veltrian Partners will be conducting its own independent analysis of the proposed transaction, which we welcome and expect.
**VII. Next Steps and Action Items**
We propose the following next steps:
1. Calderwood & Harkness and the Company will circulate the following materials to Thornbury McCaffrey and Meridian Veltrian Partners, subject to execution of appropriate NDAs and confidentiality provisions to the extent not already in place: - Management financial projections (FY 2023E–2027E); - Summary of proposed terms for the super-priority facility; and - Draft of the proposed pro forma capital structure and equity allocation.
2. The Company's financial advisor, Hargrove Advisory Group (Elena Voss), will coordinate directly with Meridian Veltrian Partners on financial diligence matters.
3. We are targeting mid-to-late May 2023 for the circulation of an initial restructuring term sheet that will formalize the proposed terms discussed today.
4. For context, the first meeting with the first lien lender group (Pinnacle National Bank, N.A. as administrative agent, with Westlake Harden & Cole LLP as lenders' counsel) took place on April 14, 2023, and the Company is pursuing parallel dialogue with both creditor constituencies.
5. We would propose scheduling a follow-up meeting in approximately two to three weeks to continue substantive discussions. Please let us know your team's availability and we will coordinate.
**VIII. Closing**
We want to express our appreciation for the constructive tone of today's meeting and the ad hoc group's willingness to engage on a consensual basis. The Company's strong preference remains to avoid a bankruptcy filing and to complete the restructuring on an out-of-court basis, and we believe that today's discussion was a productive first step toward that objective.
Please do not hesitate to reach out to me or to Nathaniel if any questions arise in the interim. We look forward to continuing the dialogue.
Best regards,
Nathan Ikeda Associate Calderwood & Harkness LLP 599 Lexington Avenue New York, NY 10022 T: (212) 558-4000 E: nikeda@calderwoodharkness.com