PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Nathaniel Bower, Partner, Bankruptcy & Restructuring, Calderwood & Harkness LLP Howard Kessler, General Counsel, Stonefield Logistics Group Inc. Priya Sundaram, Chief Financial Officer, Stonefield Logistics Group Inc.
FROM: Sylvia Hartwell, Partner, Tax, Calderwood & Harkness LLP
DATE: September 15, 2023
RE: U.S. Federal Income Tax Consequences of Equitization of $140.0 Million Mezzanine Notes and $8.1 Million Accrued PIK Interest — Cancellation of Indebtedness Income and Debt-for-Equity Exchange Analysis
Matter No.: 1012-00002
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I. Executive Summary
The purpose of this memorandum is to analyze the U.S. federal income tax consequences to Stonefield Logistics Group Inc. ("Stonefield," the "Company," or the "Debtor"), a Delaware corporation (EIN: 83-2457109), of the proposed equitization of $140.0 million in principal amount of its 11.50% Senior Secured Second Lien Notes due June 15, 2025 (CUSIP: 861537 AA 2) (the "Mezzanine Notes"), together with $8.1 million of accrued and unpaid payment-in-kind ("PIK") interest thereon (collectively, $148.1 million, the "Mezzanine Claims"), in exchange for (a) newly issued Series A Preferred Stock with an aggregate liquidation preference of $35.0 million and a 10.00% PIK dividend rate (the "Series A Preferred Stock"), and (b) shares of common stock representing 47.5% of the pro forma common equity of Stonefield (the "Common Equity," and together with the Series A Preferred Stock, the "Exchange Consideration") (the "Exchange" or the "Equitization Transaction"). The Exchange is contemplated to close on or about December 19, 2023, pursuant to the terms of an Exchange Agreement (expected execution on or about December 8, 2023) and a Restructuring Support Agreement executed on June 30, 2023.
Based on our analysis of the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated thereunder, published guidance of the Internal Revenue Service (the "IRS"), and relevant judicial authorities, we reach the following principal conclusions:
First, the Equitization Transaction will give rise to cancellation of indebtedness ("COD") income to Stonefield under Section 61(a)(12) of the Code to the extent that the adjusted issue price of the retired Mezzanine Notes (including accrued PIK interest) exceeds the fair market value ("FMV") of the Exchange Consideration issued to the mezzanine holders. Based on the preliminary recovery analysis prepared by Hargrove Advisory Group LLC, the Company's financial advisor, which indicates an implied recovery to mezzanine holders of approximately 40 to 55 cents on the dollar, the estimated COD income arising from the Exchange ranges from approximately $66.6 million to $88.9 million, with a midpoint estimate of approximately $78.1 million.
Second, the historical "stock-for-debt" exception formerly codified at Section 108(e)(10) of the Code — which, prior to its repeal by the Revenue Reconciliation Act of 1993 (P.L. 103-66), permitted a debtor corporation that issued its stock in satisfaction of indebtedness to avoid recognition of COD income — is no longer available to solvent C corporations. Current Section 108(e)(8) of the Code provides that a debtor corporation that transfers stock to a creditor in satisfaction of indebtedness is treated as having satisfied the indebtedness with an amount of money equal to the FMV of the stock. Accordingly, the former stock-for-debt exception cannot eliminate or reduce the COD income arising from the Exchange.
Third, the insolvency exclusion under Section 108(a)(1)(B) of the Code is the primary mechanism available to Stonefield for excluding all or a portion of the COD income from gross income. Under Section 108(a)(1)(B), COD income is excluded from gross income to the extent that the taxpayer is "insolvent" — i.e., to the extent that the taxpayer's liabilities exceed the FMV of the taxpayer's assets — at the time of the discharge. Given Stonefield's total leverage of 11.5x LTM Adjusted EBITDA and the significant impairment of its sponsor's equity investment, there are strong arguments supporting the conclusion that Stonefield is insolvent immediately prior to the Exchange, and that the degree of insolvency is sufficient to exclude all or substantially all of the COD income. However, the insolvency exclusion requires a contemporaneous determination of the FMV of the Company's assets and a comprehensive schedule of all liabilities, and we strongly recommend that the Company obtain a formal valuation opinion or appraisal to support this position.
Fourth, to the extent COD income is excluded from gross income under Section 108(a)(1)(B), Stonefield must reduce certain tax attributes — including net operating losses ("NOLs"), NOL carryforwards, and the tax basis of its assets — in the order prescribed by Section 108(b) of the Code. The Company should evaluate the quantum of its existing tax attributes and consider whether to make the election under Section 108(b)(5) to reduce the basis of depreciable property before reducing NOLs, particularly in light of the Section 382 ownership change analysis addressed in the companion memorandum.
This memorandum addresses only the U.S. federal income tax consequences of the Equitization Transaction to Stonefield in its capacity as debtor and issuer. It does not address the tax consequences to any holder of the Mezzanine Notes, any first lien lender, Ridgeline Capital Partners Fund III, L.P. ("Ridgeline"), or any other party to the restructuring. State, local, and non-U.S. tax consequences are beyond the scope of this memorandum, and the holders and other parties should consult their own tax advisors with respect to such matters. A separate memorandum dated September 15, 2023, prepared by the undersigned, addresses the Section 382 ownership change analysis arising from the Equitization Transaction and should be read in conjunction with this memorandum.
II. Factual Background
A. The Company and Its Capital Structure
Stonefield Logistics Group Inc. is a corporation organized under the laws of the State of Delaware, headquartered at 4200 Commerce Street, Suite 1500, Dallas, Texas 75201. The Company's registered agent in the State of Delaware is Capitol Registered Agents, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. Stonefield is a calendar-year taxpayer that files its federal income tax returns on the basis of a fiscal year ending December 31.
Stonefield operates in the transportation and logistics industry, providing freight brokerage services, last-mile delivery, and warehousing services across the United States. As of the date of this memorandum, the Company employs approximately 3,800 individuals across 26 terminal locations in 14 states. The Company's operations serve a diversified base of shippers, retailers, and e-commerce fulfillment providers.
Stonefield is a portfolio company of Ridgeline Capital Partners Fund III, L.P. ("Ridgeline"), a Delaware limited partnership and a private equity fund managed by Ridgeline Capital Partners LLC. Ridgeline acquired Stonefield in a leveraged buyout transaction that closed on December 15, 2017 (the "LBO"), investing $210.0 million in common equity capital. Following the LBO, Ridgeline held 100% of the outstanding common equity of Stonefield (subject to a management equity incentive plan that had been substantially forfeited by departing executives). As discussed in greater detail below, Ridgeline's equity investment is substantially underwater based on the current financial condition of the Company.
The Company's independent auditor is Whitfield & Pryce LLP, with engagement partner Todd Ashburn, CPA, overseeing the annual audit. Whitfield & Pryce has audited the Company's consolidated financial statements for the fiscal years ended December 31, 2020, 2021, and 2022, and is expected to audit the financial statements for the fiscal year ended December 31, 2023.
B. Pre-Restructuring Debt
The Company's pre-restructuring capital structure consists of the following funded debt obligations:
First Lien Credit Agreement. Stonefield is party to a First Lien Credit Agreement dated as of December 15, 2017 (the "First Lien Credit Agreement"), among Stonefield, as Borrower, Pinnacle National Bank, N.A. ("Pinnacle"), as Administrative Agent and Collateral Agent, and the several lenders from time to time party thereto (the "First Lien Lenders"). The First Lien Credit Agreement provides for two credit facilities:
(i) First Lien Term Loan B. A senior secured first lien term loan (the "TLB") with an original principal amount of $310.0 million, of which $285.0 million remains outstanding as of the date of this memorandum (reflecting $25.0 million in scheduled amortization payments made since the LBO closing). The TLB bears interest at a rate of SOFR plus 425 basis points (as converted from LIBOR pursuant to a benchmark transition amendment executed in June 2023) and matures on December 15, 2024 (prior to the amend-and-extend discussed herein).
(ii) Revolving Credit Facility. A senior secured first lien revolving credit facility (the "Revolver") with total commitments of $50.0 million, of which $42.0 million is drawn and $3.5 million is committed under outstanding letters of credit as of the date of this memorandum, leaving $4.5 million of undrawn and available capacity. The Revolver matures on the earlier of June 15, 2024 and 91 days prior to the maturity of the TLB.
Mezzanine Notes. Stonefield issued its 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes") in an aggregate original principal amount of $140.0 million pursuant to an Indenture dated as of December 15, 2017 (the "Mezzanine Indenture"), among Stonefield, as Issuer, and Continental Fiduciary Trust Company, as Trustee and Second Lien Collateral Agent (the "Mezzanine Trustee"). The Mezzanine Notes bear interest at a rate of 11.50% per annum, payable semi-annually in cash or, at the Company's election (subject to certain conditions), in the form of PIK interest. The Company has elected PIK interest for multiple semi-annual periods since 2021 due to liquidity constraints, resulting in $8.1 million of accrued and unpaid PIK interest through the estimated closing date of the Exchange (December 19, 2023). The total outstanding Mezzanine Claim, including accrued PIK interest, is $148.1 million.
The Mezzanine Notes are secured by a second priority lien on substantially all assets of the Company, junior in priority to the first lien securing the obligations under the First Lien Credit Agreement. The lien priority and intercreditor arrangements are governed by an Intercreditor Agreement dated December 15, 2017, among Pinnacle, as First Lien Collateral Agent, the Mezzanine Trustee, as Second Lien Collateral Agent, and Stonefield.
Summary of Pre-Restructuring Funded Debt. As of March 31, 2023, the Company's total funded debt is as follows:
For the twelve-month period ended March 31, 2023 ("LTM Q1 2023"), the Company's Adjusted EBITDA (as defined in the First Lien Credit Agreement) was $41.2 million, resulting in a total leverage ratio of approximately 11.5x LTM Adjusted EBITDA.
C. The Proposed Equitization Transaction
Pursuant to the terms of the Restructuring Support Agreement executed on June 30, 2023 (the "RSA"), among Stonefield, Ridgeline, and an ad hoc group of mezzanine holders represented by Caravel Capital Advisory LLC (the "Ad Hoc Group"), the parties have agreed to a consensual out-of-court restructuring (the "Restructuring") that includes, among other elements, the equitization of the Mezzanine Notes. The Equitization Transaction is expected to be consummated pursuant to a definitive Exchange Agreement (the "Exchange Agreement") anticipated to be executed on or about December 8, 2023, with closing on or about December 19, 2023.
Mezzanine Holders Participating in the Exchange. The Ad Hoc Group consists of the following principal holders:
The consenting mezzanine holders, holding 96.1% of the outstanding principal amount of the Mezzanine Notes, will participate in the Exchange by tendering their notes in exchange for the Exchange Consideration described below. The non-consenting holders, holding $5.5 million in aggregate principal amount, will not participate in the Exchange but will be subject to exit consent amendments discussed in Section VI below.
Exchange Consideration. The consenting mezzanine holders will receive the following consideration in exchange for their Mezzanine Notes (including accrued PIK interest):
(a) Series A Preferred Stock. Newly issued shares of Series A Preferred Stock of Stonefield, having an aggregate liquidation preference of $35.0 million and bearing a PIK dividend at the rate of 10.00% per annum, cumulative, senior in right of payment to the common stock. The terms of the Series A Preferred Stock will be set forth in a Certificate of Designations to be filed with the Delaware Secretary of State concurrently with the closing of the Exchange.
(b) Common Equity. Shares of newly issued common stock of Stonefield, representing in the aggregate 47.5% of the pro forma fully diluted common equity of Stonefield immediately following the closing of the Exchange (before giving effect to the Management Incentive Plan).
The accrued PIK interest of $8.1 million is being waived by the consenting holders as part of the overall settlement consideration embodied in the Exchange. No separate consideration is being paid or issued in respect of the accrued PIK interest; the PIK interest amount is subsumed within the total Mezzanine Claim of $148.1 million for which the Exchange Consideration is being issued.
Post-Equitization Ownership. Following the closing of the Exchange and the other Restructuring transactions, the pro forma equity capitalization of Stonefield will be as follows:
In addition, Ridgeline will contribute $12.5 million of new cash equity to Stonefield in connection with the Restructuring, which contribution is a condition to the closing of the Exchange under the RSA.
Broader Restructuring Context. The Equitization Transaction is one component of a broader consensual out-of-court restructuring that also includes:
(i) An amend-and-extend of the first lien credit facilities, pursuant to which the interest rate on the TLB will increase from SOFR + 425 basis points to SOFR + 500 basis points and the maturity will be extended from December 15, 2024 to December 19, 2028. The Revolver commitments will be reduced from $50.0 million to $40.0 million and the maturity extended accordingly;
(ii) A new $55.0 million super-priority term loan (the "Super-Priority Term Loan") provided by Belvedere Credit Opportunities Fund LP ("Belvedere"), secured by a first-priority lien on all assets of the Company, senior in right of payment and lien priority to the existing first lien facilities. The Super-Priority Term Loan will bear interest at SOFR + 650 basis points and will mature on December 19, 2027. The Super-Priority Term Loan will be issued at an original issue discount of 2.00% (i.e., net proceeds of $53.9 million); and
(iii) The Ridgeline new equity contribution of $12.5 million described above.
D. Financial Condition of the Company
The Company has experienced significant financial deterioration since 2022, driven by a combination of macroeconomic headwinds in the freight and logistics industry and company-specific operational challenges. Key financial metrics are summarized below:
The Company's monthly cash burn during the first quarter of 2023 averaged approximately $2.5 million. As of March 31, 2023, the Company's total liquidity was $15.8 million, consisting of $11.3 million in unrestricted cash and $4.5 million of undrawn Revolver availability (after giving effect to $3.5 million in outstanding letters of credit). Based on the Company's projections, absent a restructuring, the Company's liquidity would be exhausted by the third quarter of 2024, at which point the Company would be unable to meet its debt service and trade obligations and would likely be forced to seek relief under Title 11 of the United States Code.
The Company's financial distress is attributable to several factors, including: (i) the prolonged freight recession that has depressed rates across the truckload, less-than-truckload, and brokerage segments since mid-2022; (ii) excess carrier capacity in the market following the pandemic-era freight boom; and (iii) the loss of certain key customer contracts, including the Company's contract with Meridian Consumer Products, Inc., which accounted for approximately 8.5% of FY 2022 revenue and was not renewed effective January 1, 2023.
As discussed in greater detail in Section IV.B below, the financial condition of the Company is directly relevant to the availability of the insolvency exclusion under Section 108(a)(1)(B) of the Code. Given the Company's substantial indebtedness ($475.1 million in funded debt), declining earnings trajectory, and severely constrained liquidity, there are strong indications that the Company is insolvent on a balance-sheet basis — i.e., that the FMV of the Company's total liabilities exceeds the FMV of its total assets — immediately prior to the Exchange. This determination, however, requires a formal valuation of the Company's assets at FMV, which we recommend the Company obtain in connection with the closing.
III. Legal Analysis — Cancellation of Indebtedness Income
A. General Rule: Section 61(a)(12) and Realization of COD Income
Under the general rule of Section 61(a)(12) of the Code, gross income includes "income from the discharge of indebtedness." This statutory provision codifies the long-standing principle, first established by the Supreme Court in United States v. Kirby Lumber Co., 284 U.S. 1 (1931), that a debtor realizes an accession to wealth — and therefore recognizes income — when it satisfies (or is released from) an obligation for less than the face amount (or, more precisely, the adjusted issue price) of the indebtedness. The rationale underlying the Kirby Lumber doctrine is that the debtor's satisfaction of the obligation for an amount less than the amount previously borrowed results in a "freeing of assets" that represents an increase in the debtor's net worth and is properly treated as income. See also Commissioner v. Jacobson, 336 U.S. 28, 38 (1949) (confirming the freeing-of-assets rationale); Vukasovich, Inc. v. Commissioner, 790 F.2d 1409 (9th Cir. 1986).
In the context of the Equitization Transaction, Stonefield is satisfying its obligations under the Mezzanine Notes not by paying cash, but by issuing equity securities (the Series A Preferred Stock and common stock) to the mezzanine holders. As discussed in Section III.B below, when a debtor corporation satisfies an indebtedness by transferring its own stock, the debtor is treated under Section 108(e)(8) as having satisfied the indebtedness with an amount of money equal to the FMV of the stock. To the extent the FMV of the equity issued is less than the adjusted issue price of the Mezzanine Notes, the debtor realizes COD income.
Adjusted Issue Price of the Mezzanine Notes. The "adjusted issue price" of a debt instrument is, in general, the issue price of the instrument increased by the amount of original issue discount ("OID") previously included in the holder's income and decreased by the amount of any payment previously made on the instrument other than a payment of qualified stated interest. See Code § 1272(a)(6); Treas. Reg. § 1.1275-1(b). In the case of the Mezzanine Notes, the Notes were issued at par ($140.0 million) in connection with the LBO on December 15, 2017. No OID was present at issuance. Accordingly, the adjusted issue price of the principal component of the Mezzanine Notes is $140.0 million.
The treatment of the $8.1 million in accrued and unpaid PIK interest requires additional analysis. Under the terms of the Mezzanine Indenture, the Company has the option to pay interest either in cash or in the form of additional notes (PIK interest). When the Company elects PIK, the principal amount of the outstanding Mezzanine Notes increases by the amount of the PIK interest. The question is whether the PIK interest constitutes "qualified stated interest" (in which case the forgiveness of the PIK obligation generates COD income separately from the principal) or is treated as OID (in which case the PIK amounts adjust the issue price of the Mezzanine Notes and are captured in the overall COD income computation on the debt).
Under Treasury Regulation § 1.1275-1(b) and (c), and the framework of Treasury Regulation § 1.1275-2, stated interest that is unconditionally payable in cash or property (other than the issuer's debt instruments) at least annually is treated as "qualified stated interest" and is excluded from the determination of OID. Interest that is payable in the form of additional debt instruments of the issuer — i.e., PIK interest — is generally not "unconditionally payable in cash" and thus does not constitute qualified stated interest for OID purposes. Accordingly, the PIK toggle feature of the Mezzanine Notes likely causes the interest payments (when paid in kind) to be treated as OID rather than qualified stated interest, with the result that the PIK amounts are treated as an adjustment to the issue price of the Notes rather than as a separate obligation.
The practical effect is that, regardless of whether the PIK interest is characterized as OID or as a separate obligation, the $8.1 million of accrued PIK interest adds to the total indebtedness being discharged. For simplicity, and consistent with the overall structure of the Exchange, we treat the total amount of indebtedness discharged as $148.1 million (comprising $140.0 million in principal plus $8.1 million in accrued PIK interest).
B. Determination of COD Income Amount in a Debt-for-Equity Exchange
When indebtedness is exchanged for equity of the debtor corporation, the debtor is treated under Section 108(e)(8) of the Code as having satisfied the indebtedness with an amount of money equal to the FMV of the equity issued. The amount of COD income is therefore determined under the following formula:
COD Income = Adjusted Issue Price of Debt Cancelled − FMV of Equity Issued
The determination of COD income in the Equitization Transaction thus requires the valuation of the Exchange Consideration — that is, the FMV of (a) the Series A Preferred Stock ($35.0 million liquidation preference, 10.00% PIK dividend) and (b) the 47.5% pro forma common equity interest — as of the date the Exchange is treated as occurring for federal income tax purposes.
FMV of Series A Preferred Stock. The Series A Preferred Stock has an aggregate liquidation preference of $35.0 million and bears PIK dividends at a rate of 10.00% per annum. The FMV of preferred stock is not necessarily equal to its liquidation preference; rather, FMV depends on a number of factors, including the yield offered by the instrument relative to market yields for comparable instruments, the creditworthiness of the issuer, the liquidity (or lack thereof) of the instrument, and any conversion, redemption, or other features embedded in the instrument. In the present case, the 10.00% PIK dividend rate is above the coupon rate that would be offered by an investment-grade issuer but may be at or below the rate demanded by investors for preferred equity of a highly leveraged, recently restructured company in the freight and logistics sector. Depending on the assumptions used, the FMV of the Series A Preferred Stock may be at, above, or below the $35.0 million liquidation preference.
FMV of 47.5% Pro Forma Common Equity. The FMV of the common equity component of the Exchange Consideration depends on the enterprise value of Stonefield on a post-restructuring basis and the allocation of that enterprise value among the various tranches of the Company's capital structure (including the Super-Priority Term Loan, the first lien facilities, the Series A Preferred Stock, and the common equity). The enterprise value, in turn, is a function of projected future cash flows, an appropriate discount rate, and comparable company and transaction multiples.
Hargrove Advisory Group LLC ("Hargrove"), the Company's financial advisor (engagement led by Elena Voss, Managing Director), has prepared a preliminary recovery analysis for the mezzanine holders that suggests an implied recovery of approximately 40 to 55 cents on the dollar — i.e., total value of the Exchange Consideration of approximately $59.2 million to $81.5 million against a Mezzanine Claim of $148.1 million. The range reflects different assumptions regarding the appropriate EBITDA multiple and the discount applied for the illiquidity of private company equity.
Using this recovery range, we can calculate illustrative COD income amounts as follows:
These calculations are illustrative only and are based on Hargrove's preliminary recovery analysis. The actual amount of COD income will be determined by the FMV of the Exchange Consideration as of the closing date, which we strongly recommend be established by an independent valuation or appraisal prepared contemporaneously with the closing (December 19, 2023). The importance of obtaining this valuation cannot be overstated: the amount of COD income directly determines (i) the amount of income that Stonefield must exclude from gross income under Section 108(a)(1)(B) (if available), and (ii) the corresponding amount of tax attribute reduction under Section 108(b).
C. Historical Stock-for-Debt Exception (Former Section 108(e)(10))
Prior to the Revenue Reconciliation Act of 1993 (P.L. 103-66, § 13150), the Code provided what was known as the "stock-for-debt exception." Under former Section 108(e)(10), a debtor corporation that issued its own stock (other than "disqualified stock") in satisfaction of indebtedness was deemed to have satisfied the indebtedness for an amount equal to the adjusted issue price of the stock, thereby avoiding the recognition of COD income. The rationale of the exception was that, in a stock-for-debt exchange, the debtor had merely substituted one class of claim against its assets (debt) for another class of claim (equity), without experiencing a true "freeing of assets" that would justify the recognition of income.
Congress repealed the stock-for-debt exception for solvent C corporations effective for stock transfers occurring after December 31, 1994. The legislative history indicates that Congress concluded the exception was unsound because the issuance of stock at a value below the face amount of the retired debt did, in fact, result in an accession to wealth on the part of the debtor corporation — its balance sheet was strengthened by the reduction of its liabilities in excess of the value of equity given up. See H.R. Rep. No. 103-111, at 728 (1993) (Conf. Rep.).
Current Section 108(e)(8) of the Code now provides the opposite rule: when a debtor corporation transfers stock to a creditor in satisfaction of its indebtedness, the debtor is treated as having satisfied the indebtedness with an amount of money equal to the FMV of the stock. This codifies the principle that COD income arises to the extent the adjusted issue price of the retired debt exceeds the FMV of the stock issued. Section 108(e)(8)(B) contains a special rule for the issuance of partnership interests in satisfaction of partnership indebtedness, but this provision is not applicable to Stonefield, which is a C corporation.
Conclusion. The former stock-for-debt exception does not apply to the Equitization Transaction. The Exchange will generate COD income to Stonefield to the extent the adjusted issue price of the Mezzanine Notes ($148.1 million) exceeds the FMV of the Exchange Consideration issued.
D. Treatment of Accrued PIK Interest ($8.1 Million)
As noted above, the $8.1 million in accrued PIK interest is being waived by the consenting mezzanine holders as part of the overall settlement consideration embodied in the Exchange. No separate consideration is being paid or issued in respect of the accrued PIK interest.
The tax treatment of the forgiveness of the PIK interest depends on how the PIK amounts were treated for federal income tax purposes during the periods in which they accrued:
(i) If PIK interest was deducted by Stonefield as accrued interest expense. If the Company claimed deductions for the PIK interest as it accrued (i.e., treated the PIK amounts as "stated interest" for tax purposes and deducted them under Section 163), the subsequent forgiveness of the PIK interest obligation generates COD income under Section 61(a)(12). In this scenario, the Company received the benefit of the deduction when the interest was accrued; the forgiveness of the corresponding liability represents the release of the Company from an obligation previously used to offset income.
(ii) If PIK interest was treated as additional debt (OID). If the PIK amounts were treated as OID — i.e., as an increase in the principal amount of the Mezzanine Notes — the forgiveness of the PIK interest is captured in the overall COD income computation on the debt. The adjusted issue price of the Notes would include the PIK amount, and the COD income would equal the adjusted issue price (including PIK) minus the FMV of the Exchange Consideration.
As discussed in Section III.A above, the cash/PIK toggle feature of the Mezzanine Notes likely causes the PIK amounts to be treated as OID rather than as qualified stated interest under Treasury Regulation § 1.1275-2. Under this characterization, the $8.1 million of PIK interest is incorporated into the adjusted issue price of the Notes and is subsumed within the overall COD income calculation. However, we note that the characterization may depend on the specific terms of the PIK election provisions in the Mezzanine Indenture, and we recommend that the Company's tax return preparer confirm the treatment applied in prior years.
Regardless of the characterization, the practical effect is the same: the $8.1 million of PIK interest adds to the total COD income generated by the Exchange (unless excluded under Section 108, as discussed below). The total amount of indebtedness discharged for purposes of the COD income calculation is $148.1 million.
IV. Exclusions from COD Income Under Section 108
A. Overview of Section 108 Exclusions
Section 108(a)(1) of the Code provides that COD income is excluded from gross income if the discharge of indebtedness occurs in any of the following circumstances:
(A) Title 11 Case. The discharge occurs in a case under Title 11 of the United States Code (i.e., a bankruptcy case) if the debtor is under the jurisdiction of a bankruptcy court and the discharge is granted by the court or is pursuant to a plan approved by the court. Code § 108(a)(1)(A).
(B) Insolvency. The discharge occurs when the taxpayer is insolvent. Code § 108(a)(1)(B). The exclusion is limited to the amount by which the taxpayer is insolvent. Code § 108(a)(3).
(C) Qualified Farm Indebtedness. The indebtedness discharged is "qualified farm indebtedness." Code § 108(a)(1)(C).
(D) Qualified Real Property Business Indebtedness. The indebtedness discharged is "qualified real property business indebtedness." Code § 108(a)(1)(D).
(E) Qualified Principal Residence Indebtedness. The indebtedness discharged is "qualified principal residence indebtedness." Code § 108(a)(1)(E) (applicable only to individuals; as modified and extended through various legislative enactments).
Of these exclusions, only the insolvency exclusion under Section 108(a)(1)(B) is potentially available to Stonefield. The Title 11 exclusion under Section 108(a)(1)(A) is not available because the Restructuring is being accomplished as a consensual out-of-court transaction; no bankruptcy petition has been filed, and the Company is not under the jurisdiction of a bankruptcy court. The remaining exclusions (qualified farm indebtedness, qualified real property business indebtedness, and qualified principal residence indebtedness) are inapplicable to a freight and logistics company organized as a C corporation.
We note that the Title 11 exclusion, had it been available, would provide a more favorable result than the insolvency exclusion in one important respect: under Section 108(a)(1)(A), the entire amount of COD income arising in a Title 11 case is excludable from gross income, without regard to the extent of the debtor's insolvency. By contrast, the insolvency exclusion under Section 108(a)(1)(B) is limited to the amount by which the debtor's liabilities exceed the FMV of the debtor's assets — i.e., the exclusion cannot exceed the degree of insolvency. This distinction underscores the importance of accurately determining Stonefield's insolvency amount and may be relevant if the Company or its advisors consider the relative merits of an out-of-court restructuring versus a pre-packaged or pre-arranged bankruptcy filing.
B. Insolvency Exclusion — Section 108(a)(1)(B)
Under Section 108(a)(1)(B), COD income is excluded from gross income to the extent the taxpayer is "insolvent" at the time of the discharge. "Insolvent" is defined in Section 108(d)(3) as the excess of the taxpayer's liabilities over the FMV of the taxpayer's assets, determined immediately before the discharge. This is a balance-sheet test — measuring the FMV of all assets against the total amount of all liabilities — and is distinct from the equitable (cash-flow) insolvency test used in other legal contexts.
Determination of Insolvency
To apply the insolvency exclusion, it is necessary to determine the FMV of all of Stonefield's assets and the total amount of all of its liabilities, in each case immediately before the Exchange closing (anticipated to be December 19, 2023).
Liabilities of Stonefield. The Company's liabilities immediately before the Exchange include the following:
The total liabilities must include all obligations of the Company, whether or not reflected on the balance sheet prepared in accordance with generally accepted accounting principles. The IRS has taken the position in published guidance and litigation that all liabilities — including contingent liabilities, guarantees, and other off-balance-sheet obligations — should be included in the insolvency calculation to the extent they are bona fide obligations of the taxpayer. See Treas. Reg. § 1.108-2 (withdrawn but instructive); Merkel v. Commissioner, 109 T.C. 463 (1997), aff'd, 192 F.3d 844 (9th Cir. 1999). The Company's legal and financial advisors should compile a comprehensive schedule of all liabilities as of the date immediately prior to the Exchange closing.
Based on the Company's most recent publicly available financial information (the audited balance sheet as of December 31, 2022, and the unaudited interim balance sheet as of March 31, 2023, each prepared by Whitfield & Pryce), total liabilities significantly exceed total assets at book value. However, the insolvency determination under Section 108(d)(3) requires a comparison of liabilities to the FMV of assets (not book value).
FMV of Assets. The FMV of Stonefield's assets must be determined on an asset-by-asset basis (or, equivalently, on a going-concern basis if the assets are more valuable in use than in liquidation). Relevant assets include:
• Tangible personal property: fleet vehicles, trailers, warehouse equipment, and other fixed assets
• Real property: leasehold interests in terminal locations (26 terminals across 14 states) and any owned real property
• Intangible assets: customer relationships, trade name and brand value, assembled workforce, technology and software systems, permits and licenses
• Working capital: cash and cash equivalents, accounts receivable, prepaid expenses, and other current assets
• Goodwill: to the extent the going-concern value of the business exceeds the aggregate FMV of the identifiable tangible and intangible assets
Importantly, for purposes of the insolvency determination under Section 108(d)(3), the FMV of assets is measured at the asset level — not at the enterprise-value level. The IRS has consistently taken the position that the insolvency test looks to the FMV of the debtor's assets (both tangible and intangible), not to the equity value of the debtor's business as a whole. See Carlson v. Commissioner, 116 T.C. 87 (2001); IRS Chief Counsel Advice 200852030.
Preliminary Assessment of Insolvency. Based on the available financial data, there are strong indications that Stonefield is insolvent on a balance-sheet basis immediately before the Exchange:
• Total funded debt of $475.1 million significantly exceeds the implied enterprise value of the Company. Hargrove's preliminary analysis suggests a post-restructuring enterprise value in the range of $200 million to $260 million (based on projected FY 2024E EBITDA of $52.0 million and an enterprise value multiple of approximately 3.8x to 5.0x). Even after adjusting for the fact that the insolvency test uses FMV of assets (rather than enterprise value), it is highly likely that total liabilities exceed FMV of total assets by a substantial margin.
• Ridgeline's equity investment of $210.0 million is substantially underwater. The implied equity value of the Company is negative (i.e., total enterprise value is less than total funded debt), which means that the sponsor's equity is worthless from a FMV perspective.
• LTM Adjusted EBITDA of $41.2 million (and projected FY 2023E Adjusted EBITDA of $38.5 million) is grossly insufficient to service the Company's total funded debt of $475.1 million. The total leverage ratio of 11.5x is indicative of severe financial distress and suggests that the Company's assets, on a FMV basis, are insufficient to satisfy all claims.
We believe, based on our preliminary assessment, that Stonefield's liabilities exceed the FMV of its assets by a margin that is likely sufficient to exclude all or substantially all of the COD income arising from the Exchange. However, this conclusion cannot be confirmed without a formal valuation of the Company's assets as of the date immediately prior to the Exchange closing. We strongly recommend that the Company engage Hargrove Advisory Group LLC or an independent appraiser to prepare a formal insolvency analysis, consisting of a comprehensive determination of the FMV of all assets and a schedule of all liabilities, as of the date immediately prior to the Exchange closing (December 19, 2023), and that this analysis be prepared contemporaneously with the closing to serve as documentation supporting the Section 108(a)(1)(B) exclusion in the event of an IRS audit or challenge.
C. Limitation of Insolvency Exclusion
Under Section 108(a)(3) of the Code, the insolvency exclusion under Section 108(a)(1)(B) cannot exceed the amount by which the taxpayer is insolvent. In other words, the exclusion is capped at the degree of insolvency — the excess of liabilities over the FMV of assets — immediately before the discharge. If the COD income exceeds the insolvency amount, the excess is included in gross income and is subject to federal income tax.
The following examples illustrate the operation of this limitation in the context of the Equitization Transaction:
Example 1: Insolvency Amount Exceeds COD Income. Assume that Stonefield's total liabilities immediately before the Exchange are $550.0 million and the FMV of its total assets is $460.0 million. The insolvency amount is $90.0 million ($550.0M − $460.0M). If COD income is $78.1 million (the midpoint estimate), the entire $78.1 million of COD income would be excluded from gross income under Section 108(a)(1)(B), because the insolvency amount ($90.0 million) exceeds the COD income ($78.1 million). The remaining $11.9 million of insolvency ($90.0M − $78.1M) has no effect.
Example 2: COD Income Exceeds Insolvency Amount. Assume the same total liabilities ($550.0 million) but that the FMV of assets is $500.0 million. The insolvency amount is $50.0 million. If COD income is $78.1 million, only $50.0 million would be excluded under Section 108(a)(1)(B). The remaining $28.1 million of COD income ($78.1M − $50.0M) would be included in Stonefield's gross income for the 2023 taxable year and would be subject to federal income tax at the applicable corporate rate (currently 21%).
Example 3: Company is Not Insolvent. If the FMV of Stonefield's assets exceeds its liabilities immediately before the Exchange — i.e., the Company is solvent on a balance-sheet basis — no exclusion is available under Section 108(a)(1)(B), and the entire amount of COD income would be included in gross income. We consider this outcome unlikely given the available financial data, but it cannot be ruled out without a formal valuation.
As these examples demonstrate, the precise amount of insolvency is critical to determining the portion of COD income that may be excluded. This underscores the importance of obtaining a formal contemporaneous valuation.
D. Tax Attribute Reduction Under Section 108(b)
The exclusion of COD income from gross income under Section 108(a) is not a permanent exclusion in all cases. Rather, Section 108(b) requires the taxpayer to reduce certain tax attributes by the amount of COD income excluded. This "attribute reduction" mechanism reflects Congress's determination that, while the debtor should not recognize current income on the discharged debt, the debtor should give up future tax benefits (in the form of reduced NOLs, credits, or asset basis) to compensate for the exclusion.
Under Section 108(b)(2), tax attributes are reduced in the following prescribed order:
1. Net operating losses ("NOLs") and NOL carryforwards — reduced dollar-for-dollar by the amount of excluded COD income;
2. General business credit carryforwards — reduced by 33⅓ cents for each dollar of excluded COD income;
3. Minimum tax credit — reduced by 33⅓ cents for each dollar of excluded COD income;
4. Capital loss carryforwards — reduced dollar-for-dollar;
5. Tax basis of the taxpayer's assets — reduced in accordance with the rules of Section 1017 (discussed below), but not below the amount of the taxpayer's remaining liabilities immediately after the discharge;
6. Passive activity loss and credit carryforwards — reduced dollar-for-dollar (or 33⅓ cents for credits); and
7. Foreign tax credit carryforwards — reduced by 33⅓ cents for each dollar of excluded COD income.
Attribute reduction applies in the prescribed order, and each category is fully reduced before moving to the next category. The aggregate reduction cannot exceed the amount of excluded COD income.
Section 108(b)(5) Election. The Code provides an important election under Section 108(b)(5) that permits the taxpayer to elect to reduce the basis of "depreciable property" (as defined in Section 1017(b)(3)) before reducing NOLs. This election may be advantageous for a taxpayer that has significant NOL carryforwards and wishes to preserve them for use in future taxable years, particularly where the depreciable property has a relatively low FMV (such that the basis reduction does not result in a significant loss of future depreciation deductions) or where the NOLs would provide greater tax benefits in future years than the depreciation deductions.
In the case of Stonefield, the decision whether to make the Section 108(b)(5) election requires an assessment of:
(a) The quantum and usability of the Company's existing NOL carryforwards. If Stonefield has substantial NOLs that would be reduced under the default ordering rules, and if those NOLs are expected to be usable against future taxable income, preserving them through the Section 108(b)(5) election would be beneficial.
(b) The interaction with Section 382. If the Equitization Transaction triggers an ownership change under Section 382 (as analyzed in the companion memorandum), the annual limitation imposed by Section 382 on post-change use of pre-change NOLs may significantly reduce the practical value of the NOLs. If the Section 382 limitation renders the NOLs largely unusable, preserving them through the Section 108(b)(5) election would be of limited benefit, and it may be preferable to reduce NOLs (which have diminished value) rather than reduce the basis of depreciable property (which generates current and future depreciation deductions without regard to the Section 382 limitation).
(c) The basis and character of the Company's depreciable property. Reducing the basis of depreciable property reduces future depreciation deductions and may result in greater gain (or lesser loss) upon the eventual disposition of the property. The magnitude of this effect depends on the current basis and FMV of the depreciable property and the expected useful life of the assets.
We recommend that the Company, in coordination with its tax return preparer (Whitfield & Pryce) and in consultation with counsel, evaluate the relative merits of the Section 108(b)(5) election once the actual amount of excluded COD income is known and the Section 382 analysis has been completed.
Timing of Attribute Reduction. Under Section 108(b)(4)(A), the reduction of tax attributes occurs at the beginning of the taxable year following the taxable year in which the discharge occurs. For Stonefield, a calendar-year taxpayer, if the Exchange closes on December 19, 2023, the attribute reduction will take effect as of January 1, 2024. This timing rule means that the Company's tax attributes remain available for use on its 2023 tax return (the year of the discharge), but are reduced effective January 1, 2024 for purposes of all subsequent taxable years.
V. Application of Section 108(e)(8) — Stock Issued to Creditors
A. Statutory Framework
As discussed in Section III.C above, Section 108(e)(8) of the Code provides the governing rule for the treatment of a debtor corporation that transfers stock to a creditor in satisfaction of its indebtedness. Under this provision:
"If a debtor corporation transfers stock to a creditor in satisfaction of its recourse or nonrecourse indebtedness, such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock."
This rule applies to all transfers of corporate stock in satisfaction of indebtedness, whether the stock is common stock, preferred stock, or any other class of equity security, subject to the qualification that the instrument must be properly characterized as "stock" for federal income tax purposes (as opposed to debt masquerading as equity). The provision codifies the repeal of the former stock-for-debt exception and ensures that a debtor corporation realizes COD income whenever it satisfies indebtedness by issuing equity with a FMV less than the adjusted issue price of the retired debt.
The rule under Section 108(e)(8) applies independently of, and in addition to, any exclusion that may be available under Section 108(a)(1). That is, the debtor first determines the amount of COD income under the Section 108(e)(8) framework (adjusted issue price of debt minus FMV of stock) and then applies the exclusions under Section 108(a)(1) (insolvency, Title 11, etc.) to determine the amount, if any, that is excluded from gross income.
B. Characterization of Series A Preferred Stock
A threshold question in applying Section 108(e)(8) to the Equitization Transaction is whether the Series A Preferred Stock issued to the mezzanine holders constitutes "stock" of the debtor corporation for federal income tax purposes, or whether it should be recharacterized as debt.
Terms of the Series A Preferred Stock. The Series A Preferred Stock has the following material terms (based on the draft Certificate of Designations circulated on August 1, 2023):
• Aggregate liquidation preference: $35.0 million
• Dividend rate: 10.00% per annum, payable in kind (PIK), cumulative
• Seniority: Senior to common stock in right of payment of dividends and distribution of assets upon liquidation; junior to all funded debt
• Conversion: Convertible into common stock at the option of the holder, at a conversion price to be determined based on the equity value at closing
• Redemption: Subject to optional redemption by the Company after the third anniversary of issuance, at a premium; no mandatory redemption
• Voting rights: Entitled to vote on an as-converted basis with common stockholders on all matters submitted to a vote of stockholders, plus class voting rights on certain protective provisions
Debt-vs-Equity Analysis. The characterization of an instrument as debt or equity for federal income tax purposes is determined based on all the facts and circumstances, taking into account range factors identified by the courts. See, e.g., Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968); Dixie Dairies Corp. v. Commissioner, 74 T.C. 476 (1980); Notice 94-47, 1994-1 C.B. 357. The principal factors include:
(i) Fixed maturity or redemption date. Debt instruments typically have a fixed maturity date at which the principal must be repaid. The Series A Preferred Stock does not have a mandatory redemption date; while it is subject to optional redemption by the Company after the third anniversary, the Company is under no obligation to redeem. This factor favors equity characterization.
(ii) Obligation to pay a fixed return. Debt instruments carry an unconditional obligation to pay interest. The Series A Preferred Stock carries a cumulative PIK dividend at 10.00%, which resembles an interest payment in certain respects. However, dividends on preferred stock — even cumulative dividends — are generally treated as discretionary payments that require board declaration, and the failure to pay dividends does not give rise to a default or an acceleration right (unlike the failure to pay interest on a debt instrument). The 10.00% rate is above market for preferred equity of an investment-grade issuer but is consistent with the rates observed in distressed restructuring transactions. This factor is mixed but, on balance, favors equity characterization.
(iii) Subordination. Debt instruments are typically senior to equity in right of payment. The Series A Preferred Stock is junior to all funded debt obligations of the Company (including the Super-Priority Term Loan, the TLB, and the Revolver), and is senior only to the common stock. This deep subordination is consistent with an equity characterization.
(iv) Participation in upside. The conversion feature of the Series A Preferred Stock allows the holders to participate in the appreciation of the Company's equity value, a characteristic that is quintessentially associated with equity instruments. Pure debt instruments do not provide upside participation.
(v) Intent of the parties. The parties have denominated the instrument as "Series A Preferred Stock," have structured it as an equity security under Delaware corporate law, and will treat it as equity for purposes of the Company's financial statements. The Exchange is structured as a debt-for-equity exchange, not as a debt-for-debt exchange.
(vi) Thin capitalization / proportionality. The issuance of the Series A Preferred Stock does not create a thin capitalization issue, as the Company will have substantial funded debt ($375.0 million post-restructuring) that is clearly characterized as debt. The preferred stock is not issued in proportion to the mezzanine holders' prior debt holdings (the exchange ratios reflect a negotiated outcome), which is also consistent with an equity characterization.
Preliminary Conclusion. Based on the foregoing analysis, we conclude that the Series A Preferred Stock should be treated as equity for federal income tax purposes. The instrument is denominated as preferred stock, is subordinate to all funded debt, does not have a mandatory redemption date, provides for cumulative (but discretionary) PIK dividends rather than contractual interest, and includes equity participation through its conversion feature. While the 10.00% PIK dividend rate and the fixed liquidation preference introduce certain debt-like features, we believe that the weight of the factors favors equity characterization.
Consequences of Recharacterization as Debt. If the IRS were to recharacterize the Series A Preferred Stock as debt for federal income tax purposes, the consequences to Stonefield could differ materially. In particular:
• The Exchange would be treated, in part, as a debt-for-debt exchange. The portion of the Mezzanine Notes satisfied by the issuance of the Series A Preferred Stock (if characterized as debt) would be analyzed under the debt-for-debt exchange rules, including the OID rules of Sections 1271–1275 and the significant modification rules of Treasury Regulation § 1.1001-3.
• COD income could still arise to the extent the issue price of the "new debt" (the recharacterized Series A Preferred Stock) is less than the adjusted issue price of the "old debt" (the corresponding portion of the Mezzanine Notes). However, the issue price of the new debt would be determined under the OID rules (which may yield a different result than the FMV-based approach under Section 108(e)(8)).
• The Company would have new debt obligations with OID to the extent the stated redemption price at maturity of the recharacterized instrument exceeds its issue price. The OID would be amortized as interest expense over the term of the instrument under the constant-yield method.
We believe the risk of recharacterization is low, given the factors described above, but we recommend that the Company retain a memorandum documenting the equity characterization of the Series A Preferred Stock to support its position in the event of an IRS inquiry.
C. Valuation of Equity Consideration
The determination of COD income under Section 108(e)(8) requires the FMV of the equity consideration to be established as of the date of the Exchange. For purposes of this memorandum, the relevant date is the closing date of the Exchange (currently anticipated to be December 19, 2023), although the Exchange Agreement may provide that the Exchange is effective as of the execution date (December 8, 2023) or some other date. The Company's tax advisors should confirm the date on which the Exchange is treated as occurring for federal income tax purposes, as this determination will affect the valuation date.
Several factors are relevant to the valuation of the equity consideration:
• Projected EBITDA. Management's projected FY 2024E Adjusted EBITDA of $52.0 million represents a significant recovery from the FY 2023E trough of $38.5 million and is the primary driver of the Company's post-restructuring enterprise value.
• Post-restructuring debt. The Company's post-restructuring total funded debt will be approximately $375.0 million (comprising the Super-Priority Term Loan of $55.0 million, the amended TLB of $285.0 million, and the Revolver of $35.0 million, assuming partial paydown). Post-restructuring leverage is projected at approximately 7.2x FY 2024E Adjusted EBITDA.
• Comparable company and transaction multiples. The appropriate EV/EBITDA multiple for a freight brokerage and logistics company of Stonefield's size and profile should be derived from comparable public companies and recent M&A transactions in the sector. Based on Hargrove's preliminary analysis, the applicable multiple range is approximately 3.8x to 5.0x.
• Illiquidity discount. Because Stonefield is a private company, and the equity securities issued in the Exchange will not be publicly traded, an illiquidity discount (typically in the range of 15% to 30% for private company equity in this context) may be appropriate.
• Minority versus control. The 47.5% common equity interest issued to the mezzanine holders does not represent a controlling interest (Ridgeline retains 47.5%, with the remaining 5.0% allocated to the MIP). However, the mezzanine holders will have certain governance rights (including board representation and consent rights on specified corporate actions) that may enhance the value of their interest relative to a pure minority stake.
We recommend that the Company engage Hargrove Advisory Group LLC or an independent appraiser to prepare a valuation report as of the closing date that is suitable for federal income tax reporting purposes and that addresses the FMV of both the Series A Preferred Stock and the common equity component of the Exchange Consideration.
VI. Treatment of Non-Consenting Mezzanine Holders ($5.5 Million)
Non-consenting holders holding an aggregate of $5.5 million in principal amount of the Mezzanine Notes (representing approximately 3.9% of the outstanding principal amount) are not participating in the Exchange. Their notes will remain outstanding following the closing of the Exchange. However, as contemplated by the RSA and the Exchange Agreement, the consenting holders (holding more than the requisite majority under the Mezzanine Indenture) will execute exit consent amendments effectuated via a Supplemental Indenture to be dated December 8, 2023 (the "Exit Consent Amendments"). The Exit Consent Amendments will strip substantially all of the restrictive covenants, events of default, and reporting obligations from the Mezzanine Notes, leaving the non-consenting holders with notes that retain their principal, maturity, and interest rate terms but lack the customary bondholder protections.
Significant Modification Analysis. The tax consequences to Stonefield of the Exit Consent Amendments depend on whether the amendments constitute a "significant modification" of the retained Mezzanine Notes under Treasury Regulation § 1.1001-3. If a significant modification has occurred, the non-consenting holders' notes would be treated as having been exchanged for new (modified) notes in a deemed exchange, which could have COD income consequences for Stonefield if the issue price of the modified notes (determined under the OID rules) is less than the adjusted issue price of the old notes.
Treasury Regulation § 1.1001-3 defines a "modification" of a debt instrument as any alteration of a legal right or obligation of the issuer or a holder of the instrument, whether the alteration is evidenced by an express agreement, a course of performance, or otherwise. Treas. Reg. § 1.1001-3(c)(1). However, not all modifications are "significant" modifications. The regulations set forth specific tests for different types of changes:
(i) Change in yield. A modification that changes the yield of the debt instrument is a significant modification if the yield of the modified instrument differs from the yield of the unmodified instrument by more than the greater of (a) 25 basis points or (b) five percent of the annual yield of the unmodified instrument. Treas. Reg. § 1.1001-3(e)(2)(ii). In the case of the Exit Consent Amendments, there is no change in the stated interest rate, principal amount, or maturity date of the non-consenting holders' notes. Accordingly, the yield-change test should not be triggered.
(ii) Change in timing of payments. A change in the timing of payments under the debt instrument is tested under a present value analysis. Treas. Reg. § 1.1001-3(e)(3). The Exit Consent Amendments do not alter the payment schedule, so this test should not be triggered.
(iii) Change in obligor or security. A change in the obligor or a release of collateral may constitute a significant modification under certain circumstances. Treas. Reg. § 1.1001-3(e)(4). The Exit Consent Amendments do not change the obligor (Stonefield remains the issuer) and do not release the second lien collateral. However, the stripping of restrictive covenants and events of default may arguably affect the credit quality of the instrument, which could implicat