CALDERWOOD & HARKNESS LLP Attorneys at Law
599 Lexington Avenue New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
June 28, 2023
TO: Board of Directors, Stonefield Logistics Group Inc.
Marcus Delano, Chief Executive Officer Priya Sundaram, Chief Financial Officer Howard Kessler, General Counsel Julian Voight, Managing Director, Ridgeline Capital Management III LLC Serena Chu, Principal, Ridgeline Capital Management III LLC
FROM: Nathaniel Bower, Partner, Calderwood & Harkness LLP
RE: Summary of Key Terms of Proposed Restructuring Support Agreement — Stonefield Logistics Group Inc.
MATTER NO.: 1012-00002
Right-click to update Table of Contents
I. Executive Summary
Calderwood & Harkness LLP has been engaged as restructuring counsel to Stonefield Logistics Group Inc. ("Stonefield" or the "Company"), a Delaware corporation headquartered at 4200 Commerce Street, Suite 1500, Dallas, Texas 75201, since April 3, 2023. This memorandum is furnished to the Board of Directors (the "Board") in connection with its scheduled meeting on June 29, 2023, and is intended to provide a comprehensive summary of the key terms of the proposed Restructuring Support Agreement (the "RSA") that the Company, its private equity sponsor Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or the "Sponsor"), the first lien lender group, and the ad hoc group of mezzanine noteholders (the "Ad Hoc Group") are expected to execute on or about June 30, 2023.
The RSA is the product of extensive, arm's-length negotiations conducted over a period of approximately ten weeks, during which Calderwood & Harkness, the Company's financial advisor Hargrove Advisory Group LLC ("Hargrove"), first lien lender counsel Westlake Harden & Cole LLP ("Westlake"), mezzanine ad hoc group counsel Thornbury McCaffrey LLP ("Thornbury"), and mezzanine financial advisor Meridian Veltrian Partners LLC ("Meridian") exchanged multiple iterations of term sheets, financial projections, and structural proposals. The negotiations have yielded a comprehensive framework for a consensual, out-of-court restructuring of the Company's approximately $475.1 million in total funded debt.
The RSA contemplates three integrated restructuring transactions:
(1) An amend-and-extend of the existing first lien term loan B (the "TLB") and revolving credit facility (the "Revolver"), extending maturities to December 2028 and December 2027, respectively, while introducing financial maintenance covenants and repricing the facilities to reflect current market conditions;
(2) A $55.0 million new-money super-priority term loan facility (the "Super-Priority Facility"), to be provided by Belvedere Credit Opportunities Fund LP ("Belvedere") as lead arranger and initial lender, comprising $45.0 million funded at closing and a $10.0 million delayed-draw term loan, structured as a first-out obligation with a super-priority lien on substantially all assets of the Company and its subsidiaries; and
(3) An equitization of $140.0 million in mezzanine notes (the "Mezzanine Notes"), together with the waiver of $8.1 million in accrued pay-in-kind ("PIK") interest, in exchange for $35.0 million in aggregate liquidation preference of newly issued Series A Preferred Stock and 47.5% of the pro forma common equity of Stonefield.
Upon consummation of all three transactions, the restructuring will reduce total funded debt by approximately $100.1 million — from $475.1 million to $375.0 million — and reduce total leverage from approximately 11.5x LTM Adjusted EBITDA to a projected 7.2x based on FY 2024E Adjusted EBITDA of $52.0 million. Critically, all of these transactions are designed to be implemented without the commencement of a bankruptcy proceeding under Title 11 of the United States Code, thereby avoiding the significant costs, operational disruption, vendor and customer uncertainty, and reputational harm typically associated with a Chapter 11 filing.
The RSA includes a comprehensive milestone schedule requiring execution of definitive documents by December 15, 2023, and closing of all restructuring transactions by December 31, 2023 (the "Long-Stop Date"). The RSA also contains customary termination provisions, including a fiduciary out that preserves the Board's ability to exercise its duties under Delaware law.
Recommendation. Based on the analysis set forth in this memorandum, and in consultation with Hargrove Advisory Group LLC, Calderwood & Harkness LLP recommends that the Board consider and approve the RSA at its meeting scheduled for June 29, 2023, and authorize the Company's officers to execute the RSA and negotiate and execute all definitive documentation contemplated thereunder.
II. Background and Context of Financial Distress
A. Company Overview
Stonefield Logistics Group Inc. is a Delaware corporation engaged in the business of freight brokerage, last-mile delivery, and warehousing services across the United States. The Company operates approximately 26 terminals in 14 states and employs approximately 3,800 full-time and part-time employees. Stonefield's operations are conducted through four principal wholly owned subsidiaries: SLG Holdings Inc. ("SLG Holdings"), SLG Freight Inc. ("SLG Freight"), SLG Last Mile Inc. ("SLG Last Mile"), and SLG Warehousing Inc. ("SLG Warehousing"). The Company serves a diversified base of shippers, retailers, and e-commerce companies, with its core service offerings organized around three business segments: (i) asset-light freight brokerage and carrier management, (ii) last-mile delivery and white-glove installation services, and (iii) dedicated and shared-use warehousing and fulfillment operations.
Stonefield was acquired by Ridgeline Capital Partners Fund III, L.P. — a Delaware limited partnership whose general partner is Ridgeline Capital Management III LLC — in a leveraged buyout transaction that closed on December 15, 2017. Ridgeline invested $210.0 million in equity as part of the acquisition, which was funded through a combination of committed equity capital from Ridgeline Fund III and co-investment vehicles. The acquisition was financed with $310.0 million in first lien term loan B debt, a $50.0 million revolving credit facility, and $140.0 million in second lien mezzanine notes, in addition to the Sponsor's equity contribution. At the time of the acquisition, Stonefield had trailing twelve-month Adjusted EBITDA of approximately $72.5 million, implying an acquisition multiple of approximately 9.7x enterprise value to EBITDA.
B. Financial Deterioration
Since the leveraged buyout, the Company's financial performance has materially deteriorated, driven by a confluence of macroeconomic, industry-specific, and company-specific factors. The U.S. freight market entered a prolonged cyclical downturn beginning in the second half of 2022, characterized by excess carrier capacity, declining freight volumes, downward pressure on spot and contract rates, and inventory destocking by major shippers. In addition, the Company experienced the loss of several significant customer contracts in its freight brokerage segment during FY 2022 and early FY 2023, including two contracts that together represented approximately $45.0 million in annual revenue.
The Company's audited financial statements for fiscal year 2022 were prepared by Whitfield & Pryce LLP, with engagement partner Todd Ashburn. Those financial statements reflect the following key metrics:
• FY 2022 Revenue: $612.3 million (audited)
• FY 2023E Projected Revenue: $545.0 million — representing an approximate 11% year-over-year decline driven by the freight recession, excess carrier capacity, and the aforementioned customer contract losses
• FY 2022 Adjusted EBITDA: $58.7 million
• LTM Q1 2023 Adjusted EBITDA: $41.2 million — reflecting sharp margin compression as revenue declined faster than the Company was able to reduce its cost base
• FY 2023E Projected EBITDA: $38.5 million — representing a further decline reflecting the full annualized impact of contract losses and continued freight market softness
The deterioration in EBITDA has been particularly acute due to the operating leverage inherent in the Company's business model. While the freight brokerage segment is largely asset-light, the last-mile delivery and warehousing segments carry significant fixed and semi-variable costs, including lease obligations, labor commitments, and equipment costs, which cannot be reduced commensurately with revenue declines in the near term. The Company has initiated cost reduction programs, including headcount reductions, terminal consolidations, and renegotiation of certain carrier and vendor contracts, but these measures have not been sufficient to offset the revenue declines experienced to date.
During Q1 2023, the Company experienced a monthly cash burn rate of approximately $2.5 million, as total interest expense and capital expenditures exceeded operating cash flow. This cash burn rate, if sustained, would exhaust the Company's available liquidity within approximately six months absent restructuring or additional capital.
C. Near-Term Maturity Wall
The Company faces a critical near-term maturity wall that, absent restructuring, would result in a liquidity crisis and potential event of default:
• First Lien Debt: The first lien credit facilities — comprising the TLB with $285.0 million outstanding and the Revolver with $42.0 million drawn — mature on December 15, 2024. The Company does not have the ability to refinance these obligations on a conventional basis given current leverage levels, market conditions, and credit metrics.
• Mezzanine Notes: The $140.0 million in Mezzanine Notes (plus $8.1 million in accrued PIK interest) mature on June 15, 2025. Given the subordinated position of this debt and the Company's current credit profile, there is no realistic prospect of refinancing the Mezzanine Notes at or prior to maturity.
Based on the Company's financial projections prepared by management and reviewed by Hargrove, without a restructuring, the Company would be projected to exhaust its available liquidity by the third quarter of 2024, well in advance of the December 2024 first lien maturity date. The inability to refinance or restructure the first lien debt would constitute an event of default, triggering cross-default provisions in the Mezzanine Indenture and potentially accelerating all outstanding indebtedness.
D. Current Liquidity
As of March 31, 2023, the Company's total available liquidity was as follows:
• Unrestricted Cash: $11.3 million
• Revolver Availability: $4.5 million (calculated as the $50.0 million commitment less $42.0 million drawn less $3.5 million in outstanding letters of credit)
• Total Liquidity: $15.8 million
This liquidity position, while adequate to fund near-term operations, is insufficient to provide the Company with a meaningful runway to address its capital structure challenges without the proposed restructuring. At the current monthly cash burn rate of approximately $2.5 million, the Company's unrestricted cash would decline to approximately $4.3 million by the end of Q3 2023, leaving effectively no cushion against unforeseen operating disruptions or seasonal working capital requirements.
III. Pre-Restructuring Capital Structure
The Company's current capital structure, as of March 31, 2023 (and as expected to remain substantially unchanged at the time of RSA execution), is summarized in the table below:
The first lien credit facilities are governed by the First Lien Credit Agreement, dated as of December 15, 2017 (as amended from time to time, the "First Lien Credit Agreement"), among Stonefield Logistics Group Inc., as borrower, the lenders party thereto from time to time, and Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent. The first lien credit facilities are secured by a first-priority lien on substantially all assets of the Company and the Guarantors (SLG Holdings, SLG Freight, SLG Last Mile, and SLG Warehousing). The First Lien Credit Agreement is a covenant-lite facility with no financial maintenance covenants, subject only to customary affirmative and negative covenants and events of default.
The Mezzanine Notes are governed by the Indenture, dated as of December 15, 2017 (as supplemented from time to time, the "Mezzanine Indenture"), among Stonefield Logistics Group Inc., as issuer, the guarantors party thereto, and Continental Fiduciary Trust Company, as Trustee and Second Lien Collateral Agent. The Mezzanine Notes bear CUSIP number 861537 AA 2 and are designated as 11.50% Senior Secured Second Lien Notes due June 15, 2025. The Mezzanine Notes are secured by a second-priority lien on substantially all assets of the Company and the Guarantors, junior to the first lien credit facilities. Interest on the Mezzanine Notes is payable at a rate of 11.50% per annum, with a cash/PIK toggle feature that has allowed the Company to elect PIK interest in certain periods, resulting in $8.1 million of accrued PIK interest as of the date of this memorandum.
The original TLB principal at closing was $310.0 million; the Company has amortized $25.0 million in aggregate principal since the closing date through scheduled quarterly amortization payments, reducing the outstanding principal to $285.0 million.
Key leverage metrics based on the current capital structure and LTM Q1 2023 Adjusted EBITDA of $41.2 million are as follows:
• Pre-restructuring Total Leverage: 11.5x ($475.1M ÷ $41.2M)
• Pre-restructuring First Lien Leverage: 7.9x ($327.0M ÷ $41.2M)
At these leverage levels, the Company's capital structure is clearly unsustainable. Ridgeline's original equity investment of $210.0 million is significantly impaired, as total enterprise value based on current EBITDA and prevailing market multiples for comparable logistics companies (in the range of 6.0x–8.0x EBITDA) implies an enterprise value of approximately $247.0–$330.0 million — insufficient to cover total funded debt of $475.1 million and well below the aggregate of debt and equity contributed at closing.
IV. RSA Parties and Consent Levels
A. Company Side
The RSA will be executed by the following parties on the Company/Sponsor side:
• Stonefield Logistics Group Inc. — the Company and issuer/borrower under the first lien credit facilities and the Mezzanine Indenture.
• Ridgeline Capital Partners Fund III, L.P. — the Sponsor, and indirect holder of 100% of the common equity of the Company (through intermediate holding companies). Ridgeline Capital Management III LLC serves as the general partner of Ridgeline Capital Partners Fund III, L.P. The Sponsor's execution of the RSA is a condition to the consenting creditors' obligations, as the Sponsor is required to contribute $12.5 million in new cash equity and to consent to the dilution of its equity position from 100% to 47.5%.
B. First Lien Lender Group
The first lien lender group comprises the Administrative Agent, the Collateral Agent, the TLB lenders, and the Revolver lenders, as follows:
Administrative Agent and Collateral Agent: Pinnacle National Bank, N.A. (Daniel Wexford, Managing Director, Loan Restructuring Group; 200 Liberty Street, New York, NY 10281).
First Lien Lenders' Counsel: Westlake Harden & Cole LLP (Ramona Quelibo, Lead Partner; Gregory Noll, Associate; 787 Seventh Avenue, 34th Floor, New York, NY 10019).
Consenting TLB Lenders: Holders of approximately $228.5 million of the $285.0 million in outstanding TLB principal have agreed to execute the RSA, representing approximately 80.2% of outstanding TLB principal. This exceeds the "Required Lenders" threshold of greater than 50% of outstanding principal as defined in the First Lien Credit Agreement, which is the applicable consent threshold for amendments to the TLB. The key TLB syndicate members and their respective holdings are as follows:
Consenting Revolver Lenders: All three Revolver lenders have agreed to execute the RSA, representing unanimous consent:
The unanimous consent of the Revolver lenders is significant because certain provisions of the proposed amendment — including the reduction in total Revolver commitments from $50.0 million to $35.0 million — require the consent of each affected lender whose commitment is being reduced.
C. Mezzanine Ad Hoc Group
The Ad Hoc Group of mezzanine noteholders has been organized since early 2023 and has been represented in the restructuring negotiations by the following advisors:
Ad Hoc Group Counsel: Thornbury McCaffrey LLP (Alan Driscoll, Lead Partner; Monica Firth, Associate; 375 Park Avenue, 25th Floor, New York, NY 10152).
Ad Hoc Group Financial Advisor: Meridian Veltrian Partners LLC (660 Fifth Avenue, 18th Floor, New York, NY 10103).
The Ad Hoc Group members who have agreed to execute the RSA, together with their respective holdings of Mezzanine Notes, are as follows:
A cooperation agreement among the Ad Hoc Group members was executed on March 10, 2023, pursuant to which each member agreed to coordinate its restructuring strategy and refrain from trading in the Company's debt securities during the pendency of restructuring negotiations, subject to customary exceptions.
The RSA includes a joinder period, commencing July 3, 2023 and closing July 21, 2023, during which additional mezzanine noteholders not currently party to the RSA may execute joinder agreements and become "Consenting Mezzanine Holders" thereunder. Based on preliminary indications of interest received by Thornbury McCaffrey, the Company expects that an additional approximately $12.5 million in mezzanine principal will join during the joinder period, bringing total consenting mezzanine holdings to approximately $134.5 million, or 96.1% of outstanding Mezzanine Note principal. This level of consent would comfortably exceed the greater than 66⅔% threshold required to effect the exchange and the exit consent amendments under the Mezzanine Indenture.
D. New Money Provider
The Super-Priority Facility will be provided by Belvedere Credit Opportunities Fund LP (Christopher Hartigan, Managing Partner; 450 Lexington Avenue, 30th Floor, New York, NY 10017) as lead arranger and initial lender. Belvedere is also a TLB lender with $32.0 million in TLB holdings, and its dual role as both a first lien lender and the new money provider has been carefully considered in structuring the intercreditor arrangements discussed in Section V.F below.
Belvedere's legal counsel for the Super-Priority Facility is Thornbury McCaffrey LLP — the same firm that represents the mezzanine Ad Hoc Group. In light of this dual representation, Thornbury McCaffrey has implemented an ethical wall within the firm, with separate deal teams and information barriers, consistent with applicable rules of professional conduct. The Company and the Ad Hoc Group have each consented in writing to Thornbury McCaffrey's dual representation.
V. Summary of Restructuring Transactions Under the RSA
The RSA contemplates a series of integrated restructuring transactions, each of which is a condition to the closing of the others (unless waived by the requisite parties). The key terms of each transaction are summarized below.
A. Amend-and-Extend of First Lien Term Loan B
The TLB will be amended and extended pursuant to an Amended and Restated First Lien Credit Agreement, the key terms of which are summarized in the following table:
The extension of the TLB maturity from December 15, 2024 to December 19, 2028 represents an approximately four-year extension, providing the Company with substantially greater runway to execute on its operational improvement plan and benefit from a potential recovery in the freight market. The repricing of the TLB by 75 basis points — from SOFR + 425 basis points to SOFR + 500 basis points — reflects the additional credit risk associated with the Company's weakened financial position and is consistent with the pricing demanded by the lender group as a condition to extending maturity.
The introduction of financial maintenance covenants — a Total Net Leverage ratio and a Minimum Liquidity test — represents a significant change from the original covenant-lite structure and was a key demand of the first lien lender group. The Total Net Leverage covenant will be tested quarterly beginning with Q4 2025, initially set at ≤ 6.50x and stepping down over time to ≤ 5.75x by Q4 2027. The step-down schedule was negotiated to provide the Company with sufficient headroom during the initial post-restructuring period while ensuring a glidepath toward more sustainable leverage. The Minimum Liquidity covenant of $20.0 million will be tested at all times (a "springing" or continuous covenant), providing the lender group with an early warning mechanism if the Company's cash position deteriorates.
An amendment consent fee of 50 basis points of outstanding TLB principal will be payable to consenting TLB lenders upon closing, calculated as $285.0 million × 0.50% = $1,425,000.
B. Amend-and-Extend of Revolving Credit Facility
The Revolver will be amended concurrently with the TLB, with the following key changes:
The reduction in total Revolver commitments from $50.0 million to $35.0 million reflects the Revolver lenders' desire to reduce their aggregate exposure, partially offset by the introduction of the Super-Priority Facility, which will provide the Company with $55.0 million in new liquidity. The net effect on available liquidity is positive: total committed credit facilities will increase from $50.0 million (Revolver alone, pre-restructuring) to $90.0 million ($35.0 million Revolver + $55.0 million Super-Priority Facility, post-restructuring), a significant improvement.
The Revolver maturity has been extended to December 19, 2027, approximately three years from its current maturity date. However, the maturity is subject to a springing maturity provision: if the TLB is not refinanced at or prior to a date that is 91 days before the TLB maturity of December 19, 2028 — i.e., September 19, 2028 — the Revolver maturity will automatically spring to that date (91 days prior to TLB maturity). This provision is a standard structural protection for revolving lenders, ensuring they are not left with outstanding exposure when the TLB matures.
An amendment consent fee of 25 basis points of total Revolver commitments will be payable to consenting Revolver lenders, calculated as $35.0 million × 0.25% = $87,500.
C. New Money Super-Priority Term Loan
The Super-Priority Facility is a critical component of the restructuring, providing the Company with new liquidity to fund operations, transaction costs, and a cash reserve during the post-restructuring period. The key terms are as follows:
• Facility Size: $55.0 million total, comprising $45.0 million funded at closing and a $10.0 million delayed-draw term loan ("DDTL") available during the first 12 months following closing, subject to customary draw conditions.
• Lead Arranger and Initial Lender: Belvedere Credit Opportunities Fund LP.
• Interest Rate: SOFR + 700 basis points, with a 100 basis point SOFR floor. The all-in yield reflects the super-priority position and the credit risk of the Company's current financial profile. At current SOFR levels (approximately 5.10% as of the date of this memorandum), the effective interest rate would be approximately 12.10%.
• Original Issue discount ("OID"): 2.00%, applied to the full $55.0 million commitment ($55.0 million × 2.00% = $1.1 million). Net funded proceeds at closing will therefore be $43.9 million ($45.0 million funded minus $1.1 million OID).
• Maturity: December 19, 2027 (four-year tenor from the anticipated closing date).
• Commitment Fee: 1.00% per annum on the undrawn portion of the DDTL ($10.0 million, declining as drawn).
• Mandatory Prepayment: 75% excess cash flow sweep, tested annually, with proceeds applied to mandatory prepayment of the Super-Priority Facility, subject to a $20.0 million minimum liquidity threshold (i.e., the excess cash flow sweep does not apply to the extent it would reduce the Company's liquidity below $20.0 million).
• Call Protection: Non-call premium on voluntary prepayments and certain mandatory prepayments, declining over the four-year term as follows: Year 1 — 103% of par; Year 2 — 102% of par; Year 3 — 101% of par; Year 4 — par (no premium).
• Priority: Super-priority first-out lien on substantially all assets of the Company and the Guarantors, senior in right of payment and priority to all existing first lien and second lien obligations. The Super-Priority Facility will benefit from the "first-out" designation under the Amended and Restated Intercreditor Agreement described in Section V.F below.
• Change of Control: The Super-Priority Facility will include a change of control provision requiring mandatory prepayment at 101% of par upon any person or group (other than Ridgeline, the mezzanine equitization recipients, and their respective permitted transferees) acquiring more than 50% of the voting equity of the Company.
• Other Terms: The Super-Priority Facility will include customary representations and warranties, affirmative and negative covenants (including limitations on indebtedness, liens, asset sales, restricted payments, and investments), events of default, and reporting requirements. Financial covenants will include the same Total Net Leverage and Minimum Liquidity tests applicable to the amended TLB, which will be tested on a consolidated basis.
D. Equitization of Mezzanine Debt
The equitization of the Mezzanine Notes is the centerpiece of the deleveraging component of the restructuring. The key terms are as follows:
• Mezzanine Principal Exchanged: $140.0 million (100% of outstanding principal).
• Accrued PIK Interest Waived: $8.1 million. The waiver of accrued PIK interest was a significant concession negotiated by the Company and was agreed to by the Ad Hoc Group as part of the overall settlement consideration.
• Consideration to Exchanging Mezzanine Holders: In exchange for the cancellation of their Mezzanine Notes and waiver of accrued PIK interest, consenting mezzanine holders will receive:
(a) Series A Preferred Equity: $35.0 million in aggregate liquidation preference of newly issued Series A Preferred Stock of the Company, bearing a 10.00% PIK dividend rate, senior in right of payment to the common stock upon any liquidation, dissolution, or winding up of the Company; and
(b) Common Equity: 47.5% of the pro forma common equity of Stonefield, to be allocated among the exchanging mezzanine holders on a pro rata basis in proportion to the principal amount of Mezzanine Notes exchanged by each such holder.
• Implied Recovery for Mezzanine Holders: Based on the financial analysis prepared by Hargrove Advisory Group LLC (Elena Voss, Managing Director), the implied recovery for the mezzanine holders is estimated at approximately 40–55 cents on the dollar, subject to equity valuation assumptions. This range reflects the combined value of the Series A Preferred Equity and the common equity, with the equity component valued based on a range of enterprise value multiples applied to FY 2024E Adjusted EBITDA of $52.0 million. The cash-equivalent recovery from the Series A Preferred Equity alone (ignoring the common equity component) is approximately 23.6%, calculated as $35.0 million ÷ $148.1 million (principal plus accrued PIK).
• Non-Consenting Mezzanine Holders: To the extent any holders of Mezzanine Notes do not execute the RSA or a joinder thereto (the "Non-Consenting Holders"), such holders will be offered substantially identical treatment through the consent solicitation and exchange offer process. Based on current projections, the expected Non-Consenting Holders would hold approximately $5.5 million in principal, assuming $134.5 million in total consent is obtained during and after the joinder period. Non-Consenting Holders who do not participate in the exchange will retain their Mezzanine Notes, but such notes will be subject to exit consent amendments (as described below) that will strip substantially all restrictive covenants, events of default, and reporting obligations from the Mezzanine Indenture, rendering the remaining notes effectively unprotected. This mechanism is designed to incentivize participation in the exchange and eliminate the ability of Non-Consenting Holders to free-ride on the restructured capital structure.
• Implementation: The equitization will be implemented pursuant to (i) an Exchange Agreement between the Company and each exchanging mezzanine holder, pursuant to which the mezzanine holders will tender their notes in exchange for the Series A Preferred Equity and common equity, and (ii) a Supplemental Indenture between the Company and Continental Fiduciary Trust Company, as Trustee, implementing the exit consent amendments. The consent solicitation is to be launched to all holders of the Mezzanine Notes, with an early consent deadline and a final consent deadline to be determined (subject to the RSA milestone of launching the consent solicitation no later than October 15, 2023). The required consent threshold under the Mezzanine Indenture for the exit consent amendments is greater than 66⅔% in aggregate principal amount of outstanding notes.
E. Sponsor Equity Contribution
As a condition to the consenting creditors' obligations under the RSA, Ridgeline Capital Partners Fund III, L.P. has agreed to contribute $12.5 million in new cash equity to the Company at closing. This contribution will be used to fund a portion of transaction costs and to provide the Company with an additional liquidity cushion at closing. The Sponsor contribution represents a significant concession by Ridgeline, given that its original $210.0 million equity investment is substantially impaired and Ridgeline's pro forma equity ownership will be diluted from 100% to 47.5%.
The pro forma common equity ownership of the Company upon consummation of the restructuring transactions will be as follows:
The MIP will be established at closing, reserving 5.0% of pro forma common equity for grants to eligible members of the Company's management team, subject to vesting and performance conditions to be determined. The specific terms of the MIP, including the allocation among individual participants, vesting schedules, and performance metrics, will be negotiated among the Sponsor, the Ad Hoc Group, and the Company's management as part of the definitive documentation process.
The Board composition of Stonefield will be restructured at closing to reflect the new equity ownership. The post-restructuring Board will consist of seven directors:
• Three directors designated by Ridgeline Capital Partners Fund III, L.P.
• Three directors designated by the mezzanine equitization recipients (or a representative thereof)
• One independent director, to be mutually agreed upon by Ridgeline and the mezzanine equitization recipients
The governance arrangements, including Board designation rights, consent rights, and transfer restrictions, will be set forth in an Amended and Restated Stockholders' Agreement to be executed at closing.
F. Intercreditor Arrangements
The restructuring will require the negotiation and execution of an Amended and Restated Intercreditor Agreement (the "Intercreditor Agreement") among Belvedere Credit Opportunities Fund LP, as Super-Priority Agent, Pinnacle National Bank, N.A., as First Lien Agent, and the Company. The Intercreditor Agreement will establish the super-priority / first lien "first-out / second-out" structure, the key features of which include:
• Lien Priority: The Super-Priority Facility will have a first-out lien on all collateral, senior in priority to the liens securing the amended TLB and Revolver. The TLB and Revolver will have a second-out lien on the same collateral. In any enforcement action, liquidation, or distribution of proceeds, the Super-Priority Facility will be entitled to receive payment in full (including principal, accrued interest, fees, and expenses) before any distributions are made to the TLB and Revolver lenders.
• Standstill Periods: The Intercreditor Agreement will include standstill provisions restricting the ability of the second-out lenders to exercise remedies against the collateral during a specified period (expected to be 180 days) following the occurrence of an event of default, during which the Super-Priority Agent may pursue enforcement actions.
• Purchase Option: The second-out lenders (or a designated purchaser) will have the option to purchase the Super-Priority Facility obligations at par (plus accrued interest and fees) in order to prevent or discontinue enforcement actions by the Super-Priority Agent.
• DIP Financing Provisions: The Intercreditor Agreement will include provisions governing the consent (or deemed consent) of the second-out lenders to debtor-in-possession ("DIP") financing provided by or on behalf of the Super-Priority Facility lenders in the event of a bankruptcy filing by the Company, subject to customary protections and limitations.
• Adequate Protection: The Intercreditor Agreement will address the relative rights of the first-out and second-out lenders to adequate protection in any bankruptcy proceeding.
The negotiation of the Intercreditor Agreement is expected to be one of the more complex workstreams in the definitive documentation process, and Calderwood & Harkness will work closely with Westlake Harden & Cole (first lien counsel) and Thornbury McCaffrey (Belvedere counsel) to resolve outstanding issues.
VI. Post-Restructuring Capital Structure
Upon consummation of all restructuring transactions, the Company's capital structure will be as follows:
Debt
The total debt reduction achieved through the restructuring is $100.1 million, calculated as $475.1 million (pre-restructuring total funded debt) minus $375.0 million (post-restructuring total funded debt). This reduction is entirely attributable to the equitization of the Mezzanine Notes ($140.0 million principal + $8.1 million accrued PIK = $148.1 million total claim), partially offset by the incurrence of $55.0 million in new Super-Priority Facility debt and the reduction in Revolver commitments from $50.0 million to $35.0 million.
Key post-restructuring leverage metrics, based on projected FY 2024E Adjusted EBITDA of $52.0 million, are as follows:
• Post-Restructuring Total Leverage: $375.0M ÷ $52.0M = 7.2x (down from 11.5x)
• Post-Restructuring First Lien Leverage: $375.0M ÷ $52.0M = 7.2x (all post-restructuring debt is now first lien or super-priority; there is no subordinated debt remaining in the capital structure)
While post-restructuring leverage of 7.2x remains elevated by historical standards, it represents a significant improvement from the current 11.5x level and is projected to decline further as the Company benefits from the expected recovery in the freight market and the realization of cost savings from its operational improvement initiatives. Based on the Company's financial projections, which have been reviewed and sensitized by Hargrove, total leverage is projected to decline to approximately 5.5x by FY 2026E, assuming Adjusted EBITDA recovery to approximately $68.0 million.
Equity
The Series A Preferred Stock will sit structurally senior to the common equity in the capital structure, with a $35.0 million aggregate liquidation preference and a 10.00% PIK dividend rate. The PIK dividend rate will cause the liquidation preference to accrete over time. The specific terms of the Series A Preferred Stock — including optional and mandatory redemption provisions, conversion features (if any), voting rights, and anti-dilution protections — will be set forth in the Certificate of Designations to be filed with the Delaware Secretary of State and are currently under negotiation.
VII. RSA Milestones and Key Dates
The RSA includes a detailed milestone schedule, compliance with which is a condition to the continued obligations of the parties. Failure to meet any milestone constitutes a termination event exercisable by the consenting creditors (subject to any applicable cure periods). The milestone schedule is as follows:
It should be noted that the actual target closing date discussed among the parties is mid-December 2023, well inside the contractual Long-Stop Date of December 31, 2023. The Long-Stop Date was established to provide a reasonable cushion for unanticipated delays in the regulatory, tax, or documentation processes. Nevertheless, each interim milestone must be strictly observed, as failure to meet any milestone provides the consenting creditor groups with a termination right.
Calderwood & Harkness will prepare and maintain a detailed project timeline and closing checklist and will coordinate among the various advisor teams to ensure that each milestone is met on schedule. Weekly status calls among the advisor teams have been established and will continue through closing.
VIII. RSA Termination Events
The RSA contains a comprehensive set of termination provisions, which are intended to balance the commitment obligations of each party with the need for appropriate off-ramps in the event of material developments. The termination events are organized into four categories.
A. Mutual Termination
The RSA may be terminated at any time by the written agreement of (i) the Company, (ii) the Sponsor, (iii) the Required Consenting TLB Lenders (as defined in the RSA), (iv) the Required Consenting Revolver Lenders (as defined in the RSA), and (v) the Required Consenting Mezzanine Holders (as defined in the RSA). The mutual termination provision is a standard feature in restructuring support agreements and reflects the consensual nature of the arrangement.
B. Company Termination Events
The Company may terminate the RSA upon the occurrence of any of the following events:
(a) The failure of any consenting creditor group (including the consenting TLB lenders, the consenting Revolver lenders, or the consenting mezzanine holders) to comply in any material respect with its obligations under the RSA, which failure is not cured within the applicable cure period specified therein (expected to be five business days following written notice by the Company);
(b) The exercise by the Board of its fiduciary out, as described in Section IX below; or
(c) The occurrence of a material adverse change in the business, operations, assets, liabilities, or financial condition of the Company that renders the contemplated restructuring transactions impracticable, as determined by the Board in good faith after consultation with its legal and financial advisors.
C. Consenting Creditor Termination Events
Each consenting creditor group (the consenting TLB lenders, the consenting Revolver lenders, or the consenting mezzanine holders, as applicable) may terminate the RSA, upon the affirmative vote of the required holders within such group, upon the occurrence of any of the following events:
(a) The failure of the Company or the Sponsor to comply in any material respect with its obligations under the RSA, which failure is not cured within the applicable cure period;
(b) The failure to meet any milestone set forth in the milestone schedule (e.g., failure to circulate drafts of definitive documents by August 1, 2023, or failure to launch the consent solicitation by October 15, 2023), provided that any such milestone failure is not waived by the requisite consenting creditor group;
(c) The commencement of a voluntary or involuntary bankruptcy, receivership, assignment for the benefit of creditors, or other insolvency proceeding by or against the Company or any of its material subsidiaries, in the case of an involuntary proceeding, that is not dismissed within 60 days;
(d) The entry of any judgment, order, decree, or lien against the Company or its assets that would materially impair the collateral securing the credit facilities or that would materially adversely affect the ability of the parties to consummate the contemplated restructuring transactions;
(e) A material breach of any representation or warranty made by the Company in the RSA that is not cured within the applicable cure period;
(f) The occurrence of an event of default under any existing credit facility (including the First Lien Credit Agreement or the Mezzanine Indenture) that is not waived or cured within any applicable cure period; or
(g) The expiration of the Long-Stop Date (December 31, 2023) without the closing of all restructuring transactions.
D. Automatic Termination
The RSA will terminate automatically, without the need for any action by any party, upon the entry of an order for relief in a bankruptcy proceeding under Title 11 of the United States Code against the Company. This automatic termination provision is intended to recognize that the consensual, out-of-court restructuring framework established by the RSA is fundamentally inconsistent with a bankruptcy proceeding, and that the rights and obligations of the parties would need to be reassessed in the context of a bankruptcy case.
IX. Fiduciary Out Provisions
The RSA preserves the ability of the Board of Directors of Stonefield to exercise its fiduciary duties under Delaware law. As discussed in the memorandum provided by Calderwood & Harkness on April 12, 2023 regarding fiduciary duties in the zone of insolvency, the directors of a Delaware corporation owe fiduciary duties of care and loyalty to the corporation and, when the corporation is in the zone of insolvency or is insolvent, may be required to consider the interests of creditors as well as stockholders. The fiduciary out provision in the RSA is designed to ensure that the Board retains the flexibility to act in the best interests of the corporation and its stakeholders, notwithstanding the Company's commitments under the RSA.
Specifically, if the Board determines, in good faith and after consultation with the Company's legal and financial advisors (Calderwood & Harkness LLP and Hargrove Advisory Group LLC), that continued performance under the RSA would be inconsistent with the exercise of its fiduciary duties — including, by way of example, upon the receipt of a superior proposal for the restructuring or acquisition of the Company, or upon the occurrence of a material deterioration in the Company's business or financial condition that renders the contemplated restructuring transactions impracticable or value-destructive — the Board may terminate the RSA by delivering written notice to all consenting creditor groups.
Upon exercise of the fiduciary out, the Company will be obligated to pay all accrued and unpaid professional fees and expenses of the consenting creditor groups, including fees owed to Westlake Harden & Cole LLP (first lien counsel), Thornbury McCaffrey LLP (mezzanine ad hoc group counsel), and Meridian Veltrian Partners LLC (mezzanine financial advisor), as required by the RSA's expense reimbursement provisions. The payment of such fees upon a fiduciary out termination is a negotiated term intended to compensate the creditor groups for the costs incurred in negotiating and pursuing the consensual restructuring.
The Board is encouraged to review the April 12, 2023 memorandum on fiduciary duties in conjunction with its consideration of the RSA. Calderwood & Harkness is available to discuss any questions the Board may have regarding the scope and application of the fiduciary out provision.
X. Transaction Costs
The RSA requires the Company to pay, or reimburse from closing proceeds, all reasonable and documented professional fees and expenses of the consenting creditor groups, in addition to the Company's own professional fees. The estimated aggregate transaction costs are summarized below:
The D&O tail insurance policy is being procured from Northgate Specialty Insurance Company, providing $15.0 million in aggregate coverage with a six-year tail period. The procurement of a D&O tail policy is a standard element of restructuring transactions and is intended to provide continuing coverage for directors and officers for claims arising from their service prior to and during the restructuring period.
Sources of Funds for Transaction Costs. The transaction costs will be funded from the following sources:
• Net proceeds of the Super-Priority Facility: $43.9 million (of which a portion will be allocated to transaction cost reimbursement)
• Ridgeline equity contribution: $12.5 million
• Company operating cash on hand
A detailed funds flow memorandum, specifying the precise allocation of sources and uses at closing, will be prepared and circulated among the parties prior to execution of the definitive documentation.
XI. Definitive Documentation and Implementation Steps
A. Overview of Definitive Documents to be Negotiated and Executed
The definitive documentation for the restructuring transactions is expected to comprise the following principal agreements and instruments:
1. Amended and Restated First Lien Credit Agreement — among Stonefield Logistics Group Inc., as borrower, the lenders party thereto, and Pinnacle National Bank, N.A., as Administrative Agent and Collateral Agent, amending and restating the existing First Lien Credit Agreement to reflect the revised terms of the TLB and Revolver described in Sections V.A and V.B above.
2. Amendment No. 1 Cover Agreement — the technical amendment cover agreement pursuant to which the consenting TLB and Revolver lenders will consent to the Amended and Restated First Lien Credit Agreement.
3. Super-Priority Credit Agreement — among Stonefield Logistics Group Inc., as borrower, and Belvedere Credit Opportunities Fund LP, as Administrative Agent, Collateral Agent, and initial lender, establishing the terms of the $55.0 million Super-Priority Facility.
4. Super-Priority Guaranty Agreement — by SLG Holdings Inc., SLG Freight Inc., SLG Last Mile Inc., and SLG Warehousing Inc., as Guarantors, guaranteeing the obligations of the Company under the Super-Priority Credit Agreement.
5. Super-Priority Pledge and Security Agreement — granting a super-priority first-out security interest in substantially all assets of the Company and the Guarantors in favor of Belvedere Credit Opportunities Fund LP, as Collateral Agent.
6. Amended and Restated Intercreditor Agreement — among Belvedere Credit Opportunities Fund LP, as Super-Priority Agent, Pinnacle National Bank, N.A., as First Lien Agent, and the Company, establishing the relative lien priorities, standstill periods, purchase options, and DIP financing provisions described in Section V.F above.
7. Exchange Agreement — between Stonefield Logistics Group Inc. and each exchanging mezzanine holder, setting forth the terms and conditions of the exchange of Mezzanine Notes for Series A Preferred Equity and common equity.
8. Consent Solicitation Statement — the offering and consent solicitation document to be distributed to all holders of the Mezzanine Notes, describing the terms of the exchange offer, the exit consent amendments, and the deadlines for tender and consent.
9. Supplemental Indenture (Exit Consent Amendments) — between Stonefield Logistics Group Inc. and Continental Fiduciary Trust Company, as Trustee, implementing the exit consent amendments to the Mezzanine Indenture.
10. Amended and Restated Stockholders' Agreement — among the Company, Ridgeline Capital Partners Fund III, L.P., and the mezzanine equitization recipients, governing Board designation rights, consent rights, transfer restrictions, tag-along and drag-along provisions, and other equity governance matters.
11. Amended and Restated Certificate of Incorporation — to be filed with the Delaware Secretary of State, reflecting the authorization of the Series A Preferred Stock and any other amendments to the Company's charter required in connection with the restructuring.
12. Certificate of Designations — Series A Preferred Stock — to be filed with the Delaware Secretary of State, setting forth the rights, preferences, and privileges of the Series A Preferred Stock, including liquidation preference, PIK dividend rate, redemption provisions, and voting rights.
13. Registration Rights Agreement — granting customary registration rights to the mezzanine equitization recipients with respect to the common equity received in the exchange, in the event of a future initial public offering or other registered offering of the Company's securities.
Calderwood & Harkness anticipates that initial drafts of the principal definitive documents will be circulated to all parties by August 1, 2023, in accordance with the RSA milestone schedule. The negotiation and finalization of these documents will require extensive coordination among the multiple advisor teams and is expected to occupy a substantial portion of the period between August and December 2023.
B. Consent Solicitation Process for Mezzanine Notes
The consent solicitation and exchange offer will be launched to all holders of record of the 11.50% Senior Secured Second Lien Notes due June 15, 2025 (CUSIP 861537 AA 2), in accordance with the terms of the Mezzanine Indenture and applicable securities laws. The consent solicitation will seek (i) consents to the exit consent amendments to the Mezzanine Indenture, which will strip substantially all restrictive covenants, events of default, and reporting obligations from the notes held by Non-Consenting Holders, and (ii) tenders of notes in exchange for the Series A Preferred Equity and common equity consideration described in Section V.D above.
The consent solicitation is expected to include both an early consent deadline and a final consent deadline. Holders who tender their notes and deliver consents prior to the early consent deadline will be eligible for additional consideration (to be determined), while holders who tender after the early consent deadline but before the final consent deadline will receive the standard exchange consideration.
The required consent threshold for the exit consent amendments under the Mezzanine Indenture is greater than 66⅔% in aggregate principal amount of outstanding notes. Given the Ad Hoc Group's current holdings of $122.0 million (87.1%) and the expected additional joinders of $12.5 million during the joinder period, the Company is well-positioned to satisfy this threshold. However, the risk of a shortfall — while deemed low — is addressed in Section XII below.
Non-Consenting Holders who do not participate in the exchange will retain their Mezzanine Notes, but such notes will be subject to the exit consent amendments and will therefore lack the covenant protections, event of default provisions, and reporting rights that currently exist under the Mezzanine Indenture. This treatment, while substantially identical in economic terms to the treatment received by consenting holders, effectively renders the remaining notes a "stripped" instrument with minimal value relative to the exchange consideration.
C. Tax Analysis
Calderwood & Harkness's tax group, led by Sylvia Hartwell (Tax Partner), has been engaged to prepare comprehensive tax memoranda addressing the federal income tax consequences of the restructuring transactions. The tax analysis will address the following issues: