CALDERWOOD & HARKNESS LLP Attorneys at Law
150 North Michigan Avenue, Suite 3600 Chicago, Illinois 60601
Telephone: (312) 555-7200
MEMORANDUM PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
TO: Patricia ("Trish") Calloway, Chief Financial Officer, Greenfield Agricultural Partners LLC Nina Vasquez, General Counsel and Corporate Secretary, Greenfield Agricultural Partners LLC
FROM: Sophie Tremblay, Lead Associate, Banking & Finance, Calderwood & Harkness LLP (Reviewed by Ian Blackwood, Partner, Banking & Finance, Calderwood & Harkness LLP)
DATE: September 12, 2022
RE: Comparative Term Analysis — Proposed $80,000,000 HCB-Led ABL Revolving Credit Facility vs. Existing $55,000,000 Prairie National Bank, N.A. Revolving Credit Facility
Matter No.: 1020-00001
Billing Code: GAPABF-2022
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I. PURPOSE AND EXECUTIVE SUMMARY
A. Purpose
The purpose of this memorandum is to provide Greenfield Agricultural Partners LLC ("GAP" or the "Borrower") with a comprehensive side-by-side analysis comparing the material economic, structural, and covenant terms of the following two credit facilities:
(a) The proposed $80,000,000 senior secured asset-based revolving credit facility to be arranged by Heartland Commerce Bank, N.A. ("HCB") as Administrative Agent and Collateral Agent (the "Proposed Facility"), as reflected in the revised term sheet mutually agreed upon on September 9, 2022; and
(b) The existing $55,000,000 revolving credit facility with Prairie National Bank, N.A. ("PNB") dated as of April 1, 2018, as amended by that certain First Amendment to Credit Agreement dated as of March 28, 2020, and that certain Second Amendment to Credit Agreement dated as of March 30, 2021 (collectively, as so amended, the "Existing Facility").
This memorandum is intended to serve as a decision-support tool for Greenfield management and to identify the principal areas of negotiation focus as we move into definitive documentation. It is not intended to constitute a legal opinion, and all legal conclusions herein are preliminary and subject to revision upon receipt and review of the draft Credit Agreement from lender's counsel.
B. Executive Summary of Key Takeaways
Based on our review of the revised HCB term sheet and our understanding of the Existing Facility's principal terms, we offer the following summary of key takeaways for Greenfield's consideration:
1. Increased Credit Capacity. The Proposed Facility provides a $25,000,000 increase in total commitments ($80,000,000 versus $55,000,000), representing approximately a 45.5% increase in credit capacity. This increase is critical for funding Greenfield's peak seasonal working capital needs, which management estimates will require peak inventory financing of approximately $125,000,000 to $145,000,000 during the September through November harvest and merchandising season. The expanded facility size also positions Greenfield to accommodate projected revenue growth from $347.2 million in fiscal year 2021 to an estimated $391.5 million in fiscal year 2022.
2. Improved Pricing. Pricing under the Proposed Facility is meaningfully improved relative to the Existing Facility. The Proposed Facility features a tiered margin grid of SOFR + 2.00% to 2.50% (depending on utilization as measured by Excess Availability), compared to the Existing Facility's flat margin of SOFR + 2.75%. At Tier 1 pricing, this represents a 75 basis point improvement. In addition, the unused line fee under the Proposed Facility is 0.375% per annum, compared to 0.50% per annum under the Existing Facility — a 12.5 basis point reduction. On an illustrative basis, assuming average outstanding borrowings of $45,000,000, the Proposed Facility could generate net annual interest cost savings of approximately $162,500, or approximately $650,000 over the four-year term, after accounting for incremental agent and upfront fees.
3. Additional Structural Complexity. However, the Proposed Facility introduces significant additional structural requirements that are not present in the Existing Facility. Most notably, the Proposed Facility is structured as a true asset-based lending ("ABL") facility, meaning that availability is governed by a formal borrowing base formula tied to the net orderly liquidation value of eligible collateral, subject to advance rates and reserves. This structure requires monthly (and, during periods of reduced liquidity, weekly) borrowing base certificates, mandatory field examinations conducted by Pryor & Associates LLC at Borrower expense, deposit account control agreements ("DACAs") on all operating deposit accounts, a springing fixed charge coverage ratio covenant, and substantially more detailed and frequent reporting obligations. While each of these requirements is standard in the ABL market, they collectively represent a material increase in the operational and administrative burden on Greenfield's finance and treasury functions relative to the Existing Facility.
4. Extended Maturity. The Proposed Facility extends maturity to four years from closing (anticipated closing date in October 2022, yielding a maturity of approximately October 2026). This provides substantially more runway than the Existing Facility, which matures on March 31, 2023 — approximately six months from the date of this memorandum. The extended maturity eliminates near-term renewal risk and provides Greenfield with a committed credit facility through at least one full additional commodity cycle.
5. Syndicated Lender Base. The Proposed Facility is a syndicated credit facility with three participating lenders — HCB ($40,000,000 commitment, 50.00%), Meridian Agricultural Credit Corporation ("MACC") ($25,000,000, 31.25%), and Tallgrass Capital Fund II, LP ("Tallgrass") ($15,000,000, 18.75%) — whereas the Existing Facility is a bilateral relationship with PNB as the sole lender. The syndicated structure adds documentary and administrative complexity (including agency provisions, intercreditor mechanics, voting thresholds, and assignment restrictions), but also diversifies Greenfield's lender relationships and introduces agricultural lending specialists into the syndicate.
6. Organization of This Memorandum. The balance of this memorandum is organized into the following sections: (i) a summary comparison table (Section II); (ii) facility size, structure, and maturity (Section III); (iii) borrowing base mechanics (Section IV); (iv) pricing comparison (Section V); (v) collateral and security package (Section VI); (vi) financial covenants (Section VII); (vii) restrictive covenants (Section VIII); (viii) reporting requirements (Section IX); (ix) conditions precedent to closing (Section X); (x) fees and expenses (Section XI); (xi) key advantages of the Proposed Facility (Section XII); (xii) key disadvantages and additional burdens of the Proposed Facility (Section XIII); (xiii) recommendations and next steps (Section XIV); and (xiv) appendices (Section XV).
II. SUMMARY COMPARISON TABLE
The following table provides a high-level side-by-side comparison of the principal terms of the Proposed Facility and the Existing Facility. Each row is discussed in greater detail in the corresponding section of this memorandum. Where information regarding the Existing Facility is unavailable or requires client confirmation, we have noted accordingly.
III. FACILITY SIZE, STRUCTURE, AND MATURITY
A. Commitment Size
The Proposed Facility provides for a total revolving credit commitment of $80,000,000, representing a $25,000,000 (45.5%) increase over the Existing Facility's $55,000,000 commitment. As of September 30, 2022, total outstanding borrowings under the Existing Facility are approximately $38,750,000, which amount will be refinanced and repaid in full upon closing of the Proposed Facility.
The increased capacity under the Proposed Facility is designed to accommodate Greenfield's peak seasonal inventory financing needs, which management estimates will require borrowings of up to $125,000,000 to $145,000,000 during the September through November harvest and grain merchandising season. While the $80,000,000 commitment remains below the full peak inventory financing estimate, the borrowing base structure (discussed in detail in Section IV below) is designed to provide availability that scales with asset levels, and management has confirmed that the combination of revolver availability and internally generated cash flows should be sufficient to meet peak-season requirements.
Greenfield's projected revenue growth further supports the increased facility size. Fiscal year 2021 revenue was $347.2 million, and fiscal year 2022 revenue is projected at $391.5 million, representing approximately 12.8% year-over-year growth. Total assets as of June 30, 2022 were $289.6 million. The expansion of the credit facility to $80,000,000 provides Greenfield with a proportionally larger working capital facility to support this growth trajectory while maintaining sufficient headroom for seasonal fluctuations.
B. Syndicate vs. Bilateral Structure
One of the most significant structural differences between the two facilities is the move from a bilateral lending arrangement to a syndicated credit facility. The Proposed Facility is syndicated among three lenders, with the following commitment allocations:
• Heartland Commerce Bank, N.A. ("HCB"): $40,000,000 commitment (50.00% pro rata share). HCB will also serve as Administrative Agent, Collateral Agent, Sole Lead Arranger, and Sole Bookrunner.
• Meridian Agricultural Credit Corporation ("MACC"): $25,000,000 commitment (31.25% pro rata share). MACC is a specialized agricultural credit institution; the primary relationship contact is Franklin Osei, Senior Vice President, Structured Agricultural Lending.
• Tallgrass Capital Fund II, LP ("Tallgrass"): $15,000,000 commitment (18.75% pro rata share). Tallgrass is a specialty agricultural credit fund; the primary relationship contact is Monica Herrera, Partner, Credit Investments.
The total of the three lender commitments ($40,000,000 + $25,000,000 + $15,000,000) equals the aggregate $80,000,000 facility commitment.
The Existing Facility, by contrast, is a bilateral credit facility in which PNB serves as the sole lender, with no agency or syndicate mechanics. The bilateral structure provides simplicity and directness of communication, as Greenfield deals with a single relationship bank.
The practical implications of the syndicated structure in the Proposed Facility are noteworthy. The Credit Agreement will include standard agency provisions governing HCB's role as Administrative Agent and Collateral Agent, including provisions relating to the Agent's authority, duties, and limitations on liability. The agreement will also include intercreditor mechanics governing the lenders' respective rights with respect to collateral proceeds and voting. Consent and approval thresholds will be governed by "Required Lender" provisions, which typically require approval of lenders holding a majority (or, for certain fundamental matters, a supermajority or unanimity) of total commitments. Assignment restrictions will govern the ability of individual lenders to transfer or assign their commitments, which may affect Greenfield's control over the composition of its lender group. All of these elements add documentary complexity that does not exist in the bilateral Existing Facility.
We note, however, that the syndicate composition reflects meaningful agricultural sector expertise. MACC is a purpose-built agricultural credit institution, and Tallgrass is a dedicated agricultural credit fund. This specialization may translate into greater institutional understanding of Greenfield's seasonal business cycle and industry-specific risks, which could prove advantageous during periods of market stress or when Greenfield seeks future amendments or waivers.
C. Maturity
The Proposed Facility has a four-year term from closing. Assuming a closing date in October 2022 (which management and the HCB syndicate group have indicated is the targeted timeline), the Proposed Facility would mature in approximately October 2026.
The Existing Facility matures on March 31, 2023, which is approximately six months from the date of this memorandum. The Proposed Facility therefore provides approximately three and one-half additional years of committed credit availability relative to the Existing Facility's remaining term.
The maturity extension is one of the most compelling features of the Proposed Facility. The six-month remaining maturity of the Existing Facility exposes Greenfield to significant refinancing risk. While PNB has historically renewed the facility, there is no contractual guarantee of renewal, and any renewal would be subject to market conditions, PNB's credit appetite, and pricing negotiations at the time of renewal. Locking in a four-year committed facility eliminates this near-term refinancing risk and provides Greenfield with certainty of credit access through at least one full additional commodity price cycle.
D. Borrower and Loan Parties
The Borrower under both facilities is Greenfield Agricultural Partners LLC, an Iowa limited liability company (EIN 47-3918265; Iowa Secretary of State Filing No. 622847) with its principal place of business at 4100 Grand Prairie Boulevard, Suite 300, Des Moines, Iowa 50309.
The Proposed Facility expands the guarantor pool beyond the Existing Facility. Under the Proposed Facility, the following entities will serve as guarantors:
(i) Greenfield Holdings Corp. — a Delaware corporation (EIN 82-5047391; Delaware Secretary of State File No. 7291538). Holdings is the parent entity and sole member of GAP.
(ii) Greenfield Grain Storage LLC ("GGS") — an Iowa limited liability company (EIN 84-2093417) and wholly owned subsidiary of GAP. GGS owns and operates Greenfield's network of 14 grain elevator facilities across Iowa and Illinois.
(iii) Greenfield Crop Inputs Inc. ("GCI") — an Illinois corporation (EIN 37-6182049; Illinois Secretary of State File No. 08294731) and wholly owned subsidiary of GAP. GCI operates Greenfield's crop-input distribution business, sourcing and distributing seed, fertilizer, and crop protection chemicals.
Under the Existing Facility, it is our understanding that the guarantor is limited to Greenfield Holdings Corp. only, although this should be confirmed by the client through review of the existing credit documentation.
The broader guarantor base in the Proposed Facility reflects standard ABL lender practice. ABL lenders typically require downstream guaranties from operating subsidiaries that hold significant collateral assets (in this case, GGS's grain elevator facilities and stored grain inventory, and GCI's crop-input inventory). By obtaining guaranties from these subsidiaries, the lenders ensure that their security interest in the underlying collateral is supported by a direct claim against the entity that owns or holds such collateral.
E. Purpose
The stated purposes of the two facilities differ to reflect the refinancing element of the Proposed Facility:
Proposed Facility: (i) refinance and repay in full the existing $55,000,000 PNB revolving credit facility (requiring payoff of approximately $38,750,000 outstanding as of September 30, 2022); (ii) fund seasonal working capital needs, including the purchase of seed, fertilizer, crop protection chemicals, and grain; and (iii) general corporate purposes.
Existing Facility: working capital and general corporate purposes.
The refinancing purpose clause in the Proposed Facility is standard for any takeout transaction and will be documented as a condition precedent to closing (i.e., the proceeds of the initial borrowing under the Proposed Facility will be applied directly to the payoff of the Existing Facility).
IV. BORROWING BASE MECHANICS
A. Overview
The borrowing base structure is the most significant structural difference between the Proposed Facility and the Existing Facility, and it warrants careful analysis.
The Proposed Facility is structured as a true asset-based lending facility. Under an ABL structure, the amount that the Borrower may borrow at any given time is not simply the total commitment amount; rather, it is the lesser of (a) the total commitment amount and (b) the "Borrowing Base" — a formula-driven calculation that determines credit availability based on the net orderly liquidation value of eligible collateral, subject to specified advance rates and reserves. The Borrowing Base fluctuates over time as the Borrower's asset levels change, which means that actual credit availability under the Proposed Facility will vary seasonally.
The Existing Facility, by contrast, has no borrowing base. The full $55,000,000 commitment is available to the Borrower at all times (subject to compliance with general covenants and the absence of any default), regardless of the Borrower's collateral levels. This structure is simpler to administer and provides certainty of availability throughout the year.
The introduction of a borrowing base creates meaningful operational complexity for Greenfield, including the requirement to prepare and deliver monthly (and, during Trigger Periods, weekly) borrowing base certificates, establish and maintain detailed eligibility criteria and tracking systems for accounts receivable and inventory, and submit to periodic field examinations and appraisals. However, the borrowing base structure also aligns credit availability with the seasonal nature of Greenfield's agricultural operations — availability expands during harvest season when grain inventory peaks, and contracts during the planting preparation season when inventory is lower. This alignment is, in many respects, a more economically rational approach to financing a seasonal agricultural business, and it is the structure that ABL lenders require as a condition of extending credit on the pricing terms offered.
B. Borrowing Base Components and Advance Rates
The Borrowing Base under the Proposed Facility is calculated as the sum of the following components, each subject to the indicated advance rate and valuation methodology:
The advance rates specified above are consistent with market norms for ABL facilities in the agricultural sector. The 65% advance rate on crop inventory reflects the greater liquidation risk and price volatility associated with stored grain, while the 70% advance rate on crop-input inventory reflects the more predictable market value and shelf life of seed, fertilizer, and crop protection chemicals. The 80% advance rate on grain warehouse receipts reflects the enhanced liquidity and price transparency of warehouse-receipt-backed grain positions. The 85% advance rate on eligible accounts receivable is standard for ABL facilities across all industries.
We note that the specific eligibility criteria that determine which accounts receivable and which inventory categories qualify as "eligible" for borrowing base inclusion have not yet been fully specified in the term sheet. These criteria will be set forth in detail in the Credit Agreement and ancillary documents, and their scope and definition will be a key area of negotiation. Overly restrictive eligibility criteria can meaningfully reduce effective borrowing base availability below the headline advance rates. We will focus particular attention on this issue during the Credit Agreement negotiation phase.
C. Availability Reserves
In addition to the advance rate limitations described above, HCB as Administrative Agent has the discretion under the term sheet to impose "availability reserves" that further reduce the Borrowing Base. These reserves are intended to account for risks that are not fully captured by the advance rate structure, including potential dilution of receivables, seasonal obsolescence of inventory, environmental liabilities, and other contingencies.
In the initial HCB term sheet delivered on August 22, 2022, the proposed initial availability reserve was $5,000,000. Through negotiation, this amount was reduced to $3,500,000 in the revised term sheet dated September 9, 2022, representing a $1,500,000 improvement. This reduction was achieved by providing HCB with additional historical data regarding Greenfield's receivables dilution rates (which have averaged less than 2.3% over the trailing three-year period) and inventory shrinkage experience.
However, we note that the term sheet provides that the reserve amount "may be adjusted at the Agent's discretion." The scope of the Agent's discretionary reserve authority is a critical point for Credit Agreement negotiation. An unbounded discretionary reserve effectively gives the Agent the ability to reduce availability unilaterally at any time, which could undermine the Borrower's certainty of access to credit. We recommend that the Credit Agreement include limitations on the Agent's reserve authority, including requirements that reserves be set in good faith, that the Borrower be given advance notice of any reserve increase, and that reserves be supported by a reasonable basis related to changes in the value, quality, or condition of the collateral. Ideally, we would negotiate for a cap on total discretionary reserves and/or a requirement that reserves be reviewed and adjusted on a periodic basis (e.g., semi-annually).
D. Seasonal Variability Analysis
The borrowing base structure means that Greenfield's actual credit availability under the Proposed Facility will fluctuate seasonally. To illustrate this effect, we have modeled the Borrowing Base at both the estimated seasonal peak (October 2022, during harvest and grain merchandising) and the estimated seasonal trough (April 2023, during pre-planting crop-input purchases).
Peak Borrowing Base — October 2022 Estimate:
At peak harvest season, the Borrowing Base of $105,700,000 substantially exceeds the $80,000,000 commitment. The full $80,000,000 commitment is therefore accessible during this period, and Greenfield would have significant "excess availability" (i.e., borrowing base in excess of outstanding borrowings plus the commitment cap) that would support Tier 1 pricing and help avoid triggering any springing covenant tests.
Trough Borrowing Base — April 2023 Estimate:
At the seasonal trough, the Borrowing Base declines to approximately $42,375,000 — a meaningful reduction from the $80,000,000 commitment cap. This trough availability is approximately $12,625,000 less than the Existing Facility's flat $55,000,000 commitment. Greenfield should carefully evaluate whether $42,375,000 of trough-season availability is adequate to fund anticipated spring crop-input purchases, which typically represent a significant working capital deployment as Greenfield procures seed, fertilizer, and crop protection chemicals in advance of the planting season.
We note the seasonal inversion in the composition of the Borrowing Base: crop-input inventory (seed, fertilizer, chemicals) peaks in spring when Greenfield is building its input stockpiles for the planting season, while crop inventory (harvested grain) peaks in fall following harvest. The borrowing base formula captures this shift, with crop-input inventory contributing $22,120,000 at trough versus $12,880,000 at peak, while crop inventory contributes $50,765,000 at peak versus $5,330,000 at trough.
E. Comparison to Existing Facility
The practical implications of the borrowing base structure are as follows:
• Under the Existing Facility with PNB, the full $55,000,000 commitment is available to Greenfield year-round, regardless of the Borrower's asset levels (subject to general covenant compliance and the absence of default).
• Under the Proposed Facility with HCB, availability fluctuates seasonally: the full $80,000,000 commitment is accessible during peak harvest season (October–November), but effective availability declines to approximately $42,375,000 during the spring trough (April).
• The net effect is that the Proposed Facility provides superior peak availability ($80,000,000 vs. $55,000,000) but may provide slightly less effective trough availability ($42,375,000 vs. $55,000,000) compared to the Existing Facility's flat commitment.
Based on our preliminary review of Greenfield's historical borrowing patterns, peak-season utilization has generally ranged from $42,000,000 to $51,000,000 (reflecting FY2020 and FY2021 peaks), which is well within the $80,000,000 peak availability under the Proposed Facility. Trough-season utilization has generally ranged from $15,000,000 to $25,000,000, which is well within the $42,375,000 trough availability. Accordingly, the trough-season availability constraint under the Proposed Facility should not be operationally binding based on historical patterns. However, we note that Greenfield's projected revenue growth and expanding crop-input distribution operations could push spring-season borrowing needs higher in future years.
Recommendation: Greenfield should model its historical monthly borrowing patterns against the projected Borrowing Base across a full annual cycle to confirm adequacy during the spring crop-input purchasing season. This analysis should also stress-test the Borrowing Base under scenarios involving declines in commodity prices (which would reduce crop inventory and warehouse receipt valuations) and increases in crop-input costs (which could increase borrowing needs while the advance rate on crop-input inventory remains fixed at 70%).
F. Field Examinations and Appraisals
The Proposed Facility requires the engagement of an independent field examiner to conduct periodic collateral examinations and inventory appraisals. The term sheet specifies Pryor & Associates LLC as the approved field examination firm. Pryor & Associates (Thomas Pryor, Managing Partner; headquartered at 1200 Prospect Avenue, Suite 700, Cleveland, Ohio 44115) has been engaged by HCB as of September 19, 2022, and is expected to begin its initial examination of Greenfield's facilities in connection with the closing of the Proposed Facility.
The field examination requirements under the Proposed Facility are as follows:
• Two (2) field examinations per calendar year, conducted at the Borrower's expense, with fees capped at $50,000 per examination.
• During a Trigger Period (defined as any period in which Excess Availability falls below the greater of (a) 12.5% of the Borrowing Base or (b) $10,000,000), additional field examinations may be required at the Borrower's expense, with no fee cap.
The Existing Facility does not require field examinations. The absence of a field examination requirement is consistent with the Existing Facility's structure as a general corporate revolver without a borrowing base.
The introduction of mandatory field examinations carries both direct financial costs and indirect operational costs. The direct cost of two annual examinations at $50,000 each is $100,000 per year (or $400,000 over the four-year facility term). The indirect costs include the management time required to prepare for and participate in field examinations, the need to provide field examiners with access to Greenfield's grain elevator facilities, distribution centers, financial records, and accounting systems, and the potential for operational disruption at busy facilities during peak season. We recommend that Greenfield's operations team (Raymond Foss, VP of Operations) coordinate with Calderwood & Harkness to establish a field examination scheduling protocol that avoids disruption during the September through November harvest season to the extent practicable.
V. PRICING COMPARISON
A. Interest Rate
The interest rate structures of the two facilities differ significantly. The Proposed Facility features a three-tier margin grid that provides pricing benefits when Greenfield maintains higher levels of Excess Availability (i.e., when utilization of the facility is lower). The Existing Facility, by contrast, uses a flat margin regardless of utilization level.
Proposed Facility — SOFR + Applicable Margin per Grid:
Existing Facility — SOFR + 2.75% (Flat):
The Existing Facility applies a flat margin of SOFR + 2.75% at all utilization levels. There is no performance-based or utilization-based pricing adjustment.
SOFR Floor: The Proposed Facility includes a SOFR floor of 0.50%, meaning that even if the actual SOFR rate were to fall below 0.50% (which, in the current interest rate environment, is unlikely), the interest rate calculation would use 0.50% as the reference rate. The Existing Facility does not specify a SOFR floor. Given current market conditions — with SOFR trading at approximately 2.30% as of the date of this memorandum — the SOFR floor is not expected to have any practical impact for the foreseeable future. However, it is a downside protection mechanism for the lenders in a potential future low-rate environment.
Comparative Analysis:
At Tier 1 (which should be the predominantly applicable tier based on Greenfield's projected utilization patterns), the Proposed Facility offers a 75 basis point improvement over the Existing Facility's flat 2.75% margin. At Tier 2, the improvement is 50 basis points. Even at Tier 3 — the most expensive pricing tier under the Proposed Facility — the margin of 2.50% is still 25 basis points better than the Existing Facility's flat 2.75%.
In practical terms, the margin grid incentivizes Greenfield to maintain higher levels of Excess Availability, which in turn provides the lenders with greater collateral coverage. Given Greenfield's projected peak Borrowing Base of $105,700,000 against an $80,000,000 commitment, and historical peak utilization of $42,000,000 to $51,000,000, Greenfield should typically maintain Excess Availability well above the $40,000,000 threshold for Tier 1 pricing during all but the most constrained periods. The principal risk of moving to Tier 2 or Tier 3 pricing arises during the spring trough season when the Borrowing Base declines and utilization for crop-input purchases increases. Careful cash management and borrowing base optimization during this period will be important to maintaining favorable pricing.
B. Unused Line Fee
The unused line fee is charged on the daily average unused portion of the facility commitment and represents the cost to the Borrower of maintaining committed but undrawn credit capacity.
• Proposed Facility: 0.375% per annum on daily unused commitments.
• Existing Facility: 0.50% per annum on daily unused commitments.
The Proposed Facility offers a 12.5 basis point reduction in the unused line fee relative to the Existing Facility. This savings is particularly meaningful during the trough season when a larger portion of the facility is likely to be unused. For example, during the spring trough, if Greenfield has $20,000,000 outstanding against an $80,000,000 commitment (leaving $60,000,000 unused), the annual unused fee under the Proposed Facility would be $225,000 ($60,000,000 × 0.375%), compared to $300,000 under the Existing Facility ($60,000,000 × 0.50%), a savings of $75,000. Of course, the unused fee calculation under the Proposed Facility is computed on unused commitments (the lesser of the Borrowing Base and the Total Commitment minus outstanding borrowings), and the specific unused fee mechanics should be confirmed in the Credit Agreement.
C. Letter of Credit Fees
The Proposed Facility provides for the issuance of letters of credit with the following fee structure:
• LC Participation Fee: Equal to the applicable margin (i.e., 2.00% to 2.50%, depending on the applicable pricing tier) on the aggregate face amount of outstanding letters of credit.
• Fronting Fee: 0.125% per annum to HCB as the issuing bank, in addition to the LC participation fee.
The LC fee terms under the Existing Facility are not specified in the materials currently available to us and should be confirmed by the client.
D. Upfront and Agent Fees
The Proposed Facility introduces two fee categories that do not exist under the bilateral Existing Facility:
• Upfront Fee: 0.50% of the total $80,000,000 commitment = $400,000, payable at closing and split pro rata among the three lenders in proportion to their respective commitment shares.
• Administrative Agent Fee: $75,000 per annum, payable to HCB in its capacity as Administrative Agent, for its administration of the syndicated credit facility and collateral management functions.
These fees are new costs that do not exist under the bilateral Existing Facility. The upfront fee of $400,000 is a one-time cost that must be amortized over the facility term when evaluating the all-in economics. The agent fee of $75,000 per year is an ongoing annual cost. Together, these fees must be weighed against the interest rate savings that the Proposed Facility offers relative to the Existing Facility to determine the net economic benefit.
E. Estimated Annual Interest Cost Comparison
To provide an illustrative sense of the net economic impact, we have prepared the following simplified comparison assuming an average outstanding borrowing level of $45,000,000 over the facility term. This assumption is based on historical average utilization and is not a projection of future borrowing levels.
Proposed Facility at Tier 1 (SOFR + 2.00%):
• Annual margin cost: $45,000,000 × 2.00% = $900,000
Existing Facility (SOFR + 2.75%):
• Annual margin cost: $45,000,000 × 2.75% = $1,237,500
Gross Annual Margin Savings: $1,237,500 − $900,000 = $337,500
Less: Incremental Annual Costs of Proposed Facility:
• Administrative Agent fee: $75,000
• Amortized upfront fee: $400,000 ÷ 4 years = $100,000
• Subtotal incremental costs: $175,000
Net Annual Savings Estimate: $337,500 − $175,000 = approximately $162,500
Estimated Net Savings Over Four-Year Term: approximately $650,000
This estimate is rough and directional only. It does not account for field examination costs (approximately $100,000 per year), DACA implementation costs, increased legal and administrative expenses associated with the syndicated ABL structure, or the time value of money. It is also highly sensitive to actual utilization patterns and the applicable pricing tier — if Greenfield's utilization patterns result in significant periods at Tier 2 or Tier 3 pricing, the savings will be reduced. Conversely, if utilization patterns favor Tier 1 pricing, the savings could exceed the estimate above. Calderwood & Harkness recommends that Greenfield's finance team prepare a more detailed multi-year cost model incorporating projected monthly borrowing levels, seasonal Borrowing Base fluctuations, and all associated fees and expenses.
VI. COLLATERAL AND SECURITY PACKAGE
A. Proposed Facility — Collateral
The Proposed Facility requires a comprehensive collateral package consisting of first-priority perfected security interests in substantially all assets of each Loan Party (GAP, GGS, and GCI). The collateral package includes the following:
Personal Property Collateral:
• All accounts receivable of each Loan Party;
• All inventory, including harvested grain, crop inputs (seed, fertilizer, crop protection chemicals), and grain warehouse receipts;
• All equipment;
• All deposit accounts (subject to DACAs, as discussed below);
• All general intangibles, including intellectual property, contract rights, permits, and licenses;
• All instruments, chattel paper, letter-of-credit rights, and supporting obligations; and
• All proceeds and products of any of the foregoing.
Real Property Collateral:
• First-priority mortgages on all owned real property, including:
• Fourteen (14) grain elevator sites owned by GGS, located across Iowa and Illinois;
• Three (3) regional distribution centers; and
• The aggregate appraised value of all mortgaged real property is approximately $64,800,000.
• Mortgages will need to be recorded in the following jurisdictions: Polk County, Iowa (GAP headquarters and one elevator site); eight (8) additional Iowa counties (covering the remaining Iowa elevator sites); and McLean County, Illinois (covering the Bloomington, Illinois distribution center and one elevator site).
Equity Pledges:
• Pledge by GAP of 100% of the membership interests in GGS;
• Pledge by GAP of 100% of the stock of GCI; and
• To the extent applicable, pledge by Greenfield Holdings Corp. of 100% of its membership interests in GAP (the term sheet references upstream pledges in addition to downstream pledges).
Insurance Assignments:
• Assignment of all crop insurance proceeds, including federal crop insurance and any private crop insurance supplements, to the Collateral Agent;
• Assignment of business interruption insurance proceeds to the Collateral Agent;
• Property and casualty insurance policies to include loss payee and additional insured endorsements naming HCB as Collateral Agent;
• All insurance policies are currently placed through Redwood Insurance Group, Inc., with primary coverage underwritten by Northstar Mutual Insurance Company.
B. Existing Facility — Collateral
The Existing Facility is secured by a broadly similar collateral package, although the specific terms and scope of the security agreements may differ in certain respects. Based on our preliminary review, the Existing Facility's collateral includes:
• Existing UCC-1 Financing Statements filed by PNB with the Iowa Secretary of State: Filing Nos. 2018-0041729 and 2018-0041730 (both filed April 2, 2018), covering accounts, inventory, equipment, general intangibles, and other personal property of GAP;
• Existing mortgages recorded in Polk County, Iowa (headquarters property), McLean County, Illinois (Bloomington distribution center), and eight (8) additional Iowa counties covering grain elevator sites;
• The mortgage package under the Existing Facility appears to be substantially similar in scope to the mortgage package required under the Proposed Facility, covering the same real property assets.
We note that the payoff and refinancing of the Existing Facility in connection with the closing of the Proposed Facility will require coordination with PNB (Janet Braddock, SVP, Agricultural Banking) to obtain: (a) a payoff letter specifying the exact payoff amount as of the anticipated closing date; (b) UCC-3 termination statements terminating the existing UCC-1 filings; and (c) releases and satisfactions of the existing recorded mortgages in all applicable recording jurisdictions. This process should be initiated well in advance of the anticipated closing date to ensure that all termination and release documents are available at closing.
C. Key Differences — Collateral
The following key differences between the collateral packages of the two facilities warrant particular attention:
1. Deposit Account Control Agreements (DACAs). The most significant collateral difference is the Proposed Facility's requirement that the Borrower execute DACAs on all operating deposit accounts. The Existing Facility does not require DACAs. A DACA is a tri-party agreement among the Borrower, the depository bank, and the Collateral Agent that gives the Collateral Agent "control" over the deposit account within the meaning of UCC Section 9-104. Control is a perfection method under Article 9 that provides the Collateral Agent with a first-priority security interest in the deposited funds, superior to any other creditor's security interest perfected by filing alone.
The practical implications of the DACA requirement are significant. Greenfield may need to either (a) move its operating deposit accounts to HCB (which, as Administrative Agent, would effectively serve as both depository bank and secured party, simplifying the DACA execution process), or (b) execute tri-party DACAs with each of its existing depository banks, including PNB if Greenfield elects to maintain any accounts at PNB following the refinancing. The DACA process typically requires negotiation with each depository bank regarding the specific terms and conditions of the agreement, including the circumstances under which the Collateral Agent may exercise control by directing disposition of funds (sometimes referred to as a "springing" DACA versus a "Blocked" or "active" DACA). The transition process can take several weeks and requires coordination with Greenfield's treasury function. We recommend establishing a DACA transition timeline as early as possible in the documentation process and discussing with HCB whether a reasonable post-closing period for DACA execution will be permitted.
2. Equity Pledges. The Proposed Facility explicitly requires a pledge of 100% of the membership interests in GGS and 100% of the stock of GCI by GAP. We should confirm with the client whether the Existing Facility includes similar equity pledges. If not, this represents an expansion of the collateral package.
3. Insurance Assignments. The Proposed Facility requires formal assignment of crop insurance and property/casualty insurance proceeds to the Collateral Agent, with appropriate endorsements naming the Collateral Agent as loss payee and additional insured. While the Existing Facility likely includes standard insurance requirements, the formality and specificity of the insurance assignment requirements under the Proposed Facility — particularly with respect to crop insurance, which is a critical risk mitigation tool for agricultural borrowers — should be compared to the Existing Facility's requirements. Greenfield should engage Redwood Insurance Group, Inc. early in the process to coordinate the preparation of the required endorsements.
VII. FINANCIAL COVENANTS
A. Proposed Facility
The Proposed Facility contains two financial maintenance provisions:
1. Springing Fixed Charge Coverage Ratio ("FCCR"). The Borrower is required to maintain a minimum FCCR of 1.10 to 1.00. However, this covenant is "springing" in nature — it is tested only during a "Trigger Period." A Trigger Period commences when Excess Availability falls below the greater of (a) 12.5% of the then-applicable Borrowing Base or (b) $10,000,000, and continues until Excess Availability has been at or above such threshold for a specified number of consecutive days (typically 30 consecutive days, though the exact cure period will be confirmed in the Credit Agreement).
The springing nature of the FCCR covenant is generally borrower-favorable. Under a traditional "maintenance" covenant structure, the covenant is tested at regular intervals (e.g., quarterly) regardless of the Borrower's liquidity position. Under the springing structure, the FCCR covenant lies dormant and is not tested at all so long as Greenfield maintains adequate Excess Availability. The covenant is activated only when liquidity deteriorates below a threshold level, serving as a backstop that protects the lenders during periods of financial stress.
2. Minimum Excess Availability. The Borrower is required to maintain Excess Availability of at least $5,000,000 at all times. This is a "hard" minimum — not springing — meaning that it must be satisfied continuously, regardless of whether a Trigger Period is in effect. If Excess Availability falls below $5,000,000, the Borrower will be in breach of this covenant even if it would otherwise be in full compliance with all other provisions of the Credit Agreement.
The $5,000,000 minimum Excess Availability floor is a relatively modest threshold, representing approximately 6.25% of the $80,000,000 commitment and approximately 11.8% of the estimated trough Borrowing Base of $42,375,000. However, it effectively reduces the Borrower's usable credit availability by $5,000,000 at all times — i.e., the maximum amount that Greenfield can borrow at any given time is the lesser of the Borrowing Base and the Total Commitment, minus $5,000,000.
B. Existing Facility
The financial covenant package under the Existing Facility has not been fully confirmed. We understand that the Existing Facility may include traditional maintenance covenants (such as a maximum leverage ratio and/or minimum interest coverage ratio) rather than the springing ABL-style covenants found in the Proposed Facility. We request that the client provide Calderwood & Harkness with a complete copy of the existing PNB credit agreement, as amended, to enable a detailed covenant-by-covenant comparison. Specifically, we would like to review the definitions of "Fixed Charge Coverage Ratio," "Consolidated EBITDA," "Capital Expenditures," and any other defined terms used in the financial covenant calculations, as the specific definitions can materially affect the practical impact of the covenants.
C. Analysis
The springing FCCR structure in the Proposed Facility is generally more favorable to the Borrower than a traditional maintenance covenant structure because the FCCR test is only activated during periods of reduced liquidity. In a well-performing year with adequate Excess Availability, the FCCR covenant will have no practical effect.
However, the Trigger Period mechanism does introduce a "cliff" risk. When Excess Availability declines below the trigger threshold, multiple consequences activate simultaneously: (a) the FCCR covenant becomes testable; (b) reporting obligations shift from monthly to weekly borrowing base certificates and daily cash receipts reporting; and (c) additional field examinations may be required at the Borrower's expense with no fee cap. This simultaneous activation of enhanced requirements can constrain the Borrower's operational flexibility precisely at the moment when the Borrower is already experiencing financial stress. The cumulative effect of the Trigger Period provisions — covenant testing, enhanced reporting, additional examination costs — can create a challenging operational environment.
We recommend that Greenfield model historical Excess Availability against the Trigger Period threshold to assess the likelihood of entering a Trigger Period. Based on the seasonal variability analysis in Section IV above, the Trigger Period threshold (the greater of 12.5% of the Borrowing Base and $10,000,000) would be approximately $10,000,000 in most periods (since 12.5% of the trough Borrowing Base of $42,375,000 is approximately $5,297,000, which is less than $10,000,000). Greenfield should assess whether, at the seasonal trough with anticipated spring-season borrowing levels, Excess Availability could approach this threshold.
VIII. RESTRICTIVE COVENANTS
A. Debt Covenants
The Proposed Facility limits the Borrower's ability to incur additional indebtedness outside of the credit facility. The principal permitted debt baskets under the term sheet are:
• Unsecured debt basket: $3,000,000 in aggregate at any time outstanding.
• Purchase money indebtedness / capital lease obligations basket: $1,500,000 in aggregate at any time outstanding.
The Existing Facility's debt covenant baskets have not been confirmed and should be compared. Given the bilateral nature of the Existing Facility and Greenfield's longstanding relationship with PNB, it is possible that the Existing Facility includes more generous debt baskets. The $3,000,000 unsecured debt basket and $1,500,000 purchase money/capital lease basket in the Proposed Facility are relatively tight and may constrain Greenfield's ability to finance equipment purchases through purchase money arrangements or to incur small amounts of trade credit or other unsecured obligations outside the ordinary course. We will evaluate whether these baskets are adequate during the Credit Agreement negotiation phase.
B. Distribution / Dividend Restrictions
The Proposed Facility restricts the Borrower's ability to make distributions, dividends, or other payments to equity holders. Distributions are permitted only if all three of the following conditions are satisfied simultaneously:
(a) No Default or Event of Default shall have occurred and be continuing or would result from giving effect to the proposed distribution;
(b) Pro forma Excess Availability (after giving effect to the proposed distribution) is at least 20% of the then-applicable Borrowing Base; and
(c) The trailing twelve-month Fixed Charge Coverage Ratio, calculated on a pro forma basis after giving effect to the proposed distribution, is at least 1.15 to 1.00.
These conditions are cumulative — all three must be satisfied before any distribution may be made.
The distribution covenant is particularly important given Greenfield's ownership structure. GAP is 100% owned by Greenfield Holdings Corp. Holdings is, in turn, owned as follows: the Lindstrom Family Trust (62%), Calloway-Foss Investments LP (28%), and a management equity incentive plan (10%). Distributions from GAP to Holdings are the primary mechanism by which the equity holders receive returns on their investment and fund their tax obligations (as GAP is a pass-through entity for federal income tax purposes, the equity holders incur tax liabilities on their allocable shares of GAP's income, which must be funded through distributions).
The 20% Borrowing Base excess availability test in clause (b) could be a meaningful constraint during the spring trough season. At the estimated trough Borrowing Base of $42,375,000, 20% of the Borrowing Base equals approximately $8,475,000. If Greenfield has $30,000,000 outstanding during the spring trough, Excess Availability would be approximately $12,375,000 ($42,375,000 minus $30,000,000), and a distribution of more than approximately $3,900,000 would cause pro forma Excess Availability to fall below 20%. This could constrain the timing and size of tax distributions, which GAP has historically made in the first and second quarters.
The 1.15 to 1.00 FCCR test in clause (c) is notably more restrictive than the 1.10 to 1.00 springing FCCR covenant that governs the facility generally. This means that distributions are subject to a higher FCCR standard than the standard financial covenant, creating an additional margin of protection for the lenders. We should negotiate to align the distribution FCCR test with the general FCCR covenant level (1.10:1.00) or, alternatively, to include a "tax distribution" carve-out that permits distributions in amounts necessary to fund the equity holders' tax obligations without satisfying the FCCR test, subject to customary safeguards.
C. Capital Expenditures
The Proposed Facility limits capital expenditures to $8,000,000 per fiscal year, with a 50% carryforward of unused amounts from the prior year, capped at a maximum of $12,000,000 in any single fiscal year (i.e., $8,000,000 base plus up to $4,000,000 carryforward from the prior year's unused allocation).