ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL
CALDERWOOD & HARKNESS LLP One Liberty Plaza, 55th Floor New York, New York 10006
Comment Letter and Markup on Debt Commitment Letter
Project Summit
March 26, 2025
VIA ELECTRONIC MAIL AND HAND DELIVERY
Jonah Whitfield, Esq. Principal Harrowgate Capital Partners LLC 1200 Market Street, Suite 3100 Wilmington, Delaware 19801
Re: Harrowgate Private Equity Fund IV LP — Acquisition of Pennfield Holdings, Inc. (Project Summit) C&H Matter No. 1003-00004 Reference Document: Debt Commitment Letter dated March 24, 2025, from Falconer National Bank, N.A. and Dunmore Capital Markets LLC
Dear Jonah:
We refer to the Debt Commitment Letter dated March 24, 2025 (the "Commitment Letter"), from Falconer National Bank, N.A. ("Falconer") and Dunmore Capital Markets LLC ("Dunmore" and, together with Falconer, the "Commitment Parties") to Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Sponsor"), together with the accompanying term sheets for the Senior Secured Term Loan B Facility and the Senior Secured Revolving Credit Facility (collectively, the "Term Sheets"), and the Fee Letter of even date therewith (the "Fee Letter"). Calderwood & Harkness LLP ("C&H") serves as outside counsel to HPE Fund IV and Harrowgate Capital Partners LLC in connection with the proposed take-private acquisition of Pennfield Holdings, Inc. (Nasdaq: PNFD) ("Pennfield" or the "Target").
Set forth below is our comment letter summarizing the key issues we have identified in our review of the Commitment Letter and Term Sheets, together with our recommended changes. A redlined markup of the Commitment Letter reflecting all of our proposed revisions is attached hereto as Exhibit A. A comparison chart mapping each condition precedent in the Commitment Letter against the corresponding closing condition in the draft Agreement and Plan of Merger (the "Merger Agreement") is attached hereto as Exhibit B.
Copies:
Nathaniel Cross, Managing Partner, Harrowgate Capital Partners LLC Rebecca Talmadge, Partner, Harrowgate Capital Partners LLC Marcus Hale, Managing Director, Ridgepoint Partners LLC
Prepared by: Ryan Kowalski, Lead Associate, Mergers & Acquisitions, Calderwood & Harkness LLP
Reviewed by: Oliver Mackenzie, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP; Harrison Wexford, Billing Partner, Mergers & Acquisitions, Calderwood & Harkness LLP
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP has completed its review of the Commitment Letter, the Term Loan B Term Sheet, the Revolving Credit Facility Term Sheet, and the Fee Letter, each dated March 24, 2025, delivered by the Commitment Parties to the Sponsor in connection with the proposed acquisition of Pennfield Holdings, Inc. (the "Acquisition"). This comment letter summarizes the key issues identified in our review and sets forth our recommended revisions, which are reflected in the redlined markup of the Commitment Letter attached hereto as Exhibit A.
A. Overview of Committed Financing
The Commitment Letter provides for committed debt financing in the following amounts and structures:
The Term Loan B is expected to be drawn in full on the closing date. The Revolving Credit Facility is expected to be undrawn at closing and will be available post-closing for working capital and general corporate purposes.
B. Commitment Parties and Roles
The Commitment Parties and their respective roles in the financing are as follows:
Falconer National Bank, N.A. — Lead Arranger, Administrative Agent, and L/C Issuer. The senior contact at Falconer is Gregory Poole, Managing Director, Leveraged Finance Group, 383 Madison Avenue, New York, New York 10179.
Dunmore Capital Markets LLC — Co-Arranger and Joint Bookrunner. The senior contact at Dunmore is Samantha Reeves, Managing Director, Debt Capital Markets, 500 West Monroe Street, 35th Floor, Chicago, Illinois 60661.
C. Borrower and Guarantors
The Borrower under the credit facilities will be Pennfield Holdings, Inc. (as the surviving corporation in the merger) or a newly formed holding company to be designated by the Sponsor prior to or on the closing date. All existing and future direct and indirect domestic subsidiaries of the Borrower will guarantee the obligations under the credit facilities and will pledge their assets as collateral therefor.
D. Transaction Context
The committed financing supports the Sponsor's proposed $980,000,000 take-private acquisition of Pennfield Holdings, Inc. (Nasdaq: PNFD). The Acquisition is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law (the "DGCL"), in which Pinnacle Merger Sub, Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of HPE Fund IV, will merge with and into Pennfield, with Pennfield surviving the merger as a wholly owned subsidiary of HPE Fund IV. The aggregate merger consideration of $980,000,000 is based on a price of $15.95 per fully diluted share of Pennfield common stock, representing 61,450,000 fully diluted shares outstanding (inclusive of in-the-money options, restricted stock units, and performance share units accelerated in connection with the merger).
The merger consideration will be funded through a combination of (i) the $490,000,000 Term Loan B, (ii) approximately $340,000,000 of equity contributions ($258,500,000 from HPE Fund IV net of co-investment allocations, $60,000,000 from Ashford Growth Partners LP as a co-investor, and $21,500,000 in management rollover equity from Catherine Langford, Derek Simmons, and Maxwell Dunn), (iii) approximately $90,000,000 of cash on Pennfield's balance sheet, and (iv) the Revolving Credit Facility (undrawn at closing but available as a committed source if needed).
E. Overall Assessment
The Commitment Letter is substantially consistent with market terms for a take-private leveraged financing of this size and type. The pricing (SOFR + 400 bps with a 50 basis point floor and 100 basis point OID on the Term Loan B) falls within the market range for sponsor-led take-private transactions in the $750 million to $1.25 billion enterprise value range. The committed amount of $640,000,000 in total debt facilities is appropriate given the approximately 3.2x net leverage at closing.
However, C&H has identified several issues requiring negotiation with the Commitment Parties to ensure full alignment between the Commitment Letter and the Merger Agreement and to adequately protect the Sponsor's interests. The principal areas of concern are:
1. SunGard Conditionality / Excess Conditionality. Three instances where the conditions to funding in the Commitment Letter exceed the conditions to the Sponsor's obligation to close under the Merger Agreement, creating a risk that the Sponsor could be required to close the Acquisition but the lenders could refuse to fund. These are addressed in detail in Section III of this letter.
2. Flex Provisions. The pricing flex and structure flex provisions are at the wider end of the market range and require tightening. The aggregate pricing flex should be capped at 75 basis points rather than the current 100 basis points, and the financial covenant flex requires further limitation. These are addressed in Section IV.
3. Marketing Period Synchronization. The definition of "Required Financial Information" in the Commitment Letter does not precisely match the definition of "Required Information" in the Merger Agreement, creating a potential dispute about when the marketing period commences. This is addressed in Section V.
4. Flex Exercise Mechanics. The Commitment Letter lacks adequate procedural protections for the Sponsor in connection with the exercise of flex, including advance notice, single-exercise limitations, and written certification requirements. These are addressed in Section IV.
5. Miscellaneous Commercial Points. Various other commercial points, including indemnification caps, expense reimbursement caps, the Disqualified Lender list, and confidentiality carve-outs, require adjustment. These are addressed in Sections VII through X.
We recommend that the Sponsor circulate the attached redlined Commitment Letter to Gregory Poole at Falconer and Samantha Reeves at Dunmore promptly, with a target for the Commitment Parties to respond with their comments by March 28, 2025, in order to keep the transaction on schedule for execution of the Merger Agreement on April 7, 2025.
II. SUMMARY OF KEY COMMERCIAL TERMS
This section provides a summary of the key commercial terms of each credit facility as set forth in the Commitment Letter and the Term Sheets, together with C&H's comments on selected terms.
A. Term Loan B — Key Terms
The following table summarizes the principal terms of the Senior Secured Term Loan B Facility as set forth in the Term Loan B Term Sheet:
C&H Comment: The SOFR floor of 50 basis points and OID of 100 basis points are within the current market range for leveraged buyout financing of this type. We note, however, that the interaction between the base pricing and the flex provisions discussed in Section IV below is critical: at full flex as currently drafted, the all-in yield on the Term Loan B could increase to SOFR + 450 basis points with a 150 basis point OID, which would be at or above the upper end of current market range. The amortization rate of 1.0% per annum is standard for a Term Loan B in a sponsor-led take-private. The six-month soft-call premium of 1.0% is also market.
We further note that the mandatory prepayment provisions include an excess cash flow sweep that is standard in structure. The step-down thresholds are appropriate given the anticipated leverage profile. We recommend that the Sponsor confirm the cash flow projections prepared by Ridgepoint Partners to ensure that the 3.5x step-down threshold is achievable within the first two fiscal years post-closing, which would reduce the sweep percentage to 25% and preserve cash for operational flexibility.
B. Revolving Credit Facility — Key Terms
The following table summarizes the principal terms of the Senior Secured Revolving Credit Facility as set forth in the Revolving Credit Facility Term Sheet:
C&H Comment: We note that the Revolving Credit Facility is expected to be undrawn at closing, consistent with the sources and uses schedule in the Merger Agreement and the Equity Commitment Letter delivered by HPE Fund IV. We recommend that the Sponsor confirm with the Commitment Parties that the revolver will in fact be undrawn at closing and that no portion of the revolver commitment is being relied upon as a "source" to fund the merger consideration or transaction expenses. If any portion of the revolver were required to be drawn at closing, this would affect the leverage calculations and could implicate certain representations in the Merger Agreement and the Equity Commitment Letter. The letter of credit sublimit of $30,000,000 and swingline sublimit of $15,000,000 are standard for a facility of this size and should be sufficient for Pennfield's anticipated post-closing needs, based on the information reviewed in the data room.
C. Sources and Uses Reconciliation
The following reconciliation sets forth the anticipated sources and uses of funds in connection with the Acquisition:
Sources:
Uses:
Leverage at Close:
Net Debt: $490,000,000 (Term Loan B) minus $90,000,000 (cash on balance sheet) plus approximately $60,000,000 (estimated transaction costs funded from equity) = approximately $460,000,000 net debt.
LTM EBITDA: $142,000,000 (Pennfield FY 2024, fiscal year ended January 31, 2025).
Net Debt / LTM EBITDA: Approximately 3.2x.
C&H Comment: The sources and uses reconciliation should be confirmed with Ridgepoint Partners (Marcus Hale and Priya Chandrasekaran). We note that the "Available Cash" definition in the Commitment Letter should be reviewed to confirm that it matches the approximately $90,000,000 of unrestricted cash expected to be on Pennfield's balance sheet at the time of closing and that the Commitment Letter does not require that this cash be applied to reduce the Term Loan B draw amount. If the Available Cash definition permits or requires such application, the Sponsor's equity contribution would need to increase accordingly, which could require an amendment to the Equity Commitment Letter and a reallocation of the co-investment with Ashford Growth Partners LP.
III. CONDITIONS PRECEDENT — SUNGARD CONDITIONALITY ANALYSIS
A. Overview of the SunGard Principle
The "SunGard" conditionality principle, derived from SunGard Data Systems, Inc. v. Vector Capital Corp. and subsequent market practice, represents a foundational principle of leveraged acquisition financing. The core concept is straightforward but critically important: the conditions to funding under the Commitment Letter should be no more onerous than the conditions to the Sponsor's obligation to close under the Merger Agreement, such that there is no circumstance in which the Sponsor is required to consummate the Acquisition but the Commitment Parties are not required to fund the debt financing. If such a "funding gap" exists — that is, if there is a scenario in which all Merger Agreement closing conditions are satisfied but one or more Commitment Letter funding conditions are not — the Sponsor faces the risk of a "busted deal," potentially triggering a reverse termination fee obligation under the Merger Agreement and significant reputational harm.
C&H's objective in reviewing the conditions precedent to funding in the Commitment Letter is to ensure that each condition either:
(a) mirrors a condition in the Merger Agreement that is either (i) within the Sponsor's direct control or (ii) a condition to the Sponsor's obligation to close under the Merger Agreement (such that, if the Merger Agreement closing condition is not satisfied, the Sponsor is not required to close and the funding condition is moot); or
(b) is limited to ministerial, mechanical, or administrative requirements that cannot, as a practical matter, fail to be satisfied if the Merger Agreement closing conditions are satisfied and the Sponsor has complied with its obligations under the Merger Agreement and the Commitment Letter.
We have reviewed each condition to funding set forth in Section 3 of the Commitment Letter against the closing conditions set forth in Sections 7.01 (mutual conditions), 7.02 (conditions to the Sponsor's obligations), and 7.03 (conditions to Pennfield's obligations) of the draft Merger Agreement. Our findings are summarized below and in greater detail in the comparison chart attached hereto as Exhibit B.
B. Specific Conditions — C&H Comments and Requested Changes
1. No Material Adverse Effect Condition
Commitment Letter Drafting (Section 3(a)(i)): The Commitment Letter provides that it is a condition to the Commitment Parties' obligation to fund on the closing date that no "Material Adverse Effect" shall have occurred with respect to the Target since the date of the Commitment Letter. The term "Material Adverse Effect" is defined separately in Exhibit B to the Commitment Letter and contains its own set of exclusions and qualifications.
C&H Comment: This condition presents a significant SunGard conditionality concern. The Merger Agreement contains its own definition of "Material Adverse Effect" in Section 1.01 thereof, which has been extensively negotiated between the parties and their respective counsel (including Calloway, Briggs & Harmon LLP on behalf of Pennfield and the special committee). The MAE definition in the Merger Agreement contains customary carve-outs for, among other things, changes in general economic or market conditions, changes affecting the industry in which the Target operates generally, changes in applicable law or GAAP, natural disasters and acts of war or terrorism, and the announcement or pendency of the transactions contemplated by the Merger Agreement itself — in each case, except to the extent such changes have a materially disproportionate effect on the Target relative to other similarly situated companies operating in the same industry.
The MAE definition in the Commitment Letter is narrower than the Merger Agreement definition in that it omits certain of these carve-outs (specifically, it does not include carve-outs for changes in applicable law, changes in GAAP, or the announcement effects of the transaction). This creates a risk that the Commitment Parties could assert that a Material Adverse Effect has occurred under the Commitment Letter definition even though no Material Adverse Effect has occurred under the Merger Agreement definition. In such a scenario, the Sponsor would be required to close the Acquisition under the Merger Agreement (because the MAE closing condition in Section 7.02(a) would be satisfied) but the Commitment Parties could refuse to fund (because their more restrictive MAE condition would not be satisfied). This is precisely the type of funding gap that the SunGard principle is designed to prevent.
Recommendation: Delete the standalone MAE definition in Exhibit B of the Commitment Letter in its entirety and replace it with a cross-reference to the definition of "Material Adverse Effect" as set forth in Section 1.01 of the Merger Agreement. The condition should read: "No 'Material Adverse Effect' (as defined in the Merger Agreement) shall have occurred with respect to the Target since the date of the Merger Agreement."
Markup: The redline attached as Exhibit A deletes the standalone MAE definition in Exhibit B and inserts a cross-reference to Section 1.01 of the Merger Agreement.
2. Accuracy of Representations and Warranties
Commitment Letter Drafting (Section 3(a)(ii)): The Commitment Letter provides that it is a condition to funding that (a) the "Specified Representations" made by the Borrower in the Credit Agreement shall be true and correct in all material respects as of the closing date, and (b) the representations and warranties of the Target set forth in the Merger Agreement shall be true and correct to the extent required by the bring-down condition in Section 7.02(a) of the Merger Agreement (i.e., true and correct in all respects, except where the failure to be true and correct, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect).
C&H Comment: The two-part structure of this condition is appropriate and consistent with SunGard conditionality. Part (b) — the bring-down of the Target's Merger Agreement representations — is acceptable because it is co-extensive with the Sponsor's closing condition under Section 7.02(a) of the Merger Agreement. Part (a), however, requires careful review.
The "Specified Representations" are representations that the Borrower makes in the definitive Credit Agreement and that serve as conditions to initial funding. Market convention limits the Specified Representations to a narrow, enumerated list of representations that are entirely within the Borrower's control and relate to the enforceability and validity of the credit documentation itself. The customary list of Specified Representations includes:
(i) organization and existence of the Borrower;
(ii) authorization and enforceability of the Credit Agreement and related loan documents;
(iii) no conflict between the Credit Agreement and the Borrower's organizational documents;
(iv) compliance with Federal Reserve Regulations T, U, and X (margin regulations);
(v) status under the Investment Company Act of 1940;
(vi) compliance with the USA PATRIOT Act and beneficial ownership regulations;
(vii) solvency (on a consolidated basis, after giving effect to the transactions); and
(viii) use of proceeds.
The current Commitment Letter draft includes three additional representations in the Specified Representations list that are not customary and that create excess conditionality risk:
(a) Environmental Compliance — a representation that the Borrower and its subsidiaries are in compliance with all applicable environmental laws in all material respects;
(b) Labor Matters — a representation that there are no material labor disputes, strikes, or work stoppages affecting the Borrower or its subsidiaries; and
(c) ERISA — a representation that no ERISA Event has occurred that, individually or in the aggregate, could reasonably be expected to result in a material liability to the Borrower and its subsidiaries.
These three additional representations relate to the condition of the Target's business, not to the enforceability or validity of the credit documentation, and they are not within the Borrower's (or the Sponsor's) control at the time of closing. To the extent there is a failure of any of these representations, the appropriate remedy is the Target's MAE representation in the Merger Agreement (which is already incorporated into the condition via part (b) of this condition), not a separate Specified Representation. Including these representations as Specified Representations creates a funding gap: the Sponsor could be required to close the Acquisition under the Merger Agreement (because the environmental, labor, or ERISA issue does not rise to the level of an MAE under the Merger Agreement definition) but the Commitment Parties could refuse to fund (because the Specified Representation in the Credit Agreement is not satisfied).
Recommendation: Delete the environmental compliance, labor matters, and ERISA representations from the Specified Representations list in Section 3(a)(ii) of the Commitment Letter. The Specified Representations should be limited to the customary eight-item list set forth above.
Markup: The redline attached as Exhibit A revises Section 3(a)(ii) to delete references to environmental, labor, and ERISA representations from the Specified Representations list and to limit the list to the customary enumerated items.
3. Delivery of Financial Statements
Commitment Letter Drafting (Section 3(b)): The Commitment Letter provides that it is a condition to funding that the Commitment Parties shall have received (i) audited consolidated financial statements of the Target for the three most recent fiscal years ended at least 90 days prior to the closing date and (ii) unaudited interim consolidated financial statements of the Target for each fiscal quarter ended at least 45 days prior to the closing date (other than a fiscal fourth quarter).
C&H Comment: This condition is generally acceptable and aligns with SEC Regulation S-X requirements that will apply to the financial statements required for the proxy statement to be filed in connection with the Acquisition. The 90-day lookback for audited financials and the 45-day lookback for unaudited interim financials are market standard and consistent with the timing requirements for the Required Information under the Merger Agreement.
However, we recommend adding clarifying language to confirm that this condition is satisfied by delivery of the financial statements that the Target is required to deliver under the Merger Agreement (Section 6.15(a)(i) thereof). This linkage is important because it ensures that the financial statement condition cannot become a separate source of conditionality independent of the Merger Agreement. If Pennfield complies with its financial statement delivery obligations under the Merger Agreement, the corresponding Commitment Letter condition should be deemed satisfied without the need for independent compliance analysis.
We further note that Pennfield's fiscal year ends on January 31, and its most recent fiscal year (FY 2024) ended on January 31, 2025. The audited financial statements for FY 2024, FY 2023, and FY 2022 have been prepared by Pemberton & Associates LLP (the Target's independent registered public accounting firm; lead audit partner: Kevin Tarrant Corporation). We recommend that the Sponsor confirm with Megan Chu (C&H associate, Project Summit team) that the FY 2024 audited financial statements have been uploaded to the Project Summit data room on Thackeray Solutions and are available for inclusion in the confidential information memorandum.
Markup: The redline attached as Exhibit A adds clarifying language that the financial statement condition is deemed satisfied by delivery of the financial statements required to be delivered under Section 6.15(a)(i) of the Merger Agreement.
4. Solvency Certificate
Commitment Letter Drafting (Section 3(c)): The Commitment Letter provides that it is a condition to funding that the Commitment Parties shall have received a solvency certificate from the Chief Financial Officer of the Borrower (after giving effect to the Acquisition and the incurrence of the indebtedness contemplated by the Commitment Letter), certifying that the Borrower and its subsidiaries, on a consolidated basis, are solvent as of the closing date.
C&H Comment: This is a customary and expected condition. The solvency certificate should be in substantially the form attached as Exhibit C to the Commitment Letter, which provides for a certification that (a) the fair value of the assets of the Borrower and its subsidiaries on a consolidated basis exceeds their total liabilities, (b) the Borrower and its subsidiaries on a consolidated basis are able to pay their debts as they become due, and (c) the Borrower and its subsidiaries on a consolidated basis do not have unreasonably small capital. This is a standard formulation that is within the CFO's ability to certify based on the financial projections and the closing balance sheet.
We recommend confirming that the form of solvency certificate attached as Exhibit C is acceptable to Derek Simmons (Pennfield's Chief Financial Officer, who is expected to continue serving in that capacity post-closing as part of the management rollover group). If Mr. Simmons has any concerns about the form or substance of the certificate, those should be addressed prior to execution of the Commitment Letter.
Markup: No substantive change to the Commitment Letter is required on this point. The form of solvency certificate in Exhibit C should be confirmed with Derek Simmons and the Sponsor.
5. Execution of Definitive Documentation
Commitment Letter Drafting (Section 3(d)): The Commitment Letter provides that it is a condition to funding that the definitive Credit Agreement and related loan documentation (including the guarantee agreement, the security agreement, the pledge agreement, and any intercreditor agreement) shall have been executed and delivered by all parties thereto.
C&H Comment: This condition is acceptable in principle — it is a mechanical requirement that the parties execute the definitive documents on the closing date. However, the Commitment Letter does not currently contain a "documentation principles" clause that expressly limits the conditions to initial funding in the definitive Credit Agreement to those conditions set forth in the Commitment Letter itself. Without such a clause, there is a risk that the Commitment Parties (or their documentation counsel) could attempt to introduce additional conditions to funding in the definitive Credit Agreement during the negotiation process that were not contemplated by the Commitment Letter.
Recommendation: Add a documentation principles clause to Section 4 of the Commitment Letter providing that:
(a) The definitive Credit Agreement shall contain only those conditions to the initial borrowing on the closing date that are set forth in Section 3 of the Commitment Letter, and no additional conditions to borrowing shall be included.
(b) The definitive Credit Agreement shall be based on Falconer's standard form precedent for senior secured credit facilities in sponsor-led leveraged buyout transactions, modified as necessary to reflect the specific terms set forth in the Commitment Letter and the Term Sheets.
(c) To the extent there is any conflict between the Commitment Letter and the definitive Credit Agreement with respect to the conditions to the initial borrowing, the Commitment Letter shall control.
Markup: The redline attached as Exhibit A adds a documentation principles clause to Section 4 of the Commitment Letter.
6. Consummation of the Acquisition / Merger Agreement Condition
Commitment Letter Drafting (Section 3(e)): The Commitment Letter provides that it is a condition to funding that the "Acquisition" shall have been (or substantially simultaneously shall be) consummated in accordance with the Merger Agreement "without giving effect to any amendments, modifications, or waivers thereof that are materially adverse to the Lenders, unless consented to by the Commitment Parties (such consent not to be unreasonably withheld, conditioned, or delayed)."
C&H Comment: This condition requires careful attention. The concept is appropriate — the Commitment Parties should have the right to refuse to fund if the Merger Agreement has been amended in a way that materially worsens the credit position of the lenders (for example, if the purchase price is materially increased without a corresponding increase in equity, or if the condition of the Target's business is materially altered by a waiver of the Target's operating covenants). However, the consent standard as currently drafted is overbroad.
The current formulation permits the Commitment Parties to withhold consent to any amendment, modification, or waiver that is "materially adverse to the Lenders," without any qualification as to the capacity in which the amendment affects the lenders. This is problematic because many amendments to the Merger Agreement may affect the economic terms of the deal in ways that are important to the Sponsor but that do not affect the credit quality of the loan or the lenders' security position. For example, an amendment to the management retention arrangements, an increase in the reverse termination fee, or a modification to the non-solicitation covenant would be of significant commercial importance but would have no bearing on the lenders' credit position. Under the current drafting, the Commitment Parties could potentially withhold consent to such amendments on the theory that they are "materially adverse to the Lenders" in some general sense.
Recommendation: Insert the "Lender Qua Lender" qualifier, so that the consent right applies only to amendments, modifications, or waivers that are "materially adverse to the Lenders in their capacity as such" or, alternatively, "materially adverse to the interests of the Lenders in their capacity as Lenders under the Credit Facilities." This is the market-standard formulation and limits the Commitment Parties' consent right to matters that directly affect the credit — such as changes to the purchase price, the capital structure, the use of proceeds, the identity of the Target, or the conditions to closing that bear on the lenders' credit analysis.
Markup: The redline attached as Exhibit A revises Section 3(e) to add "in their capacity as Lenders" after "materially adverse to the Lenders."
7. Other Conditions
The Commitment Letter contains several additional conditions to funding:
(a) Payment of Fees and Expenses. The Commitment Letter requires payment of all fees and expenses set forth in the Fee Letter on or prior to the closing date. This is customary and acceptable.
(b) Delivery of Legal Opinions, Officer Certificates, and Organizational Documents. The Commitment Letter requires delivery of (i) customary legal opinions from counsel to the Borrower and the Guarantors, (ii) closing certificates signed by an authorized officer of the Borrower, and (iii) certified copies of the organizational documents of the Borrower and each Guarantor. These are customary ministerial conditions that cannot, as a practical matter, fail to be satisfied on the closing date if the parties are otherwise prepared to close.
(c) Perfection of Security Interests. The Commitment Letter requires that all actions necessary to perfect the Commitment Parties' security interests in the collateral shall have been taken on or prior to the closing date, including the filing of UCC-1 financing statements, delivery of stock certificates and stock powers, recording of mortgages, and delivery of control agreements.
C&H Comment on Perfection: The perfection condition as currently drafted creates a significant SunGard conditionality risk. Complete perfection of security interests across all jurisdictions and all collateral types cannot, as a practical matter, be achieved on or before the closing date. For example, stock certificates for subsidiaries may not be available on the closing date, UCC filings in jurisdictions other than the Borrower's state of organization may require several business days to process, and mortgage filings for owned real property require surveys, title insurance, and local counsel opinions that may take weeks to complete. Requiring full perfection as a condition to initial funding would create a scenario in which the Sponsor is required to close the Acquisition under the Merger Agreement but the Commitment Parties could refuse to fund based on the non-completion of a ministerial perfection step.
Recommendation: Remove full perfection of security interests from the conditions to initial funding, except for the following limited perfection requirements that can be completed on or before the closing date:
(i) filing of UCC-1 financing statements in the state of organization of the Borrower and each Guarantor;
(ii) delivery of a pledge of the equity interests in the Borrower (to the extent pledged) and the equity interests in each direct domestic subsidiary of the Borrower; and
(iii) delivery of duly executed security agreements and guarantee agreements.
All other perfection steps — including delivery of stock certificates of indirect subsidiaries, UCC filings in non-organization-state jurisdictions, recording of mortgages, delivery of landlord waivers and bailee letters, and establishment of deposit account control agreements — should be subject to a post-closing perfection covenant requiring completion within 90 days after the closing date (or such longer period as the Administrative Agent may agree in its reasonable discretion). This approach is fully consistent with SunGard conditionality and is standard in leveraged acquisition financings.
Markup: The redline attached as Exhibit A adds a post-closing perfection covenant with a 90-day deadline and removes full perfection from the conditions precedent to initial funding (retaining only the limited perfection requirements described above).
IV. FLEX PROVISIONS
The flex provisions in the Commitment Letter allow the Commitment Parties to adjust the pricing and structure of the credit facilities to the extent necessary to achieve successful syndication of the Term Loan B. The Sponsor should approach the flex provisions as one of the most important economic negotiation points in the Commitment Letter, as the exercise of flex directly increases the Sponsor's cost of financing.
A. Pricing Flex
Commitment Letter Drafting (Section 5(a)): The Commitment Letter provides that the Commitment Parties may, in their sole discretion, increase the interest rate spread on the Term Loan B by up to 50 basis points (from SOFR + 400 bps to SOFR + 450 bps) and increase the OID by up to 50 basis points (from 99.0 to 98.5, i.e., from 100 bps upfront discount to 150 bps upfront discount), if the Lead Arranger determines that such adjustments are necessary to ensure successful syndication of the Term Loan B.
C&H Comment: The pricing flex as currently drafted provides the Commitment Parties with 100 basis points of total pricing flexibility — 50 basis points of spread flex and 50 basis points of OID flex, each independently exercisable. This is at the wider end of market for a transaction of this size. Based on our review of comparable leveraged buyout commitment letters executed in the past twelve months for transactions in the $750 million to $1.25 billion enterprise value range, the median aggregate pricing flex is approximately 75 basis points, with a typical structure of 50 basis points of spread flex and 25 basis points of OID flex (or vice versa), subject to an aggregate cap.
Recommendation: Revise the pricing flex provisions to impose an aggregate cap of 75 basis points, such that:
(i) The spread on the Term Loan B may be increased by up to 50 basis points (from SOFR + 400 bps to SOFR + 450 bps); and
(ii) The OID may be increased by up to 50 basis points (from 99.0 to 98.5); provided that
(iii) The aggregate of any spread increase and any OID increase shall not exceed 75 basis points (e.g., if the spread is increased by 50 bps, the OID may be increased by no more than 25 bps; if the OID is increased by 50 bps, the spread may be increased by no more than 25 bps).
In addition, we recommend adding express language providing that any exercise of pricing flex must be made by the Lead Arranger in good faith and only if the Lead Arranger determines, based on actual syndication feedback, that the adjustment is necessary for successful syndication of the Term Loan B at the committed amount. The current draft contains no good faith qualifier, which in theory permits the exercise of flex for reasons unrelated to syndication difficulty.
Impact on Deal Economics: The following table illustrates the economic impact of the pricing flex under both the current draft and C&H's proposed revision:
At the C&H proposed aggregate cap of 75 basis points, the maximum additional cost to the Sponsor is approximately $1,838,000 per annum on an annual interest equivalent basis, compared to approximately $2,450,000 per annum under the current draft — a savings of approximately $612,000 per year, or approximately $4,284,000 over the seven-year life of the Term Loan B.
Markup: The redline attached as Exhibit A revises Section 5(a) to impose the 75 basis point aggregate cap and adds a good faith determination requirement.
B. Structure Flex
Commitment Letter Drafting (Section 5(b)): The Commitment Letter provides that the Commitment Parties may exercise "structure flex" by:
(i) Reallocating up to $50,000,000 of the Term Loan B commitment to a new Second Lien Term Loan facility, such that the Term Loan B would be reduced to $440,000,000 and a $50,000,000 Second Lien Term Loan would be created;
(ii) Modifying the amortization schedule of the Term Loan B (subject to a minimum of 1.0% per annum and a maximum of 2.0% per annum);
(iii) Modifying the mandatory prepayment terms (including the excess cash flow sweep percentages and step-down thresholds); and
(iv) Tightening the springing financial covenant under the Revolving Credit Facility from 5.75x Total Net Leverage to 5.25x Total Net Leverage.
C&H Comment on Second Lien Reallocation: The concept of a $50,000,000 reallocation to a Second Lien facility is acceptable as a syndication tool — a bifurcated first lien / second lien structure may be necessary to attract institutional investors with specific mandates. However, the Commitment Letter does not include a term sheet for the Second Lien facility that would be created via structure flex. This is a significant gap. Without a pre-agreed Second Lien term sheet, the Sponsor has no visibility into the pricing, covenants, prepayment terms, or intercreditor arrangements of the Second Lien facility, any of which could materially increase the cost of the overall financing. The Commitment Parties could, in theory, price the Second Lien at SOFR + 700 or 800 basis points (which is not uncommon for second lien loans) without any prior agreement from the Sponsor.
Recommendation: Require that the Commitment Letter include, as an additional exhibit, a term sheet for any Second Lien Term Loan facility that would be created via structure flex. The Second Lien term sheet should specify, at a minimum:
(a) the maximum interest rate spread (we recommend SOFR + 650 bps as a cap);
(b) the maturity (customarily 8 years, or one year longer than the first lien Term Loan B);
(c) the OID;
(d) prepayment terms (including any non-call period);
(e) the covenant structure (which should be no more restrictive than the first lien Term Loan B); and
(f) intercreditor terms, including standstill period, turnover provisions, and rights in enforcement proceedings, based on a standard first lien / second lien intercreditor agreement.
C&H Comment on Financial Covenant Modification: The structure flex currently permits the Commitment Parties to tighten the springing financial covenant from a Total Net Leverage ratio of 5.75x to 5.25x. We note that Pennfield's closing leverage is approximately 3.2x and its projected leverage through the five-year revolving facility maturity remains well below 5.00x under the base case financial model prepared by Ridgepoint Partners. Accordingly, the financial covenant is unlikely to be tested under normal business conditions. Nonetheless, the financial covenant serves as an important safety net in a downside scenario, and tightening it by 50 basis points (from 5.75x to 5.25x) could limit the Borrower's operational flexibility in a stress case.
Recommendation: Limit the financial covenant flex to a maximum tightening of 25 basis points, from 5.75x to 5.50x Total Net Leverage. The 40% revolving utilization threshold that triggers testing of the covenant should remain unchanged — we note that the Commitment Letter does not currently permit modification of the testing threshold via structure flex, and we recommend confirming that this is the case. If the Commitment Parties request the ability to modify the testing threshold, we recommend resisting any reduction below 35%.
Markup: The redline attached as Exhibit A adds a Second Lien term sheet as a new exhibit to the Commitment Letter, revises the financial covenant flex to permit tightening to 5.50x maximum (rather than 5.25x), and confirms that the 40% utilization threshold is not subject to modification via flex.
C. Flex Exercise Mechanics
Commitment Letter Drafting (Section 5(c)): The Commitment Letter provides that the Lead Arranger may exercise flex by delivering written notice to the Sponsor at any time prior to the earlier of (i) successful syndication of the Term Loan B and (ii) the closing date. No advance notice period is specified, and the Commitment Letter does not limit the number of times flex may be exercised.
C&H Comment: The current flex exercise mechanics are inadequate to protect the Sponsor's interests. Without an advance notice period, the Lead Arranger could exercise flex on the morning of the closing date, leaving the Sponsor with no opportunity to evaluate the impact of the flex on deal economics or to seek alternative financing. Without a single-exercise limitation, the Lead Arranger could exercise flex in increments — for example, increasing the spread by 25 basis points on Day 1, then another 25 basis points on Day 5 — without ever being required to "show its hand" as to the full extent of flex it intends to exercise.
Recommendation: Add the following procedural requirements to the flex exercise provisions:
(a) Advance Notice. The Lead Arranger must provide at least 3 business days' advance written notice to the Sponsor before exercising any pricing flex or structure flex, specifying in reasonable detail the adjustments to be made and the reasons therefor.
(b) Single Exercise. Flex may be exercised only once — that is, the Lead Arranger must exercise all flex it intends to exercise in a single written notice. Once flex has been exercised (or once the Lead Arranger has confirmed in writing that it does not intend to exercise flex), no further flex may be exercised.
(c) Written Certification. The Lead Arranger must certify in writing, at the time of exercising flex, that (i) it has used commercially reasonable efforts to syndicate the Term Loan B at the original pricing terms, (ii) such syndication efforts were not successful at the original terms, and (iii) the adjustments specified in the flex notice are, in the Lead Arranger's good faith judgment, the minimum adjustments necessary to achieve successful syndication at the committed amount.
Markup: The redline attached as Exhibit A adds the 3-business-day advance notice requirement, the single-exercise limitation, and the written certification requirement to Section 5(c) of the Commitment Letter.
V. MARKETING PERIOD
A. Definition and Duration
Commitment Letter Drafting (Section 6(a)): The marketing period is defined as a period of 15 consecutive business days following the date on which the Commitment Parties shall have received:
(i) a customary confidential information memorandum (the "CIM") in form and substance reasonably satisfactory to the Lead Arranger;
(ii) the "Required Financial Information," defined as (a) audited consolidated financial statements of the Target for the three most recently completed fiscal years (FY 2022, FY 2023, and FY 2024), (b) unaudited interim consolidated financial statements of the Target for each fiscal quarter ended at least 45 days prior to the closing date, and (c) a pro forma projected financial model reflecting the Acquisition, the financing, and the combined entity on a pro forma basis for a period of not less than five years following the closing date; and
(iii) a customary bank model in form and substance reasonably satisfactory to the Lead Arranger.
Merger Agreement Provision (Section 6.15): Section 6.15 of the draft Merger Agreement requires Pennfield to provide cooperation with the marketing of the debt financing, including making available all "Required Information" (as defined in the Merger Agreement) necessary to permit the commencement of a marketing period of 15 business days. The Merger Agreement definition of "Required Information" includes the Target's historical financial statements and other customary financial data, but the precise wording of the definition differs from the "Required Financial Information" definition in the Commitment Letter.
C&H Comment: The alignment of the marketing period trigger between the Commitment Letter and the Merger Agreement is critically important. If the definition of information required to commence the marketing period differs between the two documents, a dispute could arise as to whether the marketing period has in fact commenced. For example, if the Commitment Letter requires delivery of a "pro forma projected financial model" as a condition to commencement of the marketing period but the Merger Agreement does not include projections in its definition of "Required Information," there could be a scenario in which the Target fulfills its cooperation obligations under the Merger Agreement but the marketing period has not commenced under the Commitment Letter because the projections have not been delivered. This could delay closing and potentially cause the transaction to miss the Outside Date.
Recommendation: Revise the Commitment Letter definition of "Required Financial Information" to cross-reference the Merger Agreement definition of "Required Information," so that the same information package triggers the marketing period under both documents. Alternatively, if the definitions cannot be conformed word-for-word, ensure that the Commitment Letter definition is a subset of (not broader than) the Merger Agreement definition, such that delivery of the Required Information under the Merger Agreement automatically satisfies the Required Financial Information requirement under the Commitment Letter. We note that certain items in the Commitment Letter definition (particularly the pro forma financial model and the bank model) may not be required under the Merger Agreement definition, and we recommend confirming with Ridgepoint Partners that these items will be prepared and delivered on the same timeline as the other Required Information.
Markup: The redline attached as Exhibit A revises the definition of "Required Financial Information" in Section 6(a) to cross-reference the definition of "Required Information" in the Merger Agreement, with a supplemental clause confirming that the CIM, the bank model, and the pro forma financial model will also be delivered to the Commitment Parties on or before the date the Required Information is delivered under the Merger Agreement.
B. Blackout Periods
Commitment Letter Drafting (Section 6(b)): The Commitment Letter provides that the 15-business-day marketing period is tolled (i.e., does not run) during the following periods:
(i) the period from December 20 through January 3 of any year (the "year-end blackout");
(ii) the week of the Thanksgiving holiday (defined as the calendar week including the fourth Thursday of November); and
(iii) any period during which any component of the Required Financial Information becomes materially inaccurate and the Target has not delivered corrected financial information.
C&H Comment: The year-end blackout and Thanksgiving blackout periods are customary and generally market. However, based on the estimated transaction timeline, we note that the marketing period is most likely to fall in the late April to mid-May 2025 timeframe. Given this timeline, the Memorial Day holiday (Monday, May 26, 2025) may fall during or immediately after the marketing period. Institutional investors and bank syndication desks are typically at reduced capacity during the Memorial Day week, and attempting to complete a marketing period through this week could impair syndication efforts. We recommend adding Memorial Day week (defined as the Monday of the Memorial Day holiday and the four preceding business days) to the list of blackout periods.
With respect to the material inaccuracy tolling provision, we have two concerns:
First, the tolling provision should be limited to inaccuracies in historical financial information — i.e., the audited and unaudited financial statements. Projections and forward-looking information are inherently subject to uncertainty, and a tolling provision that applies to projections would give the Commitment Parties the ability to toll the marketing period indefinitely based on changes in business outlook that are reflected in updated projections. This is inconsistent with market practice and would undermine the certainty that the marketing period is designed to provide.
Second, before the marketing period is deemed tolled on account of a material inaccuracy, the Target should have a reasonable opportunity to cure the inaccuracy — that is, to deliver corrected financial information. We recommend a 5-business-day cure period following written notice from the Commitment Parties specifying the alleged inaccuracy, during which the marketing period continues to run while the Target prepares corrected information. If the Target delivers corrected information within the cure period, the marketing period is not tolled. If the Target fails to deliver corrected information within the cure period, the marketing period is tolled until corrected information is delivered.
Markup: The redline attached as Exhibit A adds the Memorial Day blackout period, limits the material inaccuracy tolling provision to historical financial information, and adds the 5-business-day cure period.
C. Interaction with Merger Agreement Timeline
Based on the current estimated transaction timeline, the marketing period is expected to proceed as follows:
C&H Comment: Under this timeline, the marketing period should expire approximately 56 days before the estimated closing date, which provides a comfortable buffer. We recommend that the Sponsor coordinate with Ridgepoint Partners (Marcus Hale and Priya Chandrasekaran) to confirm that the CIM preparation timeline is on track to deliver the CIM to the Commitment Parties within 5 business days of Merger Agreement execution. If CIM preparation is delayed, the marketing period could shift later, potentially overlapping with the Memorial Day blackout (if our proposed addition of that blackout is accepted) and creating unnecessary timing pressure.
We also note that the Sponsor should not be in a position where the only remaining condition to closing is the expiration of the marketing period. If the marketing period extends beyond the HSR clearance date (estimated May 8, 2025), the Sponsor would be in the unusual position of having regulatory clearance to close but being unable to close because syndication marketing is still in process. While this scenario appears unlikely under the current timeline, we recommend monitoring the CIM delivery date closely.
Markup: No change to the Commitment Letter is required on this point. This is an internal coordination matter for the deal team.
VI. CERTAIN FUNDS / LIMITED CONDITIONALITY PERIOD
Commitment Letter Drafting (Section 6A): The Commitment Letter provides that the Commitment Parties agree that, during the period commencing on the date of the Commitment Letter and ending on the earlier of (i) the closing date (after funding) and (ii) the termination of the Merger Agreement in accordance with its terms (such period, the "Certain Funds Period"), they will fund the Term Loan B on the closing date, provided that the conditions precedent set forth in Section 3 of the Commitment Letter are satisfied (or waived by the Commitment Parties) on the closing date.
C&H Comment: The Certain Funds provision is the single most important protective provision in the Commitment Letter from the Sponsor's perspective. It provides the Sponsor with certainty that, if the Merger Agreement closing conditions are satisfied and the limited funding conditions in Section 3 of the Commitment Letter are satisfied, the debt financing will be available on the closing date. This certainty is essential because the Target's board of directors and special committee (and the Target's stockholders, who must approve the merger) will rely on the Commitment Letter as evidence that the financing is available to fund the merger consideration.
Our principal concern with the Certain Funds provision, as currently drafted, relates to the interaction between the "know your customer" (KYC) and beneficial ownership information requirements and the closing date. The Commitment Letter lists compliance with KYC and beneficial ownership regulations (including the requirements of the USA PATRIOT Act, the Bank Secrecy Act, and the Beneficial Ownership Regulation promulgated by the Financial Crimes Enforcement Network) as a condition to funding but does not specify a deadline by which such information must be requested or delivered.
This creates a risk that the Commitment Parties could request KYC information on the closing date itself, assert that the information is incomplete or requires further verification, and refuse to fund on the basis that the KYC condition has not been satisfied. This would be inconsistent with the purpose of the Certain Funds provision and could create a scenario in which the Sponsor is required to close but the lenders refuse to fund.
Recommendation: Add the following provisions to the Commitment Letter:
(a) Advance Delivery Deadline. All KYC and beneficial ownership information required by the Commitment Parties must be requested from the Sponsor in writing at least 10 business days prior to the closing date, and the Sponsor must deliver such information at least 3 business days prior to the closing date. If the Commitment Parties fail to request KYC information within the 10-business-day deadline, the KYC condition is deemed satisfied.
(b) Deemed Satisfaction. If the Sponsor has timely delivered all KYC and beneficial ownership information requested by the Commitment Parties in accordance with the deadline described above, the KYC condition shall be deemed satisfied on the closing date, and the Commitment Parties may not refuse to fund on the basis of KYC non-compliance.
Markup: The redline attached as Exhibit A adds the advance delivery deadline and deemed-satisfaction provisions for KYC/beneficial ownership information.