1024-00001 · Driftwood Absolute Return Fund Ltd · Correspondence

letter-adequate-protection-proposal.docx DOCUMENT Finance & Banking

4 / 12 ← → ✕

Contract analysis Extract to table

CALDERWOOD & HARKNESS LLP

599 Lexington Avenue New York, NY 10022 Tel: (212) 455-7800

Fax: (212) 455-7801

1000 North King Street, Suite 300 Wilmington, DE 19801 Tel: (302) 651-3200

Fax: (302) 651-3201

October 3, 2023

VIA EMAIL AND OVERNIGHT COURIER

Monica L. Hartwell, Esq. Hartwell & Crane LLP 51 JFK Parkway, Suite 200 Short Hills, NJ 07078

Re: In re Cascabel Financial Holdings, Inc., et al., Case No. 23-11487 (KFM), United States Bankruptcy Court for the District of Delaware — Enhanced Adequate Protection Proposal for the Ad Hoc Group of First Lien Lenders

Dear Ms. Hartwell:

I. Introduction and Purpose

I write in my capacity as the responsible partner in the Bankruptcy & Restructuring practice of Calderwood & Harkness LLP on behalf of our client, Driftwood Absolute Return Fund Ltd. ("Driftwood" or "DARF"), a Cayman Islands exempted company with its principal office at 280 Park Avenue, 38th Floor, New York, NY 10017. Driftwood's investment activities are directed by its investment manager, Driftwood Capital Advisors LLC, a Delaware limited liability company. As you are aware, Driftwood is the DIP Lender in the above-captioned Chapter 11 case.

The purpose of this letter is to set forth a comprehensive enhanced adequate protection proposal (the "Enhanced Adequate Protection Package") designed to resolve the objection filed on September 19, 2023 by the Ad Hoc Group of First Lien Lenders (the "Ad Hoc Group"), which your firm represents, to the priming lien and roll-up provisions of the $75,000,000 Senior Secured Superpriority Debtor-in-Possession Credit Facility (the "DIP Facility"). Driftwood has carefully considered the concerns raised in the Ad Hoc Group's objection, and we believe that the proposal outlined below addresses those concerns in a manner that is both legally sufficient under Section 364(d)(1)(B) of the Bankruptcy Code and commercially reasonable under the circumstances.

It is Driftwood's strong view that good-faith negotiations represent the most efficient and value-preserving path to resolution of the Ad Hoc Group's objection. A contested final hearing on the DIP Facility would consume significant estate resources, inject uncertainty into the case at a critical early juncture, and potentially delay the availability of funds that are essential to the Debtors' ongoing operations and the preservation of going-concern value for all stakeholders — including, most notably, the Protected Lenders (as defined below) whose collateral base would be directly and adversely affected by any disruption to the Debtors' business.

Accordingly, Driftwood proposes the Enhanced Adequate Protection Package described herein with the express goal of reaching a consensual resolution in advance of the final hearing on the DIP Facility currently scheduled for October 13, 2023 before the Honorable Karen F. McAllister.

II. Background and Procedural Context

A. The Chapter 11 Filing

Cascabel Financial Holdings, Inc. ("Cascabel" or "CFH"), a Delaware corporation (EIN: 84-3291057), and its wholly owned subsidiary, Cascabel Asset Management LLC ("CAM"), a Delaware limited liability company (together, the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware on September 8, 2023 (the "Petition Date"). The cases are being jointly administered under Case No. 23-11487 (KFM) before the Honorable Karen F. McAllister. The Debtors' principal office is located at 1200 Market Street, Suite 900, Wilmington, DE 19801.

Importantly, Ridgeline Community Bank ("Ridgeline"), a Delaware state-chartered commercial bank regulated by the Delaware Office of the State Bank Commissioner and the Federal Deposit Insurance Corporation, was excluded from the Chapter 11 filing and continues to operate as a going concern under the supervision of its banking regulators. Ridgeline maintains approximately $385 million in deposits and remains in compliance with the conditions established by its regulators, subject to the ongoing supervisory process.

As of the Petition Date, Cascabel's consolidated balance sheet reflected total assets of approximately $620 million and total liabilities of approximately $710 million, resulting in negative equity of approximately $90 million. The Debtors' financial distress is attributable to a confluence of factors, including: (i) concentrated commercial real estate loan losses sustained by Ridgeline, primarily in its metropolitan office and mixed-use lending portfolio; (ii) the failed acquisition in late 2022 of Keyline Technologies, Inc., a financial technology company, which resulted in a write-down of approximately $47 million in goodwill and acquisition-related intangible assets; and (iii) significant depositor outflows at Ridgeline during the first and second quarters of 2023 in the aftermath of broader regional banking sector dislocation, which placed severe liquidity pressure on the holding company and ultimately precipitated the Chapter 11 filing.

B. Pre-Petition Capital Structure

The Debtors' pre-petition funded debt obligations total approximately $183,500,000, consisting of the following:

First Lien Term Loan. A $120,000,000 first lien term loan (the "Pre-Petition First Lien Term Loan"), dated as of January 15, 2021, maturing January 15, 2026, bearing interest at Adjusted Term SOFR plus 425 basis points. Velthorn National Bank, N.A. ("Velthorn") serves as the administrative agent and collateral agent under the Pre-Petition First Lien Term Loan. As of the Petition Date, the full $120,000,000 in principal was outstanding and held by the following lenders:

As the Court and the parties are aware, Driftwood acquired its $32,000,000 participation in the Pre-Petition First Lien Term Loan on the secondary market between March and July 2023 at an average price of $0.68 per dollar of face value, for an aggregate cost basis of $21,760,000. Non-Driftwood first lien claims total $88,000,000, consisting of the positions held by Velthorn ($38,000,000), Pinnacle ($28,000,000), and Brindoval ($22,000,000).

Second Lien Notes. $45,000,000 in 10.50% Senior Secured Second Lien Notes due 2027, issued under an indenture with Zynvaro Trust Company serving as the indenture trustee. Ashford Mezzanine Capital, LP holds approximately $30,000,000 of the second lien notes. The second lien obligations are secured by a lien on substantially the same collateral base as the first lien facility, subject to the terms of the Intercreditor Agreement dated January 15, 2021 between Velthorn, as first lien agent, and Zynvaro Trust Company, as second lien trustee.

Unsecured Notes. $18,500,000 in 8.00% Unsecured Notes due March 1, 2025, which are general unsecured obligations of Cascabel Financial Holdings, Inc.

In total, the Debtors' pre-petition funded debt obligations aggregate $183,500,000 ($120,000,000 first lien + $45,000,000 second lien + $18,500,000 unsecured).

C. The DIP Facility

The DIP Facility, for which Driftwood serves as the sole DIP lender, consists of a total commitment of $75,000,000, structured in two tranches:

(i) New Money DIP Tranche: $43,000,000 in new money commitments, available in two draws:

• Draw 1 (Interim): $18,000,000, which was authorized by the Interim DIP Order entered on September 15, 2023 (D.I. 47) and has been fully funded;

• Draw 2 (Final): $25,000,000, which will become available upon entry of the Final DIP Order; and

(ii) Roll-Up Tranche: $32,000,000, consisting of a dollar-for-dollar roll-up of Driftwood's $32,000,000 in pre-petition first lien claims into superpriority DIP obligations. The roll-up is to be effectuated upon entry of the Final DIP Order, with the rolled-up obligations to rank pari passu with the New Money DIP Tranche in right of payment and lien priority.

The material economic terms of the DIP Facility are as follows:

• Interest Rate: Adjusted Term SOFR plus 900 basis points, with a SOFR floor of 4.00%, resulting in a minimum all-in interest rate of 13.00%. Upon the occurrence and during the continuance of an Event of Default, interest accrues at the default rate of an additional 200 basis points (total spread of 1,100 basis points over Adjusted Term SOFR; minimum all-in default rate of 15.00%).

• Commitment Fee: 2.00% of the total $75,000,000 commitment ($1,500,000), payable upon entry of the Interim DIP Order. This fee has been earned and paid.

• Exit Fee: 1.50% of amounts drawn under the DIP Facility, payable upon repayment, estimated at $1,125,000 based on expected full utilization of the New Money DIP Tranche.

• Unused Line Fee: 0.50% per annum on the undrawn portion of the New Money DIP Tranche, accruing daily and payable quarterly in arrears.

• Security: First priority priming liens on substantially all assets of the Debtors (excluding assets of Ridgeline Community Bank that are subject to regulatory restrictions), including all proceeds of avoidance actions under Chapter 5 of the Bankruptcy Code.

• Carve-Out: $2,500,000 for professional fees of the Debtors' estate professionals and the Official Committee of Unsecured Creditors (with the Committee's share capped at $750,000), plus $250,000 for fees payable to the Clerk of the Bankruptcy Court and the United States Trustee, for a total Carve-Out of $2,750,000.

• Challenge Period: 75 days from entry of the Final DIP Order for the Official Committee of Unsecured Creditors; 60 days from entry of the Final DIP Order for all other parties in interest.

D. The Ad Hoc Group Objection

On September 19, 2023, the Ad Hoc Group filed its objection (D.I. 72) to the priming lien and roll-up provisions of the DIP Facility (the "Ad Hoc Group Objection"). The Ad Hoc Group is comprised of Velthorn National Bank, N.A. ($38,000,000) and Pinnacle Credit Partners Fund II, LP ($28,000,000), which together hold $66,000,000, or 55.00%, of the $120,000,000 Pre-Petition First Lien Term Loan. Your firm, Hartwell & Crane LLP, represents the Ad Hoc Group in these Chapter 11 cases, under your leadership, Ms. Hartwell.

We note that Brindoval Institutional Lending, LLC, which holds $22,000,000 in first lien claims, is not a member of the Ad Hoc Group and has not filed a separate objection. Brindoval's position with respect to the DIP Facility is not yet formally known to us.

We acknowledge the substance of the Ad Hoc Group's concerns regarding the adequacy of protection afforded to the $88,000,000 in non-Driftwood first lien claims that would be primed by the DIP liens and subordinated in priority to Driftwood's rolled-up obligations. The Ad Hoc Group Objection raises questions concerning, among other things, the scope of the priming liens, the magnitude of the roll-up relative to the existing adequate protection package, and the sufficiency of the existing protections under Section 364(d)(1)(B) in light of the risk profile of the Debtors' collateral base. While we believe the existing adequate protection provisions in the Interim DIP Order are legally defensible, we recognize that a consensual resolution is in the best interests of all parties and propose the enhanced package described in Section III below.

We also note for completeness that on October 2, 2023, the Official Committee of Unsecured Creditors (the "Committee"), by and through its counsel, Breckenridge McCoy LLP (Thomas A. Breckenridge), filed a limited objection (D.I. 89) to the DIP Facility concerning the Carve-Out amount and the Challenge Period. The Committee's concerns have been addressed through direct negotiations between Calderwood & Harkness LLP and Breckenridge McCoy LLP, resulting in an increase of the Committee's Carve-Out share from $500,000 to $750,000 and an extension of the Committee's Challenge Period from 60 days to 75 days from entry of the Final DIP Order. The Committee has indicated its intent to withdraw its limited objection upon entry of a Final DIP Order reflecting these modifications.

III. Proposed Enhanced Adequate Protection Package

Driftwood proposes the following Enhanced Adequate Protection Package for the benefit of all holders of pre-petition first lien claims under the Pre-Petition First Lien Term Loan other than Driftwood (collectively, the "Protected Lenders"), including Velthorn National Bank, N.A. (holding $38,000,000), Pinnacle Credit Partners Fund II, LP (holding $28,000,000), and Brindoval Institutional Lending, LLC (holding $22,000,000), in their respective capacities as lenders under the Pre-Petition First Lien Term Loan. The aggregate pre-petition first lien claims of the Protected Lenders total $88,000,000.

A. Replacement Liens

The Debtors shall grant to the Protected Lenders valid, binding, enforceable, and automatically perfected replacement liens (the "Replacement Liens") on all DIP collateral — that is, on substantially all assets of the Debtors, including proceeds of avoidance actions under Chapter 5 of the Bankruptcy Code, but excluding assets of Ridgeline Community Bank subject to regulatory restrictions. The Replacement Liens shall attach to the same collateral base as the pre-petition first lien collateral and shall secure all pre-petition first lien obligations owed to the Protected Lenders in the aggregate amount of $88,000,000.

The Replacement Liens shall be subject and junior only to the following interests:

(a) the DIP liens in favor of Driftwood securing the DIP Facility (including both the New Money DIP Tranche and the Roll-Up Tranche);

(b) the Carve-Out in the aggregate amount of $2,750,000 (consisting of $2,500,000 for professional fees and $250,000 for Clerk of Court and U.S. Trustee fees); and

(c) any valid, perfected, and non-avoidable liens that were senior in priority to the pre-petition first lien liens as of the Petition Date.

No other post-petition liens shall be senior to or pari passu with the Replacement Liens except as specified in clauses (a) through (c) above. The Replacement Liens shall be deemed perfected without the need for the filing of any financing statements, mortgages, deeds of trust, or other documents under applicable state or federal law.

B. Section 507(b) Superpriority Administrative Expense Claims

The Protected Lenders shall be granted allowed superpriority administrative expense claims under Section 507(b) of the Bankruptcy Code (the "Superpriority Claims") in the aggregate amount of $88,000,000, or such lesser amount as may be allowed by the Court, to the extent that the adequate protection provided under the Final DIP Order proves insufficient to compensate the Protected Lenders for any diminution in value of their interests in the pre-petition collateral.

The Superpriority Claims shall be junior only to:

(a) the superpriority administrative expense claims of Driftwood arising under the DIP Facility (including claims on account of both new money advances and rolled-up obligations); and

(b) the Carve-Out.

No other administrative expense claims (whether arising under Section 503(b), Section 507(a), or otherwise) shall be senior to or pari passu with the Protected Lenders' Superpriority Claims, except for the DIP claims of Driftwood and the Carve-Out as provided above.

C. Monthly Adequate Protection Payments

Commencing on the first business day of the first full calendar month following entry of the Final DIP Order, and continuing on the first business day of each calendar month thereafter, the Debtors shall make monthly current-pay interest payments to the Protected Lenders on the $88,000,000 in outstanding pre-petition first lien claims at the non-default contract rate of Adjusted Term SOFR plus 425 basis points. Based on the current Adjusted Term SOFR rate of approximately 5.33%, the estimated all-in annual interest rate is approximately 9.58%, yielding an estimated monthly adequate protection payment of approximately $702,133 (calculated as $88,000,000 × 9.58% ÷ 12).

Monthly adequate protection payments shall be made through Velthorn National Bank, N.A., in its capacity as administrative agent under the Pre-Petition First Lien Term Loan, for distribution pro rata to the Protected Lenders in accordance with their respective outstanding principal balances:

Monthly adequate protection payments shall continue until the earliest to occur of: (i) the stated maturity date of the DIP Facility; (ii) the effective date of a confirmed Chapter 11 plan (the "Plan Effective Date"); (iii) the acceleration of the DIP Facility following the occurrence of an Event of Default thereunder; or (iv) further order of the Court. In each case, the Protected Lenders' rights to receive adequate protection payments shall terminate only upon the satisfaction of all adequate protection obligations or as otherwise provided in the Final DIP Order.

D. Adequate Protection Reserve

A cash reserve in the amount of $3,500,000 (the "Adequate Protection Reserve") shall be funded from the proceeds of the initial DIP draw (Draw 1 of $18,000,000, which was funded under the Interim DIP Order entered September 15, 2023). The Adequate Protection Reserve shall be deposited in a segregated interest-bearing deposit account at Velthorn National Bank, N.A. (or such other financial institution as the Debtors and the Ad Hoc Group may agree), and shall be subject to a first-priority lien in favor of the Protected Lenders.

The Adequate Protection Reserve shall be available to satisfy the Debtors' adequate protection obligations described herein, including the monthly interest payments set forth in Section III.C above, in the event of any shortfall in the Debtors' operating cash flows or any failure by the Debtors to make a timely adequate protection payment. Draws on the Adequate Protection Reserve shall be made upon five (5) business days' written notice from the Administrative Agent to counsel for the Debtors and counsel for the DIP Lender.

Upon the full and indefeasible satisfaction of all adequate protection obligations of the Debtors to the Protected Lenders and repayment in full of the DIP Facility, any remaining amounts in the Adequate Protection Reserve (including accrued interest thereon) shall be returned to the Debtors' estates.

E. Reimbursement of Ad Hoc Group Counsel Fees

The Debtors' estates shall reimburse the reasonable and documented fees and expenses of Hartwell & Crane LLP, as counsel to the Ad Hoc Group, incurred in connection with the review and analysis of the DIP Facility, the preparation and prosecution of the Ad Hoc Group Objection to the priming and roll-up provisions, and the negotiation and documentation of the Enhanced Adequate Protection Package and the Adequate Protection Stipulation (as defined below).

Such reimbursement shall be capped at $1,200,000 in the aggregate (the "Fee Cap"). Invoices shall be submitted on a monthly basis to counsel for the Debtors — Jonathan R. Whitfield, Whitfield, Graves & Sato LLP — and counsel for the DIP Lender — Calderwood & Harkness LLP — with a review period of ten (10) business days following submission. Any objections to the reasonableness of invoiced amounts shall be raised within the review period, and any unresolved disputes shall be submitted to the Court for determination. Payment of undisputed invoiced amounts shall be made from the Debtors' estates as an administrative expense under and pursuant to the DIP Credit Agreement and the Final DIP Order.

IV. Budget and Reporting Protections

As an additional element of protection for the Protected Lenders, Driftwood notes that the DIP Credit Agreement already contains robust budget and reporting provisions that provide transparency into the Debtors' financial position and liquidity profile. Specifically:

The DIP Credit Agreement requires the Debtors to maintain a 13-week rolling cash flow budget (the "DIP Budget"), which is updated every four (4) weeks. The DIP Budget is prepared in coordination with the Debtors' Chief Restructuring Officer, Terrence M. Kowalski of Alderpoint Advisory Partners LLC, and the Debtors' investment banker, Solstice Partners LLC (David R. Chin, Managing Director). Budget compliance is tested on a cumulative bi-weekly basis, with permitted variances of ±10% on revenue items and ±15% on disbursement items. Non-compliance with the DIP Budget beyond the permitted variance thresholds constitutes an Event of Default under the DIP Credit Agreement, subject to applicable cure provisions.

Driftwood will consent to the Ad Hoc Group receiving copies of the bi-weekly budget variance reports contemporaneously with their delivery to the DIP Lender, subject to the execution by counsel and principals of the Ad Hoc Group members of customary confidentiality agreements in form and substance reasonably acceptable to the Debtors and the DIP Lender. This will provide the Ad Hoc Group with timely visibility into the Debtors' cash flows and the adequacy of the collateral base.

In addition, the milestones set forth in the DIP Credit Agreement provide an important governance framework and discipline on the case timeline. These milestones include, among others, the requirement that the Debtors file a plan of reorganization and disclosure statement within 90 days of the Petition Date (i.e., by December 7, 2023) and obtain confirmation of the plan within 150 days of the Petition Date (i.e., by February 5, 2024). Failure to comply with the milestones constitutes an Event of Default under the DIP Credit Agreement, providing the DIP Lender and, indirectly, the Protected Lenders with the ability to enforce compliance with the restructuring timetable.

V. Basis for Adequacy of Protection

Driftwood submits that the Enhanced Adequate Protection Package, taken as a whole, more than satisfies the requirements of Section 364(d)(1)(B) of the Bankruptcy Code, which provides that a court may authorize the obtaining of credit secured by a senior or equal lien on property that is subject to a prior lien only if "the interest of the holder of such lien is adequately protected." The determination of adequate protection is a fact-intensive inquiry committed to the sound discretion of the bankruptcy court, and the Bankruptcy Code does not require that adequate protection eliminate all risk — rather, it must compensate the affected creditor for any diminution in value of its collateral interest resulting from the priming.

The combination of the five components of the Enhanced Adequate Protection Package — (i) Replacement Liens, (ii) Section 507(b) Superpriority Claims, (iii) current-pay monthly interest at the non-default contract rate, (iv) the $3,500,000 Adequate Protection Reserve, and (v) reimbursement of up to $1,200,000 in counsel fees — provides a comprehensive and layered package that compensates the Protected Lenders for the diminution in value, if any, of their collateral position resulting from the priming and the roll-up.

The adequacy of this package is further supported by a substantial equity cushion. As reflected in the Debtors' Schedules and the First Day Declarations, Cascabel's total consolidated assets are valued at approximately $620 million. The aggregate DIP claims at full utilization total $75,000,000, and the Protected Lenders' first lien claims total $88,000,000, for a combined senior and primed secured claim amount of $163,000,000. The ratio of total assets to these combined claims is approximately 3.8x, providing a substantial collateral cushion that insulates the Protected Lenders from risk of loss.

Moreover, the DIP Facility is essential to the Debtors' continued operations and the preservation of going-concern value. Without the liquidity provided by the DIP Facility, the Debtors would face an immediate and severe cash shortfall that could precipitate an uncontrolled liquidation, resulting in a catastrophic erosion of value for all stakeholders, including the Protected Lenders. The DIP proceeds will fund ordinary-course operating expenses, regulatory compliance costs, professional fees, and the costs of the restructuring process itself — all of which serve to maintain and protect the collateral base upon which the Protected Lenders' recovery depends.

In addition, Ridgeline Community Bank continues to operate outside the Chapter 11 case under regulatory supervision with approximately $385 million in deposits. While Ridgeline's assets are excluded from the DIP collateral base due to regulatory restrictions, Ridgeline's continued operation as a going concern preserves the value of the holding company's equity interest in the bank, which is among the Debtors' most significant assets and a critical component of any reorganization or sale strategy. Similarly, Cascabel Asset Management LLC managed approximately $1.2 billion in client assets under management as of the Petition Date, representing a valuable going-concern asset that generates recurring fee income and would suffer significant attrition in a disorderly liquidation scenario.

VI. Proposed Documentation and Timeline

Driftwood proposes that the Enhanced Adequate Protection Package be memorialized in a written stipulation (the "Adequate Protection Stipulation") to be negotiated among the relevant parties and filed with the Court in advance of the final hearing. The Adequate Protection Stipulation would be submitted as a companion to, or incorporated into, the proposed Final DIP Order.

The parties to the Adequate Protection Stipulation would include:

(a) Driftwood Absolute Return Fund Ltd., as DIP Lender;

(b) Cascabel Financial Holdings, Inc. and Cascabel Asset Management LLC, as Debtors and Debtors in Possession;

(c) Velthorn National Bank, N.A., in its dual capacities as administrative agent and collateral agent under the Pre-Petition First Lien Term Loan and as a lender holding $38,000,000 in first lien claims; and

(d) Pinnacle Credit Partners Fund II, LP, as a lender holding $28,000,000 in first lien claims.

Brindoval Institutional Lending, LLC, which holds $22,000,000 in first lien claims and is not a member of the Ad Hoc Group, will be invited to join the Adequate Protection Stipulation and receive the full benefits of the Enhanced Adequate Protection Package. We would appreciate your assistance in facilitating communication with Brindoval's counsel (if known to you) for purposes of obtaining Brindoval's joinder.

The Adequate Protection Stipulation will also incorporate the terms of the resolution of the Committee's limited objection, specifically the increase of the Committee's share of the Carve-Out from $500,000 to $750,000 and the extension of the Committee's Challenge Period to 75 days from entry of the Final DIP Order.

Driftwood proposes the following timeline for documentation and implementation:

We recognize that this timeline is aggressive but believe it is achievable given the relatively limited scope of the documentation required. The terms of the Enhanced Adequate Protection Package are set forth in detail in this letter, and we are prepared to circulate an initial draft of the Adequate Protection Stipulation promptly upon receiving an indication of the Ad Hoc Group's interest in proceeding on this basis.

VII. Withdrawal of Objection

Upon execution of the Adequate Protection Stipulation by the parties and entry of the Final DIP Order by the Court, the Ad Hoc Group shall withdraw the Ad Hoc Group Objection filed on September 19, 2023 (D.I. 72) with prejudice. The Ad Hoc Group shall not oppose entry of the Final DIP Order or the approval of the roll-up of Driftwood's $32,000,000 in pre-petition first lien claims into superpriority DIP obligations pari passu with the New Money DIP Tranche.

For the avoidance of doubt, withdrawal of the Ad Hoc Group Objection shall not affect the Ad Hoc Group members' rights under the Challenge Period established by the Final DIP Order. Velthorn and Pinnacle, as parties in interest other than the Committee, shall retain the right to investigate and, if appropriate, challenge the validity, extent, priority, and perfection of Driftwood's pre-petition liens within the 60-day Challenge Period (expiring December 12, 2023, based on an assumed Final DIP Order entry date of October 13, 2023). The Challenge Period rights are separate and distinct from the priming and roll-up issues addressed by the Ad Hoc Group Objection and the Enhanced Adequate Protection Package.

VIII. Reservation of Rights

This letter constitutes a settlement proposal and is made without prejudice to any and all of Driftwood's rights, remedies, claims, and defenses, whether arising under the Bankruptcy Code, the DIP Credit Agreement, the Pre-Petition First Lien Term Loan, applicable non-bankruptcy law, or otherwise.

Nothing contained herein shall constitute, or be deemed to constitute, an admission by Driftwood regarding the merits or substance of the Ad Hoc Group Objection, or an acknowledgment that the existing adequate protection provisions contained in the Interim DIP Order entered September 15, 2023 are insufficient under Section 364(d)(1)(B) of the Bankruptcy Code.

In the event that the parties are unable to reach a consensual resolution on the basis of this proposal or any modification thereof, Driftwood expressly reserves all rights to seek entry of the Final DIP Order over the Ad Hoc Group's objection and to argue that the adequate protection provisions already contained in the Interim DIP Order — including, without limitation, the replacement liens and superpriority claims granted therein — are legally sufficient to satisfy the requirements of Section 364(d)(1)(B).

This letter, and the proposal contained herein, is made subject to and protected by Federal Rule of Evidence 408 and corresponding state rules of evidence regarding the inadmissibility of statements, conduct, and offers made in the course of compromise negotiations. Neither this letter nor any of its contents may be offered or received into evidence in any proceeding, whether in the Bankruptcy Court or any other tribunal, to prove the validity or invalidity of any claim, the amount of any claim, or any party's liability or lack thereof, except in a proceeding to enforce the terms of any agreement reached pursuant to this proposal.

IX. Closing and Response Requested

We respectfully request that you discuss this proposal with your clients, Velthorn National Bank, N.A. and Pinnacle Credit Partners Fund II, LP, and provide us with the Ad Hoc Group's response by close of business on Friday, October 6, 2023. We appreciate that this timeframe is tight, but believe the proposal as presented is comprehensive and commercially reasonable, and that an expedited response will benefit all parties by preserving sufficient time to negotiate, finalize, and file the Adequate Protection Stipulation in advance of the October 13 final hearing.

I am available at any time between now and October 6 for a telephone call or an in-person meeting to discuss any questions, concerns, or proposed modifications that the Ad Hoc Group may have regarding the Enhanced Adequate Protection Package. My team at Calderwood & Harkness — including Nathaniel Bower and Amy Chesterton, who are copied on this letter — is likewise available to support expedited negotiations and drafting.

We are committed to working collaboratively with Hartwell & Crane LLP, Whitfield, Graves & Sato LLP (counsel for the Debtors), and Breckenridge McCoy LLP (counsel for the Committee) to finalize the Adequate Protection Stipulation on an expedited basis that allows all parties to present a consensual resolution to Judge McAllister at the final hearing.

I can be reached at Calderwood & Harkness LLP, 599 Lexington Avenue, New York, NY 10022, telephone (212) 455-7800, or at the firm's Wilmington office at 1000 North King Street, Suite 300, Wilmington, DE 19801, telephone (302) 651-3200. My direct line is (212) 455-7812, and my email is cwhitman@calderwoodharkness.com.

Copies of this letter are being sent simultaneously to Jonathan R. Whitfield at Whitfield, Graves & Sato LLP and Thomas A. Breckenridge at Breckenridge McCoy LLP.

We appreciate your attention to this matter and look forward to hearing from you promptly.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Colette Whitman Partner Bankruptcy & Restructuring

599 Lexington Avenue New York, NY 10022 Tel: (212) 455-7812

Email: cwhitman@calderwoodharkness.com

cc: Marcus Ellison, Driftwood Capital Advisors LLC

Priya Venkatesh, Driftwood Capital Advisors LLC Jonathan R. Whitfield, Whitfield, Graves & Sato LLP Rachel P. Dumont, Whitfield, Graves & Sato LLP Thomas A. Breckenridge, Breckenridge McCoy LLP Terrence M. Kowalski, Alderpoint Advisory Partners LLC (CRO) Nathaniel Bower, Calderwood & Harkness LLP Amy Chesterton, Calderwood & Harkness LLP

Lender	Outstanding Principal	% of Facility
Velthorn National Bank, N.A.	$38,000,000	31.67%
Pinnacle Credit Partners Fund II, LP ("Pinnacle")	$28,000,000	23.33%
Brindoval Institutional Lending, LLC ("Brindoval")	$22,000,000	18.33%
Driftwood Absolute Return Fund Ltd.	$32,000,000	26.67%
Total	$120,000,000	100.00%
Protected Lender	Outstanding Principal	Pro Rata Share	Estimated Monthly Payment
Velthorn National Bank, N.A.	$38,000,000	43.18%	~$303,284
Pinnacle Credit Partners Fund II, LP	$28,000,000	31.82%	~$223,420
Brindoval Institutional Lending, LLC	$22,000,000	25.00%	~$175,429
Total	$88,000,000	100.00%	~$702,133
Milestone	Target Date
Response from Hartwell & Crane LLP to this proposal	October 6, 2023 (COB)
Drafting and finalization of the Adequate Protection Stipulation	October 6–8, 2023
Filing of the Adequate Protection Stipulation with the Court	October 9, 2023
Final hearing on the DIP Facility before Hon. Karen F. McAllister	October 13, 2023
Entry of the Final DIP Order (incorporating the Adequate Protection Stipulation)	October 13, 2023
Upon entry of the Final DIP Order: Draw 2 ($25,000,000) available; Roll-Up ($32,000,000) effectuated	October 13, 2023

CALDERWOOD & HARKNESS LLP
599 Lexington Avenue New York, NY 10022 Tel: (212) 455-7800
Fax: (212) 455-7801
1000 North King Street, Suite 300 Wilmington, DE 19801 Tel: (302) 651-3200
Fax: (302) 651-3201
October 3, 2023
VIA EMAIL AND OVERNIGHT COURIER
Monica L. Hartwell, Esq. Hartwell & Crane LLP 51 JFK Parkway, Suite 200 Short Hills, NJ 07078
Re: In re Cascabel Financial Holdings, Inc., et al., Case No. 23-11487 (KFM), United States Bankruptcy Court for the District of Delaware — Enhanced Adequate Protection Proposal for the Ad Hoc Group of First Lien Lenders
Dear Ms. Hartwell:
I. Introduction and Purpose
I write in my capacity as the responsible partner in the Bankruptcy & Restructuring practice of Calderwood & Harkness LLP on behalf of our client, Driftwood Absolute Return Fund Ltd. ("Driftwood" or "DARF"), a Cayman Islands exempted company with its principal office at 280 Park Avenue, 38th Floor, New York, NY 10017. Driftwood's investment activities are directed by its investment manager, Driftwood Capital Advisors LLC, a Delaware limited liability company. As you are aware, Driftwood is the DIP Lender in the above-captioned Chapter 11 case.
The purpose of this letter is to set forth a comprehensive enhanced adequate protection proposal (the "Enhanced Adequate Protection Package") designed to resolve the objection filed on September 19, 2023 by the Ad Hoc Group of First Lien Lenders (the "Ad Hoc Group"), which your firm represents, to the priming lien and roll-up provisions of the $75,000,000 Senior Secured Superpriority Debtor-in-Possession Credit Facility (the "DIP Facility"). Driftwood has carefully considered the concerns raised in the Ad Hoc Group's objection, and we believe that the proposal outlined below addresses those concerns in a manner that is both legally sufficient under Section 364(d)(1)(B) of the Bankruptcy Code and commercially reasonable under the circumstances.
It is Driftwood's strong view that good-faith negotiations represent the most efficient and value-preserving path to resolution of the Ad Hoc Group's objection. A contested final hearing on the DIP Facility would consume significant estate resources, inject uncertainty into the case at a critical early juncture, and potentially delay the availability of funds that are essential to the Debtors' ongoing operations and the preservation of going-concern value for all stakeholders — including, most notably, the Protected Lenders (as defined below) whose collateral base would be directly and adversely affected by any disruption to the Debtors' business.
Accordingly, Driftwood proposes the Enhanced Adequate Protection Package described herein with the express goal of reaching a consensual resolution in advance of the final hearing on the DIP Facility currently scheduled for October 13, 2023 before the Honorable Karen F. McAllister.
II. Background and Procedural Context
A. The Chapter 11 Filing
Cascabel Financial Holdings, Inc. ("Cascabel" or "CFH"), a Delaware corporation (EIN: 84-3291057), and its wholly owned subsidiary, Cascabel Asset Management LLC ("CAM"), a Delaware limited liability company (together, the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware on September 8, 2023 (the "Petition Date"). The cases are being jointly administered under Case No. 23-11487 (KFM) before the Honorable Karen F. McAllister. The Debtors' principal office is located at 1200 Market Street, Suite 900, Wilmington, DE 19801.
Importantly, Ridgeline Community Bank ("Ridgeline"), a Delaware state-chartered commercial bank regulated by the Delaware Office of the State Bank Commissioner and the Federal Deposit Insurance Corporation, was excluded from the Chapter 11 filing and continues to operate as a going concern under the supervision of its banking regulators. Ridgeline maintains approximately $385 million in deposits and remains in compliance with the conditions established by its regulators, subject to the ongoing supervisory process.
As of the Petition Date, Cascabel's consolidated balance sheet reflected total assets of approximately $620 million and total liabilities of approximately $710 million, resulting in negative equity of approximately $90 million. The Debtors' financial distress is attributable to a confluence of factors, including: (i) concentrated commercial real estate loan losses sustained by Ridgeline, primarily in its metropolitan office and mixed-use lending portfolio; (ii) the failed acquisition in late 2022 of Keyline Technologies, Inc., a financial technology company, which resulted in a write-down of approximately $47 million in goodwill and acquisition-related intangible assets; and (iii) significant depositor outflows at Ridgeline during the first and second quarters of 2023 in the aftermath of broader regional banking sector dislocation, which placed severe liquidity pressure on the holding company and ultimately precipitated the Chapter 11 filing.
B. Pre-Petition Capital Structure
The Debtors' pre-petition funded debt obligations total approximately $183,500,000, consisting of the following:
First Lien Term Loan. A $120,000,000 first lien term loan (the "Pre-Petition First Lien Term Loan"), dated as of January 15, 2021, maturing January 15, 2026, bearing interest at Adjusted Term SOFR plus 425 basis points. Velthorn National Bank, N.A. ("Velthorn") serves as the administrative agent and collateral agent under the Pre-Petition First Lien Term Loan. As of the Petition Date, the full $120,000,000 in principal was outstanding and held by the following lenders:
As the Court and the parties are aware, Driftwood acquired its $32,000,000 participation in the Pre-Petition First Lien Term Loan on the secondary market between March and July 2023 at an average price of $0.68 per dollar of face value, for an aggregate cost basis of $21,760,000. Non-Driftwood first lien claims total $88,000,000, consisting of the positions held by Velthorn ($38,000,000), Pinnacle ($28,000,000), and Brindoval ($22,000,000).
Second Lien Notes. $45,000,000 in 10.50% Senior Secured Second Lien Notes due 2027, issued under an indenture with Zynvaro Trust Company serving as the indenture trustee. Ashford Mezzanine Capital, LP holds approximately $30,000,000 of the second lien notes. The second lien obligations are secured by a lien on substantially the same collateral base as the first lien facility, subject to the terms of the Intercreditor Agreement dated January 15, 2021 between Velthorn, as first lien agent, and Zynvaro Trust Company, as second lien trustee.
Unsecured Notes. $18,500,000 in 8.00% Unsecured Notes due March 1, 2025, which are general unsecured obligations of Cascabel Financial Holdings, Inc.
In total, the Debtors' pre-petition funded debt obligations aggregate $183,500,000 ($120,000,000 first lien + $45,000,000 second lien + $18,500,000 unsecured).
C. The DIP Facility
The DIP Facility, for which Driftwood serves as the sole DIP lender, consists of a total commitment of $75,000,000, structured in two tranches:
(i) New Money DIP Tranche: $43,000,000 in new money commitments, available in two draws:
• Draw 1 (Interim): $18,000,000, which was authorized by the Interim DIP Order entered on September 15, 2023 (D.I. 47) and has been fully funded;
• Draw 2 (Final): $25,000,000, which will become available upon entry of the Final DIP Order; and
(ii) Roll-Up Tranche: $32,000,000, consisting of a dollar-for-dollar roll-up of Driftwood's $32,000,000 in pre-petition first lien claims into superpriority DIP obligations. The roll-up is to be effectuated upon entry of the Final DIP Order, with the rolled-up obligations to rank pari passu with the New Money DIP Tranche in right of payment and lien priority.
The material economic terms of the DIP Facility are as follows:
• Interest Rate: Adjusted Term SOFR plus 900 basis points, with a SOFR floor of 4.00%, resulting in a minimum all-in interest rate of 13.00%. Upon the occurrence and during the continuance of an Event of Default, interest accrues at the default rate of an additional 200 basis points (total spread of 1,100 basis points over Adjusted Term SOFR; minimum all-in default rate of 15.00%).
• Commitment Fee: 2.00% of the total $75,000,000 commitment ($1,500,000), payable upon entry of the Interim DIP Order. This fee has been earned and paid.
• Exit Fee: 1.50% of amounts drawn under the DIP Facility, payable upon repayment, estimated at $1,125,000 based on expected full utilization of the New Money DIP Tranche.
• Unused Line Fee: 0.50% per annum on the undrawn portion of the New Money DIP Tranche, accruing daily and payable quarterly in arrears.
• Security: First priority priming liens on substantially all assets of the Debtors (excluding assets of Ridgeline Community Bank that are subject to regulatory restrictions), including all proceeds of avoidance actions under Chapter 5 of the Bankruptcy Code.
• Carve-Out: $2,500,000 for professional fees of the Debtors' estate professionals and the Official Committee of Unsecured Creditors (with the Committee's share capped at $750,000), plus $250,000 for fees payable to the Clerk of the Bankruptcy Court and the United States Trustee, for a total Carve-Out of $2,750,000.
• Challenge Period: 75 days from entry of the Final DIP Order for the Official Committee of Unsecured Creditors; 60 days from entry of the Final DIP Order for all other parties in interest.
D. The Ad Hoc Group Objection
On September 19, 2023, the Ad Hoc Group filed its objection (D.I. 72) to the priming lien and roll-up provisions of the DIP Facility (the "Ad Hoc Group Objection"). The Ad Hoc Group is comprised of Velthorn National Bank, N.A. ($38,000,000) and Pinnacle Credit Partners Fund II, LP ($28,000,000), which together hold $66,000,000, or 55.00%, of the $120,000,000 Pre-Petition First Lien Term Loan. Your firm, Hartwell & Crane LLP, represents the Ad Hoc Group in these Chapter 11 cases, under your leadership, Ms. Hartwell.
We note that Brindoval Institutional Lending, LLC, which holds $22,000,000 in first lien claims, is not a member of the Ad Hoc Group and has not filed a separate objection. Brindoval's position with respect to the DIP Facility is not yet formally known to us.
We acknowledge the substance of the Ad Hoc Group's concerns regarding the adequacy of protection afforded to the $88,000,000 in non-Driftwood first lien claims that would be primed by the DIP liens and subordinated in priority to Driftwood's rolled-up obligations. The Ad Hoc Group Objection raises questions concerning, among other things, the scope of the priming liens, the magnitude of the roll-up relative to the existing adequate protection package, and the sufficiency of the existing protections under Section 364(d)(1)(B) in light of the risk profile of the Debtors' collateral base. While we believe the existing adequate protection provisions in the Interim DIP Order are legally defensible, we recognize that a consensual resolution is in the best interests of all parties and propose the enhanced package described in Section III below.
We also note for completeness that on October 2, 2023, the Official Committee of Unsecured Creditors (the "Committee"), by and through its counsel, Breckenridge McCoy LLP (Thomas A. Breckenridge), filed a limited objection (D.I. 89) to the DIP Facility concerning the Carve-Out amount and the Challenge Period. The Committee's concerns have been addressed through direct negotiations between Calderwood & Harkness LLP and Breckenridge McCoy LLP, resulting in an increase of the Committee's Carve-Out share from $500,000 to $750,000 and an extension of the Committee's Challenge Period from 60 days to 75 days from entry of the Final DIP Order. The Committee has indicated its intent to withdraw its limited objection upon entry of a Final DIP Order reflecting these modifications.
III. Proposed Enhanced Adequate Protection Package
Driftwood proposes the following Enhanced Adequate Protection Package for the benefit of all holders of pre-petition first lien claims under the Pre-Petition First Lien Term Loan other than Driftwood (collectively, the "Protected Lenders"), including Velthorn National Bank, N.A. (holding $38,000,000), Pinnacle Credit Partners Fund II, LP (holding $28,000,000), and Brindoval Institutional Lending, LLC (holding $22,000,000), in their respective capacities as lenders under the Pre-Petition First Lien Term Loan. The aggregate pre-petition first lien claims of the Protected Lenders total $88,000,000.
A. Replacement Liens
The Debtors shall grant to the Protected Lenders valid, binding, enforceable, and automatically perfected replacement liens (the "Replacement Liens") on all DIP collateral — that is, on substantially all assets of the Debtors, including proceeds of avoidance actions under Chapter 5 of the Bankruptcy Code, but excluding assets of Ridgeline Community Bank subject to regulatory restrictions. The Replacement Liens shall attach to the same collateral base as the pre-petition first lien collateral and shall secure all pre-petition first lien obligations owed to the Protected Lenders in the aggregate amount of $88,000,000.
The Replacement Liens shall be subject and junior only to the following interests:
(a) the DIP liens in favor of Driftwood securing the DIP Facility (including both the New Money DIP Tranche and the Roll-Up Tranche);
(b) the Carve-Out in the aggregate amount of $2,750,000 (consisting of $2,500,000 for professional fees and $250,000 for Clerk of Court and U.S. Trustee fees); and
(c) any valid, perfected, and non-avoidable liens that were senior in priority to the pre-petition first lien liens as of the Petition Date.
No other post-petition liens shall be senior to or pari passu with the Replacement Liens except as specified in clauses (a) through (c) above. The Replacement Liens shall be deemed perfected without the need for the filing of any financing statements, mortgages, deeds of trust, or other documents under applicable state or federal law.
B. Section 507(b) Superpriority Administrative Expense Claims
The Protected Lenders shall be granted allowed superpriority administrative expense claims under Section 507(b) of the Bankruptcy Code (the "Superpriority Claims") in the aggregate amount of $88,000,000, or such lesser amount as may be allowed by the Court, to the extent that the adequate protection provided under the Final DIP Order proves insufficient to compensate the Protected Lenders for any diminution in value of their interests in the pre-petition collateral.
The Superpriority Claims shall be junior only to:
(a) the superpriority administrative expense claims of Driftwood arising under the DIP Facility (including claims on account of both new money advances and rolled-up obligations); and
(b) the Carve-Out.
No other administrative expense claims (whether arising under Section 503(b), Section 507(a), or otherwise) shall be senior to or pari passu with the Protected Lenders' Superpriority Claims, except for the DIP claims of Driftwood and the Carve-Out as provided above.
C. Monthly Adequate Protection Payments
Commencing on the first business day of the first full calendar month following entry of the Final DIP Order, and continuing on the first business day of each calendar month thereafter, the Debtors shall make monthly current-pay interest payments to the Protected Lenders on the $88,000,000 in outstanding pre-petition first lien claims at the non-default contract rate of Adjusted Term SOFR plus 425 basis points. Based on the current Adjusted Term SOFR rate of approximately 5.33%, the estimated all-in annual interest rate is approximately 9.58%, yielding an estimated monthly adequate protection payment of approximately $702,133 (calculated as $88,000,000 × 9.58% ÷ 12).
Monthly adequate protection payments shall be made through Velthorn National Bank, N.A., in its capacity as administrative agent under the Pre-Petition First Lien Term Loan, for distribution pro rata to the Protected Lenders in accordance with their respective outstanding principal balances:
Monthly adequate protection payments shall continue until the earliest to occur of: (i) the stated maturity date of the DIP Facility; (ii) the effective date of a confirmed Chapter 11 plan (the "Plan Effective Date"); (iii) the acceleration of the DIP Facility following the occurrence of an Event of Default thereunder; or (iv) further order of the Court. In each case, the Protected Lenders' rights to receive adequate protection payments shall terminate only upon the satisfaction of all adequate protection obligations or as otherwise provided in the Final DIP Order.
D. Adequate Protection Reserve
A cash reserve in the amount of $3,500,000 (the "Adequate Protection Reserve") shall be funded from the proceeds of the initial DIP draw (Draw 1 of $18,000,000, which was funded under the Interim DIP Order entered September 15, 2023). The Adequate Protection Reserve shall be deposited in a segregated interest-bearing deposit account at Velthorn National Bank, N.A. (or such other financial institution as the Debtors and the Ad Hoc Group may agree), and shall be subject to a first-priority lien in favor of the Protected Lenders.
The Adequate Protection Reserve shall be available to satisfy the Debtors' adequate protection obligations described herein, including the monthly interest payments set forth in Section III.C above, in the event of any shortfall in the Debtors' operating cash flows or any failure by the Debtors to make a timely adequate protection payment. Draws on the Adequate Protection Reserve shall be made upon five (5) business days' written notice from the Administrative Agent to counsel for the Debtors and counsel for the DIP Lender.
Upon the full and indefeasible satisfaction of all adequate protection obligations of the Debtors to the Protected Lenders and repayment in full of the DIP Facility, any remaining amounts in the Adequate Protection Reserve (including accrued interest thereon) shall be returned to the Debtors' estates.
E. Reimbursement of Ad Hoc Group Counsel Fees
The Debtors' estates shall reimburse the reasonable and documented fees and expenses of Hartwell & Crane LLP, as counsel to the Ad Hoc Group, incurred in connection with the review and analysis of the DIP Facility, the preparation and prosecution of the Ad Hoc Group Objection to the priming and roll-up provisions, and the negotiation and documentation of the Enhanced Adequate Protection Package and the Adequate Protection Stipulation (as defined below).
Such reimbursement shall be capped at $1,200,000 in the aggregate (the "Fee Cap"). Invoices shall be submitted on a monthly basis to counsel for the Debtors — Jonathan R. Whitfield, Whitfield, Graves & Sato LLP — and counsel for the DIP Lender — Calderwood & Harkness LLP — with a review period of ten (10) business days following submission. Any objections to the reasonableness of invoiced amounts shall be raised within the review period, and any unresolved disputes shall be submitted to the Court for determination. Payment of undisputed invoiced amounts shall be made from the Debtors' estates as an administrative expense under and pursuant to the DIP Credit Agreement and the Final DIP Order.
IV. Budget and Reporting Protections
As an additional element of protection for the Protected Lenders, Driftwood notes that the DIP Credit Agreement already contains robust budget and reporting provisions that provide transparency into the Debtors' financial position and liquidity profile. Specifically:
The DIP Credit Agreement requires the Debtors to maintain a 13-week rolling cash flow budget (the "DIP Budget"), which is updated every four (4) weeks. The DIP Budget is prepared in coordination with the Debtors' Chief Restructuring Officer, Terrence M. Kowalski of Alderpoint Advisory Partners LLC, and the Debtors' investment banker, Solstice Partners LLC (David R. Chin, Managing Director). Budget compliance is tested on a cumulative bi-weekly basis, with permitted variances of ±10% on revenue items and ±15% on disbursement items. Non-compliance with the DIP Budget beyond the permitted variance thresholds constitutes an Event of Default under the DIP Credit Agreement, subject to applicable cure provisions.
Driftwood will consent to the Ad Hoc Group receiving copies of the bi-weekly budget variance reports contemporaneously with their delivery to the DIP Lender, subject to the execution by counsel and principals of the Ad Hoc Group members of customary confidentiality agreements in form and substance reasonably acceptable to the Debtors and the DIP Lender. This will provide the Ad Hoc Group with timely visibility into the Debtors' cash flows and the adequacy of the collateral base.
In addition, the milestones set forth in the DIP Credit Agreement provide an important governance framework and discipline on the case timeline. These milestones include, among others, the requirement that the Debtors file a plan of reorganization and disclosure statement within 90 days of the Petition Date (i.e., by December 7, 2023) and obtain confirmation of the plan within 150 days of the Petition Date (i.e., by February 5, 2024). Failure to comply with the milestones constitutes an Event of Default under the DIP Credit Agreement, providing the DIP Lender and, indirectly, the Protected Lenders with the ability to enforce compliance with the restructuring timetable.
V. Basis for Adequacy of Protection
Driftwood submits that the Enhanced Adequate Protection Package, taken as a whole, more than satisfies the requirements of Section 364(d)(1)(B) of the Bankruptcy Code, which provides that a court may authorize the obtaining of credit secured by a senior or equal lien on property that is subject to a prior lien only if "the interest of the holder of such lien is adequately protected." The determination of adequate protection is a fact-intensive inquiry committed to the sound discretion of the bankruptcy court, and the Bankruptcy Code does not require that adequate protection eliminate all risk — rather, it must compensate the affected creditor for any diminution in value of its collateral interest resulting from the priming.
The combination of the five components of the Enhanced Adequate Protection Package — (i) Replacement Liens, (ii) Section 507(b) Superpriority Claims, (iii) current-pay monthly interest at the non-default contract rate, (iv) the $3,500,000 Adequate Protection Reserve, and (v) reimbursement of up to $1,200,000 in counsel fees — provides a comprehensive and layered package that compensates the Protected Lenders for the diminution in value, if any, of their collateral position resulting from the priming and the roll-up.
The adequacy of this package is further supported by a substantial equity cushion. As reflected in the Debtors' Schedules and the First Day Declarations, Cascabel's total consolidated assets are valued at approximately $620 million. The aggregate DIP claims at full utilization total $75,000,000, and the Protected Lenders' first lien claims total $88,000,000, for a combined senior and primed secured claim amount of $163,000,000. The ratio of total assets to these combined claims is approximately 3.8x, providing a substantial collateral cushion that insulates the Protected Lenders from risk of loss.
Moreover, the DIP Facility is essential to the Debtors' continued operations and the preservation of going-concern value. Without the liquidity provided by the DIP Facility, the Debtors would face an immediate and severe cash shortfall that could precipitate an uncontrolled liquidation, resulting in a catastrophic erosion of value for all stakeholders, including the Protected Lenders. The DIP proceeds will fund ordinary-course operating expenses, regulatory compliance costs, professional fees, and the costs of the restructuring process itself — all of which serve to maintain and protect the collateral base upon which the Protected Lenders' recovery depends.
In addition, Ridgeline Community Bank continues to operate outside the Chapter 11 case under regulatory supervision with approximately $385 million in deposits. While Ridgeline's assets are excluded from the DIP collateral base due to regulatory restrictions, Ridgeline's continued operation as a going concern preserves the value of the holding company's equity interest in the bank, which is among the Debtors' most significant assets and a critical component of any reorganization or sale strategy. Similarly, Cascabel Asset Management LLC managed approximately $1.2 billion in client assets under management as of the Petition Date, representing a valuable going-concern asset that generates recurring fee income and would suffer significant attrition in a disorderly liquidation scenario.
VI. Proposed Documentation and Timeline
Driftwood proposes that the Enhanced Adequate Protection Package be memorialized in a written stipulation (the "Adequate Protection Stipulation") to be negotiated among the relevant parties and filed with the Court in advance of the final hearing. The Adequate Protection Stipulation would be submitted as a companion to, or incorporated into, the proposed Final DIP Order.
The parties to the Adequate Protection Stipulation would include:
(a) Driftwood Absolute Return Fund Ltd., as DIP Lender;
(b) Cascabel Financial Holdings, Inc. and Cascabel Asset Management LLC, as Debtors and Debtors in Possession;
(c) Velthorn National Bank, N.A., in its dual capacities as administrative agent and collateral agent under the Pre-Petition First Lien Term Loan and as a lender holding $38,000,000 in first lien claims; and
(d) Pinnacle Credit Partners Fund II, LP, as a lender holding $28,000,000 in first lien claims.
Brindoval Institutional Lending, LLC, which holds $22,000,000 in first lien claims and is not a member of the Ad Hoc Group, will be invited to join the Adequate Protection Stipulation and receive the full benefits of the Enhanced Adequate Protection Package. We would appreciate your assistance in facilitating communication with Brindoval's counsel (if known to you) for purposes of obtaining Brindoval's joinder.
The Adequate Protection Stipulation will also incorporate the terms of the resolution of the Committee's limited objection, specifically the increase of the Committee's share of the Carve-Out from $500,000 to $750,000 and the extension of the Committee's Challenge Period to 75 days from entry of the Final DIP Order.
Driftwood proposes the following timeline for documentation and implementation:
We recognize that this timeline is aggressive but believe it is achievable given the relatively limited scope of the documentation required. The terms of the Enhanced Adequate Protection Package are set forth in detail in this letter, and we are prepared to circulate an initial draft of the Adequate Protection Stipulation promptly upon receiving an indication of the Ad Hoc Group's interest in proceeding on this basis.
VII. Withdrawal of Objection
Upon execution of the Adequate Protection Stipulation by the parties and entry of the Final DIP Order by the Court, the Ad Hoc Group shall withdraw the Ad Hoc Group Objection filed on September 19, 2023 (D.I. 72) with prejudice. The Ad Hoc Group shall not oppose entry of the Final DIP Order or the approval of the roll-up of Driftwood's $32,000,000 in pre-petition first lien claims into superpriority DIP obligations pari passu with the New Money DIP Tranche.
For the avoidance of doubt, withdrawal of the Ad Hoc Group Objection shall not affect the Ad Hoc Group members' rights under the Challenge Period established by the Final DIP Order. Velthorn and Pinnacle, as parties in interest other than the Committee, shall retain the right to investigate and, if appropriate, challenge the validity, extent, priority, and perfection of Driftwood's pre-petition liens within the 60-day Challenge Period (expiring December 12, 2023, based on an assumed Final DIP Order entry date of October 13, 2023). The Challenge Period rights are separate and distinct from the priming and roll-up issues addressed by the Ad Hoc Group Objection and the Enhanced Adequate Protection Package.
VIII. Reservation of Rights
This letter constitutes a settlement proposal and is made without prejudice to any and all of Driftwood's rights, remedies, claims, and defenses, whether arising under the Bankruptcy Code, the DIP Credit Agreement, the Pre-Petition First Lien Term Loan, applicable non-bankruptcy law, or otherwise.
Nothing contained herein shall constitute, or be deemed to constitute, an admission by Driftwood regarding the merits or substance of the Ad Hoc Group Objection, or an acknowledgment that the existing adequate protection provisions contained in the Interim DIP Order entered September 15, 2023 are insufficient under Section 364(d)(1)(B) of the Bankruptcy Code.
In the event that the parties are unable to reach a consensual resolution on the basis of this proposal or any modification thereof, Driftwood expressly reserves all rights to seek entry of the Final DIP Order over the Ad Hoc Group's objection and to argue that the adequate protection provisions already contained in the Interim DIP Order — including, without limitation, the replacement liens and superpriority claims granted therein — are legally sufficient to satisfy the requirements of Section 364(d)(1)(B).
This letter, and the proposal contained herein, is made subject to and protected by Federal Rule of Evidence 408 and corresponding state rules of evidence regarding the inadmissibility of statements, conduct, and offers made in the course of compromise negotiations. Neither this letter nor any of its contents may be offered or received into evidence in any proceeding, whether in the Bankruptcy Court or any other tribunal, to prove the validity or invalidity of any claim, the amount of any claim, or any party's liability or lack thereof, except in a proceeding to enforce the terms of any agreement reached pursuant to this proposal.
IX. Closing and Response Requested
We respectfully request that you discuss this proposal with your clients, Velthorn National Bank, N.A. and Pinnacle Credit Partners Fund II, LP, and provide us with the Ad Hoc Group's response by close of business on Friday, October 6, 2023. We appreciate that this timeframe is tight, but believe the proposal as presented is comprehensive and commercially reasonable, and that an expedited response will benefit all parties by preserving sufficient time to negotiate, finalize, and file the Adequate Protection Stipulation in advance of the October 13 final hearing.
I am available at any time between now and October 6 for a telephone call or an in-person meeting to discuss any questions, concerns, or proposed modifications that the Ad Hoc Group may have regarding the Enhanced Adequate Protection Package. My team at Calderwood & Harkness — including Nathaniel Bower and Amy Chesterton, who are copied on this letter — is likewise available to support expedited negotiations and drafting.
We are committed to working collaboratively with Hartwell & Crane LLP, Whitfield, Graves & Sato LLP (counsel for the Debtors), and Breckenridge McCoy LLP (counsel for the Committee) to finalize the Adequate Protection Stipulation on an expedited basis that allows all parties to present a consensual resolution to Judge McAllister at the final hearing.
I can be reached at Calderwood & Harkness LLP, 599 Lexington Avenue, New York, NY 10022, telephone (212) 455-7800, or at the firm's Wilmington office at 1000 North King Street, Suite 300, Wilmington, DE 19801, telephone (302) 651-3200. My direct line is (212) 455-7812, and my email is cwhitman@calderwoodharkness.com.
Copies of this letter are being sent simultaneously to Jonathan R. Whitfield at Whitfield, Graves & Sato LLP and Thomas A. Breckenridge at Breckenridge McCoy LLP.
We appreciate your attention to this matter and look forward to hearing from you promptly.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Colette Whitman Partner Bankruptcy & Restructuring
599 Lexington Avenue New York, NY 10022 Tel: (212) 455-7812
Email: cwhitman@calderwoodharkness.com
cc: Marcus Ellison, Driftwood Capital Advisors LLC
Priya Venkatesh, Driftwood Capital Advisors LLC Jonathan R. Whitfield, Whitfield, Graves & Sato LLP Rachel P. Dumont, Whitfield, Graves & Sato LLP Thomas A. Breckenridge, Breckenridge McCoy LLP Terrence M. Kowalski, Alderpoint Advisory Partners LLC (CRO) Nathaniel Bower, Calderwood & Harkness LLP Amy Chesterton, Calderwood & Harkness LLP
Lender | Outstanding Principal | % of Facility
Velthorn National Bank, N.A. | $38,000,000 | 31.67%
Pinnacle Credit Partners Fund II, LP ("Pinnacle") | $28,000,000 | 23.33%
Brindoval Institutional Lending, LLC ("Brindoval") | $22,000,000 | 18.33%
Driftwood Absolute Return Fund Ltd. | $32,000,000 | 26.67%
Total | $120,000,000 | 100.00%
Protected Lender | Outstanding Principal | Pro Rata Share | Estimated Monthly Payment
Velthorn National Bank, N.A. | $38,000,000 | 43.18% | ~$303,284
Pinnacle Credit Partners Fund II, LP | $28,000,000 | 31.82% | ~$223,420
Brindoval Institutional Lending, LLC | $22,000,000 | 25.00% | ~$175,429
Total | $88,000,000 | 100.00% | ~$702,133
Milestone | Target Date
Response from Hartwell & Crane LLP to this proposal | October 6, 2023 (COB)
Drafting and finalization of the Adequate Protection Stipulation | October 6–8, 2023
Filing of the Adequate Protection Stipulation with the Court | October 9, 2023
Final hearing on the DIP Facility before Hon. Karen F. McAllister | October 13, 2023
Entry of the Final DIP Order (incorporating the Adequate Protection Stipulation) | October 13, 2023
Upon entry of the Final DIP Order: Draw 2 ($25,000,000) available; Roll-Up ($32,000,000) effectuated | October 13, 2023

CALDERWOOD & HARKNESS LLP

VIA EMAIL AND OVERNIGHT COURIER

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts