MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Samuel Eklund, Responsible Partner Linda Osei, Billing Partner Sylvia Hartwell, Specialist Partner, Tax
FROM: Hannah Brinkley, Lead Associate Patrick Gallagher, Working Associate
DATE: June 2, 2023
RE: Driftwood CLO 2023-I — Warehouse-to-CLO Take-Out Mechanics
Matter No.: 1024-00004
Billing Code: DARF-CLO-2023I
CLIENT: Driftwood Absolute Return Fund Ltd.
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I. Executive Summary and Purpose
The purpose of this memorandum is to analyze in detail the mechanics for taking out the $250,000,000 revolving warehouse credit facility provided by Havenwood Bank, N.A. at the closing of the Driftwood CLO 2023-I transaction, and to identify the procedural, timing, documentary, and coordination steps required to execute the warehouse take-out in a manner consistent with the requirements of the warehouse facility agreement, the CLO Indenture, the Note Purchase Agreement, and applicable law. This memorandum is intended to serve as a comprehensive working document for the Calderwood & Harkness deal team and the responsible partners overseeing the transaction.
Transaction Overview. Driftwood CLO 2023-I, Ltd., a Cayman Islands exempted company (Registration No. EX-382916), will serve as the Issuer, and Driftwood CLO 2023-I, LLC, a Delaware limited liability company (DE File No. 7429831), will serve as the Co-Issuer. Together, the Issuer and the Co-Issuer are issuing $400,000,000 in notes across six tranches. The primary purpose of the note issuance is to take out the existing warehouse credit facility provided by Havenwood Bank, N.A. and to fund the remaining collateral portfolio to its target par amount.
Driftwood Credit Management LLC (SEC CRD #182447), a registered investment adviser, serves as the Collateral Manager for the transaction. David Hwan, Managing Director, Structured Credit, at Driftwood Credit Management, is the portfolio manager responsible for collateral selection and oversight of the warehouse ramp process. The Collateral Manager's principal office is located at 200 Brickell Avenue, Suite 3100, Miami, FL 33131.
The warehouse credit facility was executed on May 22, 2023, and the ramp of collateral purchases commenced on May 25, 2023. Based on discussions with Mr. Hwan and the Driftwood trading desk, the warehouse ramp is expected to be approximately 85% complete by August 15, 2023. As of the target CLO Closing Date, the anticipated outstanding balance under the warehouse facility will be approximately $212,500,000, which amount must be repaid in full from CLO note proceeds at closing.
The target CLO Closing Date, which will also serve as the warehouse take-out date, is anticipated to fall in September 2023. Based on the current transaction timeline, including the anticipated pricing date of September 8, 2023, the Closing Date has been subsequently confirmed as September 12, 2023, with final settlement and DTC clearance expected within one week following closing, on or about September 20, 2023.
Scope of This Memorandum. This memorandum addresses the following topics in connection with the warehouse take-out: (1) the terms of the warehouse facility relevant to the take-out; (2) the sources and uses of closing funds; (3) the collateral assignment procedures required to transfer the warehouse collateral portfolio to the CLO structure; (4) the payoff and release mechanics for the warehouse facility; (5) the coordination steps required with Ironclad Trust Company, N.A. as the incoming trustee and custodian; (6) DTC settlement timing and note delivery mechanics; and (7) the key documentary deliverables that must be prepared, negotiated, reviewed, and executed in connection with the warehouse take-out.
This memorandum should be read in conjunction with the draft Indenture (most recent draft circulated on May 28, 2023), the executed warehouse facility agreement dated May 22, 2023, and the preliminary offering memorandum. We anticipate updating this memorandum as the transaction timeline firms and additional details become available, including the final payoff figures and the collateral portfolio composition as of the Closing Date.
II. Overview of the Warehouse Facility
A. Facility Terms
The warehouse credit facility is a $250,000,000 revolving credit facility provided by Havenwood Bank, N.A. to the Issuer for the purpose of acquiring broadly syndicated first-lien senior secured leveraged loans during the pre-CLO ramp period. The material terms of the warehouse facility are summarized below.
Lender. Havenwood Bank, N.A. is a national banking association with its principal office located at 227 West Monroe Street, Chicago, IL 60606. The primary relationship contact at Havenwood Bank for the warehouse facility is Thomas Eriksen, Managing Director, Structured Finance Lending. All payoff-related communications should be directed to Mr. Eriksen in the first instance, with copies to the relevant operational contacts at Havenwood Bank to be identified in the payoff letter.
Warehouse Lender's Counsel. Havenwood Bank is represented in connection with the warehouse facility and the CLO take-out by Kenton & Caldwell LLP. The lead partner at Kenton & Caldwell is Victor Salazar, Partner, Banking & Finance, whose office is located at 200 Park Avenue, New York, NY 10166. Mr. Salazar will be responsible for preparing or reviewing the release documentation on behalf of Havenwood Bank, as discussed further in Section VI below.
Facility Amount. The aggregate revolving commitment under the warehouse facility is $250,000,000. Advances under the facility are made on a revolving basis as the Collateral Manager directs purchases of eligible collateral assets during the ramp period.
Advance Rate. Advances under the warehouse facility are made at an advance rate of 85% of the eligible collateral par value, as determined by Havenwood Bank's collateral valuation methodology. This advance rate is consistent with market practice for CLO warehouse facilities of this type. Accordingly, for approximately $250,000,000 in collateral par accumulated during the ramp period, the maximum draw capacity under the facility would be approximately $212,500,000.
Interest Rate. Interest on outstanding advances under the warehouse facility accrues at a rate equal to Compounded SOFR plus 150 basis points, calculated on an Actual/360 day count basis. Interest is payable monthly in arrears.
Facility Date. The warehouse credit facility was executed on May 22, 2023. The facility has a scheduled maturity date that extends beyond the anticipated CLO Closing Date, ensuring that the warehouse remains available during the full ramp period and until the CLO take-out is consummated.
Borrower. The borrower under the warehouse facility is Driftwood CLO 2023-I, Ltd. (the Issuer). Prior to the CLO closing, all collateral purchased during the ramp period is held in the warehouse custody structure and pledged to Havenwood Bank, N.A. as security for the outstanding advances.
Collateral Manager Involvement. Driftwood Credit Management LLC, in its capacity as Collateral Manager, selects and directs the purchase of broadly syndicated first-lien senior secured leveraged loans during the warehouse ramp period. All purchases are subject to the eligibility criteria set forth in the warehouse facility agreement and, to the extent practicable during the ramp, the collateral quality tests that will apply under the CLO Indenture. The Collateral Manager's investment team, led by David Hwan, maintains day-to-day responsibility for trade execution and portfolio construction during the ramp.
B. Ramp Status and Expected Balance at Take-Out
The warehouse ramp commenced on May 25, 2023, with the first collateral purchases settling in the days immediately following. Based on the current pace of purchases and market conditions, Mr. Hwan has indicated that the warehouse is expected to be approximately 85% ramped by August 15, 2023, which is in advance of the anticipated signing date of August 22, 2023.
At the time of warehouse take-out (i.e., the CLO Closing Date, currently targeted for September 12, 2023), the outstanding principal balance drawn under the warehouse facility is projected to be approximately $212,500,000. This figure represents draws at the 85% advance rate against approximately $250,000,000 of collateral par accumulated during the ramp period. The actual outstanding balance at take-out may vary depending on the precise level of collateral purchases made during the final weeks of the ramp, any repayments or principal paydowns received on the underlying loans during the ramp period, and the application of the advance rate to the final collateral par balance.
In addition to the outstanding principal balance, accrued and unpaid interest on the warehouse advances will also be due and payable at take-out. The exact amount of accrued interest will be calculated through the payoff date and set forth in the payoff letter to be delivered by Havenwood Bank, as described in Section V below. Based on the anticipated outstanding balance and the contractual interest rate, we estimate that accrued interest at the time of take-out will be in the range of approximately $800,000 to $1,200,000, depending on the exact payoff date and the prevailing SOFR rate. This estimate will be refined as the Closing Date approaches.
C. Take-Out Provisions in the Warehouse Agreement
The warehouse facility agreement expressly contemplates that the facility will be taken out through the consummation of a broadly syndicated CLO securitization. The relevant take-out provisions of the warehouse facility agreement may be summarized as follows:
Full Repayment and Termination. Upon consummation of the CLO take-out, all outstanding obligations under the warehouse facility — including all outstanding principal, accrued and unpaid interest, and any breakage costs, fees, or expenses owed to Havenwood Bank — must be paid in full. The warehouse facility will terminate upon receipt by Havenwood Bank of the full payoff amount and the execution of the Termination and Release Agreement.
Release of Collateral. Havenwood Bank is contractually obligated to release all liens, security interests, pledges, and encumbrances on the collateral assets upon receipt of the full payoff amount. The mechanics of the release, including the form and timing of the release documentation, are discussed in Section VI below. The release is a critical prerequisite to the effectiveness of the Indenture lien that will secure the CLO notes.
Notice Requirements. The warehouse facility agreement requires that the Issuer provide Havenwood Bank with a minimum of three (3) business days' advance written notice prior to the intended take-out date. This notice is necessary to allow Havenwood Bank sufficient time to prepare the final payoff figures, arrange for the preparation of release documentation, and coordinate the internal approvals required to execute the Termination and Release Agreement. The Calderwood & Harkness team should ensure that this notice is delivered promptly upon confirmation of the Closing Date.
III. Sources and Uses of Funds at CLO Closing
A. Sources
The sole source of funds for the CLO closing will be the proceeds from the issuance of CLO Notes by the Issuer and Co-Issuer. The total aggregate principal amount of notes to be issued is $400,000,000, distributed across six tranches as set forth in the table below.
The notes will be offered and sold pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). The rated notes (Class A-1 through Class D) will be issued in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. The subordinated notes will be issued in minimum denominations of $250,000 and integral multiples of $1 in excess thereof, reflecting the equity-like nature of the subordinated tranche.
B. Uses
The proceeds from the issuance of the CLO Notes will be applied as follows at and in connection with the Closing Date:
1. Warehouse Payoff to Havenwood Bank, N.A. The first-priority use of proceeds will be the repayment in full of all outstanding obligations under the warehouse facility. The estimated payoff amount is $212,500,000 in principal plus accrued and unpaid interest through the payoff date (the exact accrued interest amount to be confirmed in the payoff letter from Havenwood Bank). As described further in Section V below, the warehouse payoff wire will be the first disbursement from the Issuer's closing account following receipt of note proceeds.
2. Placement Fee to Meridian Atlantic Securities LLC. A placement fee of $1,820,000 is payable to Meridian Atlantic Securities LLC as lead placement agent. This fee represents 0.50% of the aggregate principal amount of the rated notes ($364,000,000 = $256,000,000 + $40,000,000 + $28,000,000 + $24,000,000 + $16,000,000). The placement fee will be wire-transferred to Meridian Atlantic on the Closing Date in accordance with the Note Purchase Agreement and the Closing Funds Flow Memorandum.
3. Co-Placement Fee to Northbridge Capital Markets Inc. A co-placement fee of $90,000 is payable to Northbridge Capital Markets Inc. as co-placement agent for the subordinated notes. This fee represents 0.25% of the aggregate principal amount of the subordinated notes ($36,000,000). The co-placement fee will be wire-transferred to Northbridge on the Closing Date.
4. Funding of Transaction Accounts. A portion of the note proceeds will be deposited into the various transaction accounts established under the Indenture, including the Collection Account, Payment Account, Interest Reserve Account, and Expense Account. These accounts will be established at Havenwood Bank, N.A. in its capacity as account bank and held by Ironclad Trust Company, N.A. in its capacity as Indenture Trustee. The specific initial deposit amounts for each account will be set forth in the Closing Funds Flow Memorandum.
5. Remaining Collateral Purchases. After application of proceeds to the warehouse payoff, placement fees, account funding, and transaction expenses, the remaining note proceeds will be available to fund additional collateral purchases during the post-closing ramp period. The target portfolio par is $400,000,000, and the Indenture requires that the Effective Date conditions (including full ramp and compliance with collateral quality tests and coverage tests) be satisfied by December 12, 2023, which is ninety (90) days following the Pricing Date of September 8, 2023.
6. Transaction Expenses. The remaining transaction expenses to be paid at or in connection with closing include legal fees (Calderwood & Harkness LLP, Kenton & Caldwell LLP, Ashworth & Pratt LLP, Applegategate Offshore Services Ltd., and other counsel), rating agency fees (Brindoval Analytical Services Inc. and Ridgeline Credit Ratings LLC), trustee acceptance fees (Ironclad Trust Company, N.A.), printing and document reproduction costs, and other customary closing costs. Estimated aggregate closing expenses (exclusive of placement fees) are in the range of $1,500,000 to $2,000,000; exact figures will be set forth in the Closing Funds Flow Memorandum.
C. Net Funding Requirement
After application of CLO note proceeds to the warehouse payoff of approximately $212,500,000, the remaining proceeds available for new collateral purchases, account funding, and expenses will be approximately as follows:
Total CLO Note Proceeds: $400,000,000 Less: Warehouse Payoff (estimated): ($212,500,000) Less: Placement Fee (Meridian Atlantic): ($1,820,000) Less: Co-Placement Fee (Northbridge): ($90,000) Less: Estimated Transaction Expenses: ($1,750,000) (estimated) Net Available for New Purchases and Reserves: approximately $183,840,000
The exact net funding requirement will be set forth in the Closing Funds Flow Memorandum, which will be prepared by Calderwood & Harkness in coordination with David Hwan (Driftwood Credit Management), Jonathan Halevy (Meridian Atlantic Securities), and Catherine Nowak (Ironclad Trust Company), and circulated to all parties no later than five (5) business days before the Closing Date.
IV. Collateral Assignment Procedures
A. Transfer of Collateral from Warehouse to CLO Structure
On the Closing Date, all collateral assets held in the warehouse custody accounts at Havenwood Bank, N.A. will be assigned and transferred to Driftwood CLO 2023-I, Ltd. (the Issuer). This transfer is the mechanism by which the collateral portfolio that was accumulated during the warehouse ramp period becomes the property of the CLO Issuer, free and clear of the warehouse lien, and is simultaneously pledged to Ironclad Trust Company, N.A. as security for the CLO notes under the Indenture.
The transfer of collateral will be effected pursuant to an Assignment of Collateral agreement (the "Assignment Agreement") to be entered into between the Issuer (as assignee) and the warehouse entity and/or Havenwood Bank, N.A. (as assignor and/or releasing party). The Assignment Agreement will provide for the transfer of all right, title, and interest in and to the collateral assets identified on the schedule attached thereto from the warehouse structure to the Issuer, effective as of the Closing Date. Calderwood & Harkness will prepare the initial draft of the Assignment Agreement and circulate it to Kenton & Caldwell LLP for review and comment on behalf of Havenwood Bank.
Simultaneously with the execution and delivery of the Assignment Agreement and the receipt by Havenwood Bank of the full payoff amount, the transferred collateral will be pledged to Ironclad Trust Company, N.A. (100 Wall Street, Suite 1650, New York, NY 10005) as Trustee under the Indenture dated August 22, 2023. The pledge is effected by operation of the grant clause in the Indenture, which provides for a first-priority perfected security interest in all collateral assets in favor of the Trustee for the benefit of the secured parties (i.e., the noteholders). Catherine Nowak, Vice President, Corporate Trust, at Ironclad Trust, is the primary contact for custodial matters related to the collateral transfer and the ongoing custody of the CLO's collateral portfolio.
B. Schedule of Transferred Loan Positions
The Assignment Agreement must attach a detailed schedule of all transferred loan positions (the "Collateral Schedule"). The Collateral Schedule will identify each loan position by the following data points, at a minimum:
• Obligor name
• CUSIP and/or Loan Identification Number (LIN)
• Par amount held
• Original purchase price (as a percentage of par)
• Current market value (as of the most recent valuation date)
• Agent bank (administrative agent under the underlying credit agreement)
• Maturity date
• Spread (margin above SOFR or applicable reference rate)
• Moody's/S&P credit rating (or equivalent Brindoval/Ridgeline rating)
The Collateral Schedule will be compiled by the Driftwood Credit Management trading desk under the supervision of David Hwan, reviewed by Calderwood & Harkness for completeness and consistency with the Indenture eligibility criteria, and attached as an exhibit to the Assignment Agreement and the Officer's Certificate of the Issuer.
Each transferred loan must satisfy the eligibility criteria set forth in the Indenture. The principal eligibility requirements, as currently drafted, include the following:
• Asset Type: Broadly syndicated first-lien senior secured leveraged loans (primarily U.S. obligors).
• Minimum Weighted Average Spread: 350 basis points.
• Minimum Diversity Score: 60.
• Maximum CCC Bucket: 7.5% of the target portfolio par ($30,000,000 based on a $400,000,000 target par).
• Maximum Second-Lien Bucket: 5.0% of the target portfolio par ($20,000,000).
• Maximum Fixed-Rate Bucket: 10.0% of the target portfolio par ($40,000,000).
• Minimum Weighted Average Recovery Rate: 45.0%.
• Minimum Weighted Average Rating Factor (WARF): 2,850 (Brindoval scale).
• Maximum Weighted Average Life (WAL): 7.5 years.
Compliance with each of the foregoing collateral quality tests must be confirmed as of the Closing Date in the Officer's Certificate to be delivered by an authorized officer of the Issuer. Any failure to satisfy these tests as of the Closing Date would constitute a failure of a condition to closing under the Indenture and the Note Purchase Agreement and could delay or prevent the issuance of the CLO notes and the warehouse take-out.
C. Representations Regarding Title and Eligibility
The Assignment Agreement will include the following representations and warranties from the warehouse entity and/or Havenwood Bank:
(a) Good Title. The warehouse entity/Havenwood Bank has good and marketable title to each collateral asset identified on the Collateral Schedule, free and clear of all liens, security interests, pledges, claims, and encumbrances, other than the warehouse liens being released simultaneously with the take-out.
(b) Eligibility. Each collateral asset on the Collateral Schedule satisfies the Indenture eligibility criteria as of the transfer date, based on information available to the Collateral Manager as of such date.
(c) No Defaults. To the knowledge of the warehouse entity and the Collateral Manager, no event of default or unmatured event of default exists under the underlying loan documentation for any collateral asset identified on the Collateral Schedule, and no obligor is the subject of a bankruptcy, insolvency, or similar proceeding as of the transfer date.
(d) No Adverse Claims. No person or entity other than Havenwood Bank (pursuant to the warehouse lien) has asserted any claim, lien, or interest in or to the collateral assets.
These representations are critical to the structural integrity of the CLO and to the comfort of the rating agencies, the Trustee, and the noteholders. Calderwood & Harkness will negotiate the scope and qualification of these representations with Kenton & Caldwell LLP in the drafting process.
D. Custodial Transfer Mechanics
Loan Positions Held in Electronic Form. The vast majority of the collateral assets are expected to be represented by book-entry positions in the records of the applicable agent banks. Ironclad Trust Company, N.A. will receive notice of the transfer of each such position via the administrative agent banks for the underlying syndicated loans. The transfer process for syndicated loan positions typically involves the submission of institutional trade confirmations and LSTA standard assignment and assumption forms (or their electronic equivalents, as applicable). Ironclad Trust's operations team, under the direction of Catherine Nowak, will coordinate with the Driftwood Credit Management trading desk and the relevant agent banks to ensure timely and accurate processing of all assignment and transfer instructions.
Physical Notes. In the event that any collateral assets are represented by physical promissory notes or other physical instruments, the originals of such instruments must be physically delivered to Ironclad Trust's vault at its offices at 100 Wall Street, Suite 1650, New York, NY 10005, or to a sub-custodian designated by Ironclad Trust in accordance with the Collateral Administration Agreement. Physical delivery of original notes must be effected on or prior to the Closing Date, with appropriate endorsements or allonges as required.
Timing. Custodial transfers of collateral positions must be initiated at least two (2) business days prior to the Closing Date to allow for settlement of the transfers through the agent banks and confirmation of receipt by Ironclad Trust. Given the number of positions likely to be in the portfolio at closing (estimated at 200 to 250 individual loan positions), early coordination between the Driftwood Credit Management team and the Ironclad Trust custody operations team is essential. David Hwan (Driftwood/DCM) and Catherine Nowak (Ironclad Trust) should begin the custodial transfer coordination process no later than one week before the anticipated Closing Date, with a target of having all transfer instructions submitted to the relevant agent banks by no later than two (2) business days before closing.
V. Warehouse Payoff Mechanics
A. Payoff Letter
Havenwood Bank, N.A. will deliver a payoff letter (the "Payoff Letter") to the Issuer (Driftwood CLO 2023-I, Ltd.) and to Calderwood & Harkness LLP, as counsel to the Issuer. The Payoff Letter is a critical closing deliverable, as it sets forth the precise amount required to fully discharge all outstanding obligations under the warehouse facility and provides the wire transfer instructions necessary to effect the payoff.
The Payoff Letter will state the following information:
(a) The outstanding principal balance under the warehouse facility as of the payoff date (estimated at $212,500,000);
(b) Accrued and unpaid interest on the outstanding advances, computed at the contractual rate of Compounded SOFR plus 150 basis points on an Actual/360 day count basis, through and including the payoff date;
(c) Any breakage costs, facility fees, prepayment premiums (if applicable), unused commitment fees, or other expenses owed to Havenwood Bank under the terms of the warehouse facility agreement;
(d) The aggregate payoff amount, representing the sum of items (a), (b), and (c) above; and
(e) Wire transfer instructions for Havenwood Bank, N.A., including the receiving bank name, ABA routing number, account number, account name, and any applicable reference numbers.
Calderwood & Harkness will review the Payoff Letter upon receipt to confirm its accuracy, verify consistency with the terms of the warehouse facility agreement, and independently verify the accrued interest calculation against the firm's own interest accrual model. Any discrepancies will be raised immediately with Thomas Eriksen (Havenwood Bank) and Victor Salazar (Kenton & Caldwell). The Payoff Letter should be requested from Havenwood Bank no later than five (5) business days before the anticipated Closing Date, with the final payoff figures confirmed no later than one (1) business day before closing.
B. Wire Transfer Execution
On the Closing Date, the CLO note proceeds will be deposited into the Issuer's closing account (which may be the Collection Account at Havenwood Bank, N.A., as account bank, or a separate closing escrow account, as determined in the Closing Funds Flow Memorandum). Immediately upon availability of good funds in the Issuer's closing account, the warehouse payoff wire will be transmitted to Havenwood Bank in accordance with the wire instructions set forth in the Payoff Letter.
The Closing Funds Flow Memorandum, to be prepared by Calderwood & Harkness in coordination with the Collateral Manager and the placement agents, will set forth the precise sequence and timing of all closing wires, with the warehouse payoff wire designated as the first-priority disbursement. No other closing disbursements (placement fees, expense payments, or collateral purchases) will be initiated until the warehouse payoff wire has been transmitted and confirmed. This priority sequencing is essential to minimize the lien gap risk described in Section X.B below.
The wire transfer will be initiated by the Issuer's authorized signatory (or by Ironclad Trust, as directed by the Issuer, depending on the account structure) through the applicable banking platform. Calderwood & Harkness will provide wire transfer instructions and confirmation protocols to all parties in advance of the Closing Date.
C. Confirmation of Receipt
Upon receipt of the full payoff amount, Havenwood Bank, N.A. will confirm receipt in writing. This confirmation may take the form of a wire confirmation from Havenwood Bank's treasury operations group or an email confirmation from Thomas Eriksen or another designated officer of Havenwood Bank. The written confirmation of receipt is a condition precedent to the effectiveness of the Termination and Release Agreement and the release of security interests described in Section VI below.
Calderwood & Harkness will monitor the wire transfer status in real time on the Closing Date and will follow up directly with Mr. Eriksen and the Havenwood Bank operations team to obtain the written confirmation as promptly as possible following receipt of the wire. The C&H team should plan for a confirmation turnaround time of approximately thirty (30) to sixty (60) minutes following the transmission of the wire, although this timeframe may vary depending on interbank processing schedules.
VI. Release of Security Interests
A. Warehouse Facility Termination and Release Agreement
Upon receipt by Havenwood Bank of the full payoff amount and confirmation thereof, the parties will execute and deliver a Termination and Release Agreement (the "Release Agreement"). The Release Agreement will be entered into among the following parties:
• Driftwood CLO 2023-I, Ltd. (Issuer)
• Driftwood Credit Management LLC (Collateral Manager)
• Havenwood Bank, N.A. (Warehouse Lender)
The Release Agreement will accomplish the following:
(a) Termination of the Warehouse Facility. The Release Agreement will formally terminate the $250,000,000 revolving warehouse credit facility dated May 22, 2023, and all commitments, obligations, and rights of the parties thereunder (other than any surviving indemnification obligations or post-termination covenants expressly designated as surviving provisions in the warehouse facility agreement).
(b) Release of Liens. Havenwood Bank will unconditionally and irrevocably release all liens, security interests, pledges, assignments, and encumbrances granted to it or for its benefit on the collateral assets, the warehouse custody accounts, and any other property of the Issuer or the Collateral Manager pledged or assigned as security under the warehouse facility agreement or any related security documents.
(c) Full Satisfaction and Discharge. The Release Agreement will confirm that all obligations of the Issuer and the Collateral Manager under the warehouse facility agreement have been fully satisfied and discharged, and that Havenwood Bank has no further claims against the Issuer, the Collateral Manager, or the collateral assets in connection with the warehouse facility.
The Release Agreement will be governed by and construed in accordance with the laws of the State of New York, consistent with the governing law provision of the warehouse facility agreement. Kenton & Caldwell LLP (Victor Salazar) will prepare or review the Release Agreement on behalf of Havenwood Bank; Calderwood & Harkness will review and negotiate the Release Agreement on behalf of the Issuer and the Collateral Manager. The form of the Release Agreement should be substantially agreed upon no later than five (5) business days before the Closing Date to avoid last-minute negotiations that could delay the closing.
B. UCC Termination Statements
In connection with the warehouse facility, it is expected that UCC-1 financing statements were filed in the State of Delaware (as the jurisdiction of organization of the Co-Issuer and potentially as a filing jurisdiction for the Collateral Manager) and potentially in other applicable jurisdictions to perfect Havenwood Bank's security interest in the collateral assets and the warehouse accounts. Upon execution of the Release Agreement and the release of Havenwood Bank's security interests, it is necessary for Havenwood Bank to file UCC-3 termination statements in all jurisdictions where UCC-1 financing statements were filed in connection with the warehouse facility.
Calderwood & Harkness will coordinate with Kenton & Caldwell LLP to confirm the filing jurisdictions and file numbers for all existing UCC-1 financing statements related to the warehouse facility, and to ensure that UCC-3 termination statements are prepared and filed promptly following the Closing Date. C&H will obtain copies of the filed UCC-3 termination statements for inclusion in the closing binder and will verify that all applicable termination statements have been filed within thirty (30) days following the Closing Date. The filing of UCC-3 termination statements is a post-closing obligation that will be tracked on the C&H post-closing checklist.
C. Timing
The release of Havenwood Bank's security interests is effective upon the occurrence of both of the following events: (i) receipt by Havenwood Bank of the full payoff amount (as confirmed in writing per Section V.C above); and (ii) execution and delivery of the Termination and Release Agreement by all parties thereto.
The timing of the release is critical because, until the warehouse liens are released, Ironclad Trust Company's lien under the Indenture cannot attach as a first-priority perfected security interest in the collateral assets. The structural integrity of the CLO depends on the Indenture Trustee holding a first-priority perfected security interest in all collateral assets, and the rating agencies' analysis of the CLO's credit risk assumes the existence of such a first-priority lien. Any gap between the release of the warehouse liens and the attachment of the Indenture lien — even a momentary gap — creates a theoretical risk that an intervening creditor could assert a lien on the collateral that is senior to the Indenture lien.
To mitigate this gap risk, the Release Agreement and the Indenture lien grant should be structured to take effect simultaneously. The mechanics for achieving this simultaneity are discussed further in Section X.B below.
VII. Coordination with Ironclad Trust Company, N.A. as Incoming Trustee and Custodian
A. Trustee's Role
Ironclad Trust Company, N.A. will serve in multiple capacities under the CLO transaction documents. Specifically, Ironclad Trust will act as:
• Indenture Trustee under the Indenture dated August 22, 2023
• Note Registrar for the CLO Notes
• Paying Agent for distributions on the CLO Notes
• Transfer Agent for transfers and exchanges of the CLO Notes
• Custodian for the collateral assets
• Collateral Administrator under the Collateral Administration Agreement dated August 22, 2023
The annual trustee fee is $25,000 (flat), payable from the Expense Account. The trustee expense cap is $50,000 per payment date. Ironclad Trust's DTC Participant Number is 2176, which is relevant to the authentication and delivery of the global notes through DTC, as described in Section VIII below.
B. Pre-Closing Coordination Steps
The following pre-closing coordination steps must be completed by or in coordination with Ironclad Trust prior to the Closing Date:
1. Establishment of Trust Accounts. Ironclad Trust will establish the following trust accounts at Havenwood Bank, N.A. (as account bank) prior to the Closing Date: the Collection Account, the Payment Account, the Principal Account, the Interest Account, and the Expense Account. Account titling conventions must conform to the requirements of the Indenture, with each account titled in the name of "Ironclad Trust Company, N.A., as Trustee for the benefit of the Secured Parties of Driftwood CLO 2023-I, Ltd." or words to substantially similar effect. Deposit account control agreements ("DACAs") between Ironclad Trust, Havenwood Bank (as account bank), and the Issuer must be executed and delivered with respect to each trust account to perfect Ironclad Trust's security interest in the accounts and the funds on deposit therein. Account titling and DACAs should be finalized at least five (5) business days before the Closing Date.
2. DTC Eligibility. Ironclad Trust will confirm DTC eligibility for all CLO Notes by CUSIP (Class A-1 Notes through Subordinated Notes, including both 144A and Regulation S CUSIPs). The DTC eligibility process requires the submission of DTC depository letters, underwriting agreements, and related documentation to DTC's Underwriting Department. DTC depository letters should be submitted no later than ten (10) business days before the anticipated Closing Date to ensure that all CUSIPs are eligible for DTC book-entry clearance and settlement on the Closing Date. Patrick Gallagher (C&H) will coordinate with Catherine Nowak (Ironclad Trust) to monitor the DTC eligibility process and escalate any issues promptly.
3. Custody Setup. Ironclad Trust will establish custody accounts for the transferred collateral and will communicate trade settlement instructions to all agent banks for the underlying syndicated loans in the collateral portfolio. The custody setup process requires coordination between Ironclad Trust's custody operations team and the Driftwood Credit Management trading desk. Custody account setup should be completed no later than one week before the Closing Date.
4. Authentication of Notes. On the Closing Date, Ironclad Trust will authenticate the global notes representing each tranche of the CLO Notes. Authentication will be effected by a duly authorized officer of Ironclad Trust upon receipt of: (i) an Officer's Certificate from the Issuer certifying that all conditions to issuance have been satisfied; and (ii) a written order from the Issuer directing the Trustee to authenticate and deliver the notes. The authentication process is governed by the terms of the Indenture.
C. Closing Date Coordination
On the morning of the Closing Date, Catherine Nowak (Ironclad Trust) will participate in a closing call with the Calderwood & Harkness deal team, the Issuer, the Collateral Manager, Havenwood Bank, and the placement agents. The closing call will serve as the final coordination point before the execution of closing steps and will confirm the following:
• Receipt by Ironclad Trust of all executed Trustee documents, including the Indenture, the Collateral Administration Agreement, any supplemental indenture, and the DACAs for the trust accounts
• Readiness to authenticate and deliver the CLO Notes via DTC (DTC Participant No. 2176)
• Receipt of the Trustee's Counsel Opinion from Ashworth & Pratt LLP (Lillian Marchetti, One Liberty Plaza, 46th Floor, New York, NY 10006) opining as to Ironclad Trust's due organization, authority, and power to enter into the transaction documents
• Confirmation that all trust accounts are open and operational at Havenwood Bank (as account bank)
• Wire instructions for the trustee acceptance fee
Following the closing call, the closing events will proceed in the following sequence:
1. Execution and delivery of all closing documents by all parties.
2. Authentication of the global notes by Ironclad Trust.
3. Delivery of the global notes to DTC for credit to the DTC participant accounts of the initial purchasers (Meridian Atlantic Securities LLC and Northbridge Capital Markets Inc.).
4. Receipt of CLO note proceeds into the Issuer's closing/collection account at Havenwood Bank.
5. Transmission of the warehouse payoff wire to Havenwood Bank ($212,500,000 plus accrued interest).
6. Confirmation of receipt of the warehouse payoff by Havenwood Bank.
7. Execution and delivery of the Termination and Release Agreement; release of warehouse liens.
8. Perfection of the Indenture security interest — the first-priority lien under the Indenture attaches to all collateral assets upon release of the warehouse liens, with UCC-1 financing statements for the Indenture lien having been pre-filed with an effective date of the Closing Date.
9. Application of remaining proceeds per the Closing Funds Flow Memorandum (placement fees, new collateral purchases, account funding, transaction expenses).
The sequencing of these events must be strictly observed. Any deviation from the sequence could create gap risk (as described in Section X.B) or a failure of closing conditions under the Indenture or the Note Purchase Agreement.
D. Post-Closing Custodial Transfer Completion
Certain loan transfers, particularly those involving underlying syndicated loans with longer settlement cycles or loans where the administrative agent requires additional processing time, may settle T+5 to T+10 after the Closing Date. This is a common feature of CLO closings, as the institutional loan market does not uniformly settle on a T+0 or T+1 basis.
Ironclad Trust will track and confirm the settlement of all collateral transfers during the post-closing period. A daily settlement status report should be prepared by Ironclad Trust's custody operations team and circulated to the Driftwood Credit Management trading desk, Calderwood & Harkness, and the Issuer until all transfers have settled. Any failed trades or unresolved settlement issues should be escalated promptly.
Final custodial reconciliation — confirming that all collateral positions identified on the Collateral Schedule have been successfully transferred to Ironclad Trust's custody and that the custodial records match the Collateral Manager's records — is to be completed by the Final Settlement Date of September 20, 2023.
VIII. DTC Settlement Timing and Note Delivery
A. DTC Clearance Process
All CLO Notes — both rated notes (Class A-1 through Class D) and subordinated notes — will be represented by one or more global notes held through The Depository Trust Company ("DTC"). Beneficial interests in the global notes will be recorded in the books and records of DTC and its direct and indirect participants. No physical certificates will be issued to individual investors except in limited circumstances as provided in the Indenture.
The ISIN for the Class A-1 Notes (144A) is US26738TAA51. The CUSIPs for all tranches are as set forth in the table in Section III.A above. Ironclad Trust, as DTC Participant No. 2176, will authenticate the global notes on the Closing Date and deliver them to DTC for credit to the DTC participant accounts of the initial purchasers.
The initial purchasers for the CLO Notes are:
• Meridian Atlantic Securities LLC — Lead placement agent. CRD #39821. Offices at 383 Madison Avenue, 22nd Floor, New York, NY 10179. Primary contacts: Jonathan Halevy (Managing Director) and Priya Ramanathan (Director).
• Northbridge Capital Markets Inc. — Co-placement agent for the subordinated notes. Offices at 1251 Avenue of the Americas, 34th Floor, New York, NY 10020. Primary contact: Raymond Cho (Managing Director).
Upon authentication by Ironclad Trust, the global notes will be credited to the DTC participant accounts of Meridian Atlantic and Northbridge. Meridian Atlantic and Northbridge will in turn credit the applicable allocations to the DTC participant accounts of the investors (or their custodians) who have been allocated positions in each tranche. The allocations process is managed by the placement agents in coordination with the Issuer and the Collateral Manager.
B. Settlement Timeline
The key dates in the settlement timeline for the CLO Notes are as follows:
The CLO Notes will pay interest and principal on quarterly payment dates falling on the 15th day of each January, April, July, and October, commencing on January 15, 2024. The record date for each payment date is the 15th calendar day preceding such payment date. The first payment period will be a long-first period, reflecting the interval between the Closing Date (September 12, 2023) and the first Payment Date (January 15, 2024).
C. Investor Allocations
Based on preliminary indications from Meridian Atlantic Securities and Northbridge Capital Markets, the following key anchor investors are expected to receive allocations of CLO Notes via DTC:
These anchor allocations represent a significant portion of the rated note issuance and are subject to confirmation by Meridian Atlantic and Northbridge. Final allocations will be determined by the placement agents following the pricing process and will be communicated to Ironclad Trust for DTC credit on the Closing Date. The subordinated notes ($36,000,000) are expected to be placed with a small number of dedicated CLO equity investors, with final allocations to be confirmed by Northbridge.
IX. Key Documentary Deliverables for the Warehouse Take-Out
A. Documents to be Prepared or Reviewed by Calderwood & Harkness
The following documents are the primary responsibility of the Calderwood & Harkness deal team in connection with the warehouse take-out:
1. Warehouse Payoff Letter. The Payoff Letter will be prepared and delivered by Havenwood Bank, N.A. to the Issuer and Calderwood & Harkness. C&H's responsibility is to review the Payoff Letter for accuracy, confirm consistency with the terms of the warehouse facility agreement (including the interest rate, day count convention, and any fee provisions), independently verify the accrued interest calculation, and confirm the wire transfer instructions. Any discrepancies or questions should be raised with Thomas Eriksen (Havenwood Bank) and Victor Salazar (Kenton & Caldwell) immediately upon identification.
2. Warehouse Facility Termination and Release Agreement. The Release Agreement will be entered into among the Issuer, Driftwood Credit Management LLC, and Havenwood Bank, N.A. Calderwood & Harkness will prepare the initial draft of the Release Agreement and negotiate its terms with Kenton & Caldwell LLP on behalf of Havenwood Bank. Key negotiation points will include the scope of the release (unconditional vs. limited), the treatment of surviving obligations (if any), and the representations and warranties of each party. The form of the Release Agreement should be substantially agreed upon no later than five (5) business days before the Closing Date.
3. Assignment of Collateral (Warehouse to CLO Issuer). The Assignment Agreement will effect the transfer of all collateral assets from the warehouse structure to the Issuer, with a simultaneous pledge to Ironclad Trust under the Indenture. The Assignment Agreement will attach the Collateral Schedule (as described in Section IV.B above). Calderwood & Harkness will prepare the initial draft of the Assignment Agreement and coordinate with the Driftwood Credit Management trading desk on the preparation of the Collateral Schedule.
4. Officer's Certificate of the Issuer (Closing Certificate). The Officer's Certificate will be executed by an authorized officer of the Issuer on the Closing Date and will certify, among other things: (i) the satisfaction of all conditions to closing under the Indenture and the Note Purchase Agreement; (ii) the accuracy of all representations and warranties of the Issuer as of the Closing Date; (iii) the absence of any Event of Default or Default under the Indenture; and (iv) compliance with all applicable collateral quality tests as of the Closing Date (based on the portfolio composition report prepared by the Collateral Manager). Calderwood & Harkness will prepare the form of the Officer's Certificate for execution by the Issuer.
5. Closing Funds Flow Memorandum. The Closing Funds Flow Memorandum will set forth a detailed statement of all sources and uses of funds at closing, including all wire transfer instructions, the sequencing of wires, and the exact dollar amounts for each disbursement. The memorandum will be prepared by Calderwood & Harkness in coordination with David Hwan (Driftwood Credit Management), Jonathan Halevy (Meridian Atlantic Securities), Catherine Nowak (Ironclad Trust), and Thomas Eriksen (Havenwood Bank), and will be circulated to all parties for review and confirmation no later than five (5) business days before the Closing Date. The final version of the Closing Funds Flow Memorandum will be circulated no later than one (1) business day before closing.
6. UCC-3 Termination Statements. UCC-3 termination statements will be filed by Havenwood Bank (or Kenton & Caldwell on its behalf) in Delaware and any other applicable jurisdictions where UCC-1 financing statements were filed in connection with the warehouse facility. Calderwood & Harkness will coordinate with Kenton & Caldwell to confirm the filing jurisdictions and file numbers, obtain copies of the filed UCC-3 termination statements, and verify that all required termination statements have been filed within thirty (30) days following the Closing Date.
B. Documents from Other Parties Required for Take-Out
The following documents are the responsibility of parties other than Calderwood & Harkness but are required as conditions to the warehouse take-out and the CLO closing:
7. Trustee's Certificate of Authentication. Ironclad Trust Company, N.A. will deliver a certificate confirming the authentication of the global notes representing each tranche of the CLO Notes. The authentication certificate will be executed by a duly authorized officer of Ironclad Trust on the Closing Date.
8. Trustee's Counsel Opinion. Ashworth & Pratt LLP (Lillian Marchetti, Partner) will deliver a legal opinion opining on Ironclad Trust's due organization, valid existence, and authority to enter into and perform its obligations under the Indenture, the Collateral Administration Agreement, and the other transaction documents to which it is a party. Calderwood & Harkness will review the form of the Trustee's Counsel Opinion in advance of closing.
9. Cayman Legal Opinion. Applegategate Offshore Services Ltd. (Nigel Pemberton, Senior Partner, Windward House, 4th Floor, George Town, Grand Cayman KY1-1306) will deliver a Cayman Islands legal opinion opining on the due incorporation and valid existence of Driftwood CLO 2023-I, Ltd. under Cayman Islands law, the corporate authority of the Issuer to enter into the transaction documents, and the enforceability of the transaction documents against the Issuer under Cayman Islands law. Calderwood & Harkness will provide instructions to Applegategate Offshore and review the form of the Cayman opinion prior to closing.
10. Rating Agency Confirmation Letters. Final rating confirmation letters will be required from both Brindoval Analytical Services Inc. (primary analyst: Anita Delgado) and Ridgeline Credit Ratings LLC (primary analyst: Kenji Matsuda), confirming the final ratings assigned to each rated tranche of the CLO Notes (Class A-1 through Class D). The receipt of final rating confirmations is a condition to closing under both the Indenture and the Note Purchase Agreement. Calderwood & Harkness will coordinate with the rating agencies to ensure timely delivery of the confirmation letters.
11. Note Purchase Agreement. The Note Purchase Agreement will be executed by the Issuers (Driftwood CLO 2023-I, Ltd. and Driftwood CLO 2023-I, LLC), Meridian Atlantic Securities LLC (as lead placement agent), and Northbridge Capital Markets Inc. (as co-placement agent). The Note Purchase Agreement will be dated as of the Pricing Date (September 8, 2023) and will govern the terms of the purchase and sale of the CLO Notes by the initial purchasers. Calderwood & Harkness is responsible for drafting the Note Purchase Agreement, which will be negotiated with counsel to the placement agents.
12. Secretary's Certificate of the Issuer. A Secretary's Certificate (or Director's Certificate, as applicable under Cayman Islands practice) will be delivered by the Issuer certifying: (i) the incumbency and specimen signatures of all authorized officers and directors of the Issuer; (ii) the adoption and continuing effectiveness of the board resolutions authorizing the transaction (dated August 20, 2023); and (iii) true and correct copies of the Issuer's organizational documents, including the Memorandum and Articles of Association of Driftwood CLO 2023-I, Ltd. (Cayman Registration No. EX-382916). Calderwood & Harkness will prepare the form of the Secretary's Certificate for execution by the Issuer.
X. Risk Factors and Practical Considerations
A. Timing Risk
The warehouse payoff must occur on the same business day as the issuance and settlement of the CLO Notes. Any delay in the receipt of CLO note proceeds into the Issuer's closing account — whether due to DTC processing delays, failed trades, investor settlement failures, or interbank wire transfer issues — could result in a corresponding delay in the transmission of the warehouse payoff wire to Havenwood Bank. Such a delay would cause additional interest to accrue under the warehouse facility at the rate of Compounded SOFR plus 150 basis points, increasing the cost of the transaction and potentially creating a shortfall in the Closing Funds Flow Memorandum.