Jonathan,
I hope you're well. As you know, we returned our marked draft of the Credit Agreement yesterday (March 3), reflecting Calderwood & Harkness's tracked-changes mark-up of the Whitfield & Gage first draft circulated on February 24, 2025. A blackline showing all of our changes against the W&G draft was sent concurrently. I trust you and Margaret have had a chance to begin reviewing.
I wanted to flag the key open issues from the borrower's perspective in advance so that you and your team can focus your review before we get on a call. I'd suggest the associates try to schedule a call for March 5 or 6 to work through as many drafting-level items as possible. To the extent certain commercial points need partner involvement, we can arrange a separate principals call with Claudia and Margaret (and potentially Elaine Prescott from Crescent Harbor) as needed. Please let me know your availability.
Set forth below is a summary of the principal areas of disagreement or items requiring further discussion. We are finalizing a formal Credit Agreement Issues List (Version 1.0), which we will circulate shortly as a tracking tool, but I wanted to preview the substance here so the call is productive.
**1. Definitions — Consolidated EBITDA / Adjusted EBITDA**
The W&G draft's definition of "Consolidated EBITDA" is too narrow on permitted add-backs. As you know, Nexford's LTM Adjusted EBITDA of approximately $385,000,000 reflects $28,000,000 of add-backs that were included in management's calculation and presented to the lender group: $12,000,000 of acquisition-related costs, $8,500,000 of non-recurring restructuring charges, $4,500,000 of sponsor management fees, and $3,000,000 of integration costs. Our mark-up proposes including each of these as specifically enumerated add-back categories.
In addition, the W&G draft included a cap on pro forma cost savings and synergies add-backs that we view as unnecessarily restrictive for a sponsor-backed Term Loan B. We'd like to discuss whether an aggregate add-back cap (expressed as a percentage of EBITDA) is the right approach, or whether uncapped add-backs — consistent with recent market precedent for TLBs of this size and profile — are more appropriate here. This is a point we feel strongly about, and the add-back categories were extensively diligenced by Crescent Harbor in connection with its commitment.
**2. Incremental Facility Provisions**
Several items here:
- *Free-and-Clear Basket.* The W&G draft set the free-and-clear incremental basket at a fixed dollar amount. Our mark-up proposes the greater of $280,000,000 and 100% of LTM EBITDA (approximately $385,000,000 at current levels), which is consistent with the agreed term sheet. This needs to be conformed.
- *Ratio-Based Incremental Capacity.* We propose that ratio-based incremental capacity be tested at 4.50x pro forma first lien net leverage. This is below the 5.00x springing financial covenant level and provides appropriate cushion. The W&G draft was ambiguous on the applicable test — we should align on this.
- *Most Favored Nation.* Our mark-up accepts the 50 basis point threshold for MFN protection but proposes a 12-month sunset, after which the MFN ceases to apply to new incremental term loans. This is consistent with the term sheet. The W&G draft did not include the sunset — it needs to be added.
- *Amortization for Incremental Debt.* The W&G draft's requirement that incremental lenders receive pro rata amortization is too rigid. Incremental equivalent debt should be permitted with different amortization schedules, and we've reflected this in our mark-up.
**3. Excess Cash Flow Sweep**
The step-down thresholds need to match the term sheet: 50% sweep when pro forma first lien net leverage exceeds 4.25x, stepping down to 25% at or below 4.25x, and to 0% at or below 3.50x. Our mark-up conforms these levels.
On the ECF definition itself, the W&G draft included several deductions that we believe result in double-counting or are otherwise inconsistent with market. Specifically, the treatment of voluntary prepayments and capital expenditures funded with cash on hand should reduce ECF dollar-for-dollar — the current draft is unclear on this and in certain respects appears to exclude these deductions.
I'll note that at closing, pro forma first lien net leverage is approximately 3.38x (after giving effect to the refinancing of the existing credit facilities with Atlas Meridian Bank, N.A. and the application of the OID at 50 bps), which would place Nexford in the 0% sweep tier immediately. However, EBITDA fluctuation could move the borrower into higher tiers, so getting these mechanics right is important.
**4. Restricted Payments / Builder Basket**
Several discrepancies from the term sheet:
- *Builder Basket.* The W&G draft lacked a starter amount. Our mark-up includes a $50,000,000 starter basket plus 50% of cumulative consolidated net income commencing Q1 2025, consistent with the term sheet.
- *General Annual RP Basket.* The W&G draft had this at $15,000,000 per year. The term sheet provides for $25,000,000 — needs to be increased.
- *Unlimited Restricted Payments.* Should be available subject to pro forma compliance with 3.75x total net leverage, per the term sheet. The W&G draft tested this at first lien net leverage rather than total net leverage. This is a meaningful distinction and needs to be corrected.
**5. Change of Control**
The change of control provision needs to reflect the agreed construct: triggered upon (i) acquisition by any person or group (other than Granite Peak Capital Partners, LP and its affiliates) of more than 35% of the voting equity of Holdings, (ii) Nexford Industrial Holdings Inc. ceasing to be a direct wholly-owned subsidiary of Holdings, or (iii) a "change of control" (or similar event) under the Senior Unsecured Notes Indenture (the $250,000,000 7.250% Senior Unsecured Notes due 2028, with Pinnacle Trust Company, N.A. as trustee).
Two specific points: (a) the W&G draft set the voting equity threshold at 30% rather than 35% — this needs to be conformed to the term sheet; and (b) our mark-up proposes that the definition of "Permitted Holders" include not only Granite Peak Capital Partners, LP and its affiliates, but also any successor fund or co-investment vehicle managed by Granite Peak (including GP Fund IV Co-Invest, LP). This is standard for sponsor-backed deals and reflects the actual ownership structure.
**6. Financial Covenant**
We confirm the springing financial covenant structure is agreed in principle: maximum 5.00x first lien net leverage, tested quarterly only when revolving credit facility borrowings exceed 40% of revolving commitments. As you know, no revolving facility is being established in this transaction — the $1,400,000,000 Term Loan B is the only facility — so the covenant will apply only if a revolving facility is later added via the incremental provisions.
That said, the W&G draft's testing mechanics need refinement. We'd like to discuss the cure period, whether equity cure mechanics will be available (and if so, the applicable limitations), and the definition of "Test Period" (which should be the trailing four fiscal quarters, but the draft's cross-references are internally inconsistent in several places). Happy to walk through these on the call.
**7. Collateral and Security — Excluded Assets**
The W&G draft's excluded assets provisions were narrower than what was agreed in the term sheet. Our mark-up includes exclusions for: (a) motor vehicles with a book value below $250,000 per vehicle, (b) letter of credit rights under $1,000,000, and (c) commercial tort claims under $2,500,000.
On deposit account control agreements, the W&G draft would require DACAs over every deposit account, including de minimis operating accounts. We propose a threshold — for example, accounts with average monthly balances below $500,000 — to reduce administrative burden. DACAs would still be required for the main concentration accounts at Crescent Harbor Bank, N.A. and the primary operating accounts at Redstone National Bank (accounts ending -4471, -4472, and -6633), which covers the vast majority of the borrower's cash management. But requiring control agreements over every petty cash and payroll sub-account is not commercially reasonable and was not contemplated by the term sheet.
**8. Mandatory Prepayments — Asset Sales**
The reinvestment period for asset sale proceeds should be 365 days, with a 180-day extension (545 days total) if the borrower has entered into a binding commitment to reinvest, plus a $25,000,000 annual de minimis basket below which no mandatory prepayment is required. The W&G draft provided only a 270-day reinvestment period with no extension and no de minimis threshold — all three points need to be conformed to the term sheet.
**9. Representations and Warranties — Sanctions / OFAC / Anti-Corruption**
The sanctions representation in the W&G draft extends to all "agents" of the Loan Parties without a knowledge qualifier. Our mark-up adds "to the knowledge of the Loan Parties" with respect to agents, which is consistent with both the term sheet and current market standard for sponsor-backed financings. The representations should cover compliance with sanctions administered by OFAC, the U.S. Department of State, and other relevant authorities, which they do — but the knowledge qualifier for agents is important and something Nexford's compliance team has flagged.
The anti-corruption representation (FCPA / Bank Secrecy Act / USA PATRIOT Act) is generally acceptable as drafted. We've proposed minor conforming edits only.
**10. Soft Call Protection**
The term sheet provides for a 101 (1%) soft call premium on repricing transactions within 6 months of closing. The W&G draft extended this to 12 months. This needs to be shortened to 6 months per the term sheet. I expect this is straightforward, but flagging it here.
**11. SOFR Mechanics**
The W&G draft included the credit spread adjustment (10 bps for 1-month SOFR, 15 bps for 3-month SOFR) and the 0.75% SOFR floor, both of which are agreed. We've made minor technical comments in the mark-up on the fallback rate mechanics and the SOFR breakage indemnification provisions — these should be relatively easy to work through.
**Areas of General Agreement**
For completeness, I'll note several areas where the W&G draft was generally acceptable or where our comments were limited to conforming and technical edits:
- Maturity: 7 years from closing (March 28, 2032) — agreed. - Amortization: 1.00% per annum, payable in quarterly installments of $3,500,000 — agreed. - Interest rate: SOFR + 400 bps — agreed. - Default rate: +200 bps — agreed. - Governing law: State of New York — agreed. - Conditions precedent structure: generally acceptable, subject to conforming the list of closing deliverables to the actual closing checklist (Sophie Tremblay on our side is coordinating this with your team).
**Proposed Next Steps**
As noted above, I'd like to get the associates on a call March 5 or 6 to work through as many of these issues as possible. For items that are clearly commercial — in particular, the change of control threshold (30% vs. 35%), the restricted payment leverage test (first lien vs. total net leverage), and the soft call period (6 vs. 12 months) — these may need to be escalated to a principals call between Claudia and Margaret, potentially with Elaine Prescott from Crescent Harbor on the line.
Please let me know your availability and we'll get something on the calendar. As mentioned, we are finalizing the Credit Agreement Issues List (Version 1.0) and will circulate it separately as a tracking document.
For reference, I am not re-attaching the marked draft or blackline sent yesterday — please let me know if you need those re-sent.
Thanks, Jonathan. Looking forward to working through these.
Best regards,
Marcus Leung Lead Associate
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