Margaret,
I hope you had a good weekend. I wanted to reach out directly on the Nexford credit agreement to see if we can streamline the path forward on the handful of commercial points that remain open between our respective drafts.
As you know, we returned our marked second draft on Saturday, March 8. I think both sides have made substantial progress — the vast majority of the covenant architecture, the conditions precedent, and the administrative mechanics are in good shape. That said, there are several commercial terms where we remain apart, and I'd like to see if we can narrow the gap on these before your team turns the next draft. My hope is that if we can align on the key issues at the principal level, we can avoid another full round of back-and-forth and keep this deal on track for the March 28 closing.
To that end, I'd like to propose a call — you and me, with Marcus Leung and Jonathan Ferris on the line — later this week, ideally Wednesday afternoon or Thursday morning. I'll coordinate separately with Ryan Ostrowski at Granite Peak and Patricia Voss at Kellner Brandt to see whether they want to participate on certain items; you may want to confirm with Elaine Prescott at Crescent Harbor whether she'd like to join from the bank side as well.
Let me lay out below where I see the remaining open points so we can have a focused and productive discussion.
**1. Most Favored Nation Sunset Period**
We're agreed on the 50 basis point threshold for the MFN protection on incremental term loans, which is helpful. The open point is the sunset. Your current draft provides that the MFN clause applies to incremental term loans incurred within the first 12 months after closing. Our mark proposed shortening this to 6 months.
Nexford's view is that a 6-month sunset is consistent with recent market precedent for Term Loan B transactions of this size and credit quality. A 12-month MFN window is, in our client's view, overly restrictive on the borrower's ability to access the incremental facility at market terms after the initial post-closing period, particularly in a rising rate environment where repricing dynamics may shift quickly. That said, I recognize there's a range here, and we're prepared to discuss a compromise — something in the neighborhood of 9 months — on the call.
**2. Excess Cash Flow Sweep — Definition of "Excess Cash Flow"**
The sweep mechanics themselves are largely settled. We're agreed in principle, consistent with the term sheet, on the step-downs: 50% above 4.25x first lien net leverage, 25% at or below 4.25x, and 0% at or below 3.50x.
The remaining issue is the definition of "Excess Cash Flow" — specifically, the permitted deductions. Our mark proposed that ECF be reduced by:
(i) voluntary prepayments of the Term Loan B (and any pari passu debt) made during the applicable fiscal year;
(ii) cash restructuring charges and integration costs actually paid during the applicable period; and
(iii) cash consideration paid for Permitted Acquisitions funded with internally generated cash during the applicable period, subject to a cap (which we're happy to discuss).
Your draft currently includes the voluntary prepayment deduction but does not include the acquisition deduction or the restructuring/integration cost deduction. Margaret, this point is critical for Nexford. As you're aware, Nexford has completed four bolt-on acquisitions since 2021 — Clearfield Tool & Die, Summit Industrial Fabrication, Ridgepoint Specialty Coatings, and Lakeshore Precision Engineering — and the active tuck-in strategy is core to the business plan that the lender group underwrote. The ECF definition needs to reflect the reality that cash deployed toward permitted acquisitions and associated integration costs should not simultaneously be swept to prepay the term loan. These are standard deductions in sponsor-backed TLB deals, and I'm confident we can find language that works for both sides.
On a related point, we also want to confirm that voluntary prepayments during the fiscal year net against the ECF sweep obligation dollar-for-dollar. This is market, and I don't expect it to be controversial, but I want to make sure we're aligned.
**3. Restricted Payment Capacity — Ratio-Based Unlimited Basket**
We're agreed on the general basket ($25,000,000 per annum) and the builder basket ($50,000,000 starter amount plus 50% of cumulative consolidated net income from Q1 2025). The open issue is the ratio test for the unlimited restricted payment basket.
Our mark proposed that unlimited restricted payments be permitted subject to pro forma compliance with a total net leverage ratio of not greater than 3.75x. Your draft sets this at 3.50x. Given that pro forma total net leverage at closing is approximately 4.03x, the difference between these two thresholds is meaningful — it materially affects the timeline for when Granite Peak will have access to this basket for future distributions. A 3.75x test is well within the range we're seeing in comparable sponsor-backed TLB transactions and appropriately balances lender protection with sponsor flexibility.
There is also a secondary point here: we believe the ratio test should be measured on a pro forma basis giving effect only to the restricted payment itself, not to any debt incurrence during the test period. The payment-only pro forma is our position, and I'd like to address this on the call as well.
**4. Additional Points to Flag**
A couple of additional items I'd like to touch on briefly during the call:
- *MFN and the Free-and-Clear Basket:* The free-and-clear incremental basket (the greater of $280,000,000 and 100% of LTM EBITDA) is agreed, as is the 4.50x first lien net leverage incurrence test for ratio-based incremental amounts beyond the free-and-clear basket. The question is whether the MFN protection applies to incremental loans incurred under the free-and-clear basket. Nexford's position is that free-and-clear incremental loans should be exempt from the MFN — this is the prevailing approach in the market and is consistent with the economic logic of the free-and-clear concept.
- *Builder Basket — CNI Definition:* A minor but important definitional point: we want to confirm that "consolidated net income" for purposes of the builder basket is defined consistently with GAAP, without further exclusions of extraordinary and non-recurring gains. Our draft reflects a clean CNI definition, and we'd like to preserve that.
**Next Steps and Timing**
Margaret, I want to stress the importance of resolving these points promptly. As you know, we're targeting March 21 for general syndication close and March 24 for execution-ready documents. The security, guarantee, and pledge documents — we circulated first drafts this morning — and the intercreditor agreement (which I understand your team is targeting to circulate by March 12) will also need attention, but those workstreams are more mechanical and can proceed in parallel.
If you're amenable to the call, I'd suggest that each side prepare a brief bullet-point position summary on the items above and exchange those a day in advance so we can make the most of our time on the phone. I'll have Marcus pull something together on our end.
Please let me know your availability for Wednesday or Thursday and whether Elaine will want to join. I appreciate the collaborative approach from your team throughout this process, and I'm confident we can close these gaps efficiently.
Best regards,
Claudia
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**Claudia Merritt** Partner, Banking & Finance Calderwood & Harkness LLP 425 Lexington Avenue New York, New York 10017 Direct: (212) 884-7231 cmerritt@calderwoodharkness.com
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