Claudia,
I've completed my initial review of the first draft credit agreement that Whitfield & Gage circulated yesterday (February 24) on behalf of Crescent Harbor Bank, N.A. as administrative agent. Sophie assisted with the review of the schedules and definitions sections. Below is a high-level summary of the key issues I've identified, along with my recommended strategy for the borrower's mark-up, which I'd like to discuss with you before we turn the document.
I'm also finalizing the Credit Agreement Issues List — Version 1.0 in Excel format, which I'll circulate separately once it's ready. That document will track all of the items below (and a number of additional minor points) in a more granular format.
Here's where things stand:
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**1. General Observations**
The W&G draft is structured as a fairly standard institutional Term Loan B credit agreement governed by New York law, which is what we expected. The facility is $1,400,000,000, with a 7-year maturity from closing (March 28, 2032).
Overall, the draft hews to the commitment letter and term sheet in most respects, but there are a number of provisions where the agent's counsel has taken positions that are more restrictive than what was agreed or what is market for a sponsor-backed Term Loan B of this size. I estimate roughly 40–50 substantive comments will be reflected in the borrower's mark-up. I've organized the key issues into categories below.
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**2. Definitions — Key Issues**
**(a) "Consolidated EBITDA" Definition**
The W&G draft includes a Consolidated EBITDA definition with customary add-backs, but it's narrower than what was contemplated in the term sheet on several points:
- **Acquisition-related costs add-back:** Capped at $10 million per fiscal year in the W&G draft. The term sheet had no express annual cap, and the company's LTM add-backs include $12 million of acquisition-related costs. I think we should push to remove the annual cap entirely, or at a minimum increase it to $15 million. For context, the $385 million LTM Adjusted EBITDA figure ($357 million reported + $28 million in add-backs) breaks down as follows: $12 million acquisition-related, $8.5 million non-recurring restructuring, $4.5 million sponsor management fees, and $3 million integration costs. A $10 million cap would haircut the EBITDA number and tighten every leverage-based test.
- **Restructuring charges add-back:** Limited to "non-recurring" without any clarity on what qualifies. We need a broader formulation — "restructuring, transition, and business optimization charges" — to comfortably capture the $8.5 million in non-recurring restructuring charges currently reflected in the LTM numbers.
- **Sponsor management fees:** No express add-back for the $4.5 million annual management fee paid to Granite Peak. This needs to be an explicit permitted add-back.
- **Cost savings / synergies add-back (run-rate):** The draft limits projected cost savings to those "reasonably expected to be realized within 12 months" and caps them at 15% of Consolidated EBITDA. The 12-month realization period is market, but the 15% cap is below the 20–25% range we typically see in sponsor deals. I recommend pushing to 25%.
**(b) "Change of Control" Definition**
The draft defines "Change of Control" to include (i) acquisition by any person or group (other than Granite Peak and its affiliates) of more than 35% of the voting equity of Holdings (Granite Peak NIH Holdings, LLC), (ii) Nexford ceasing to be a direct wholly-owned subsidiary of Holdings, and (iii) a "change of control" (or similar event) under the Senior Unsecured Notes Indenture (the $250 million 7.250% Notes due 2028, Pinnacle Trust Company as trustee). This is generally consistent with the term sheet.
Two issues:
- The draft fails to include a customary carve-out for IPOs. The trigger should not apply if Granite Peak retains the largest block of voting equity post-IPO even if its percentage falls below 35%. We should add an IPO carve-out.
- The cross-default to the unsecured notes indenture change of control is drafted too broadly — it references any "change of control or similar event." This should be narrowed to reference only an actual "Change of Control Triggering Event" as defined in the indenture, not any vaguely "similar" event.
**(c) "Net Leverage Ratio" Calculations**
The first lien net leverage ratio is calculated as (first lien debt minus unrestricted cash) / Consolidated EBITDA. Pro forma first lien net leverage at closing is approximately 3.38x (($1,400,000,000 – $100,000,000 pro forma cash) ÷ $385,000,000). Total net leverage including the $250 million unsecured notes is approximately 4.03x (($1,400,000,000 + $250,000,000 – $100,000,000) ÷ $385,000,000).
The "unrestricted cash" netting concept in the W&G draft caps the amount of cash that can be netted at $75 million. This is below the $100 million of pro forma balance sheet cash expected at closing. We should push hard on this — either uncap the netting or at minimum raise the cap to $150 million. This directly affects covenant headroom and every leverage-based test in the agreement (ECF step-downs, restricted payments, incremental capacity, etc.). This is one of the most commercially significant issues in the draft.
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**3. Financial Covenant**
The springing financial covenant is a maximum first lien net leverage ratio of 5.00x, tested quarterly only when aggregate outstanding revolving loans exceed a specified percentage of revolving commitments. Since no revolving facility is being established in this transaction, the covenant effectively will not be tested unless a revolver is added later via an incremental facility.
Two issues:
- The W&G draft sets the testing threshold at 35% of revolving commitments rather than the 40% agreed in the term sheet. Needs to be corrected.
- The draft does not include a customary equity cure right, which Granite Peak will likely want. I'd recommend discussing with you and with Patricia Voss at Kellner Brandt & Associates whether to push for a two-cure-per-year equity cure provision. This is a sponsor-driven ask but worth raising early.
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**4. Interest Rate and Fees**
- SOFR + 400 bps margin, SOFR floor of 0.75%, credit spread adjustments (10 bps for 1-month SOFR, 15 bps for 3-month SOFR) — all consistent with the term sheet and commitment letter. - Default rate of +200 bps is as agreed. - OID at 50 bps (issue price 99.50) and arrangement fee of 50 bps ($7 million each) are referenced correctly.
One issue: the W&G draft provides that the default rate applies automatically upon any Event of Default, including non-payment and covenant defaults. Market practice for Term Loan B facilities is to require automatic application only upon payment defaults, with application upon other Events of Default at the direction of the Required Lenders. W&G's draft is fairly aggressive on this point. Recommend conforming to market.
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**5. Mandatory Prepayments — Excess Cash Flow Sweep**
The ECF sweep step-downs reflect the agreed terms: 50% of Excess Cash Flow above 4.25x first lien net leverage, 25% between 4.25x and 3.50x, and 0% at or below 3.50x.
However, the W&G draft does not include several customary deductions from the ECF calculation:
- No deduction for voluntary prepayments of the Term Loan B during the applicable period (these should reduce the ECF sweep dollar-for-dollar). - No deduction for cash restructuring charges and integration costs actually paid during the period. - Capital expenditure deduction is limited to maintenance CapEx. Growth CapEx should also be deductible — Nexford's LTM CapEx is $78 million, and a meaningful portion is growth-related.
I recommend expanding the ECF deductions to be fully borrower-friendly, as is typical in sponsor-backed TLBs. This is the kind of issue W&G may push back on but where we have strong market precedent.
**Asset Sale Mandatory Prepayment:** 100% of net cash proceeds, subject to reinvestment rights over 365 days (with a 180-day extension if a binding commitment is entered, for a total of 545 days) and a $25 million annual de minimis basket — consistent with term sheet. No issues.
**Insurance / Condemnation:** 100% of net cash proceeds, subject to reinvestment rights and a $10 million threshold — consistent with term sheet. No issues.
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**6. Voluntary Prepayment / Repricing Protection**
The W&G draft includes a 101 soft call premium for repricing transactions. This is as agreed. However, the W&G draft extends the soft call period to 12 months from closing. The term sheet provides for 6 months. Need to pull this back to 6 months — this is a clear departure from the agreed terms.
Standard SOFR breakage indemnification is included. No issues.
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**7. Incremental Facility Provisions**
This section has several significant issues:
- **Free-and-clear basket:** The W&G draft sets this at $280 million flat. The term sheet provides for the greater of $280 million and 100% of LTM EBITDA (which would currently be $385 million). This is a significant difference — the grower component pegged to LTM EBITDA is important to the sponsor and needs to be corrected.
- **Ratio-based incurrence test:** W&G draft uses 4.25x first lien net leverage. The term sheet provides 4.50x. Needs to be corrected.
- **Most favored nation protection:** The W&G draft includes an MFN clause for incremental term loans with a 50 bps threshold — this matches the term sheet. However, the MFN sunset in the W&G draft is 18 months, not the 12 months agreed in the term sheet. Need to correct.
- **Acquisition carve-out from MFN:** The W&G draft does not include a carve-out from the MFN for incremental term loans used to finance acquisitions. I recommend requesting this carve-out, which is increasingly common in the market and gives the borrower meaningful flexibility for bolt-on acquisitions without triggering a margin ratchet on the existing facility.
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**8. Negative Covenants — Restricted Payments**
- General restricted payment basket: $25 million per year — consistent. - Builder basket: 50% of cumulative consolidated net income from Q1 2025 plus a $50 million starter amount — consistent. - Unlimited restricted payments subject to pro forma compliance with 3.75x total net leverage — consistent.
Two issues:
- The W&G draft includes a blocker on restricted payments if a Default or Event of Default has occurred and is continuing, even for payments within the general basket and builder basket. Market practice in sponsor TLBs is to limit the blocker to Events of Default only (not incipient Defaults) for the general and builder baskets. We should push to conform to market here.
- The "Available Amount" (builder basket) in the W&G draft starts accumulating only after the first full fiscal quarter ending after closing. Since closing is March 28, 2025, and Q1 ends March 31, the draft may inadvertently exclude Q1 2025 consolidated net income. We need to clarify that the accumulation period starts from Q1 2025, which is consistent with the term sheet.
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**9. Negative Covenants — Indebtedness / Liens**
Permitted indebtedness carve-outs are generally in line, including capital leases and purchase money debt up to $50 million and a general basket of $35 million. The incremental facility issues discussed above in Section 7 are the primary concern here.
Permitted liens: the W&G draft ties the permitted lien baskets to the permitted indebtedness baskets, which is standard. No major issues, but I'd flag that the de minimis lien basket is $5 million in the W&G draft, which is lower than the $10 million we typically see. Recommend increasing.
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**10. Security and Guarantee Package**
The guarantee and collateral package is generally consistent with the term sheet: first-priority lien on substantially all assets of Nexford and all domestic subsidiary guarantors, plus Holdings' equity pledge.
- **Guarantors:** Holdings (Granite Peak NIH Holdings, LLC) plus 11 Subsidiary Guarantors (NPC, NES, NCST, NMS, NP LLC, NIH Intl, Clearfield, Summit, Ridgepoint, Lakeshore). Nexford International Holdings, Inc. (CFC holdco) provides a limited pledge — 65% of voting equity and 100% of non-voting equity of its first-tier foreign subsidiary (Nexford Canada Holdings ULC). Canadian subs (NCH ULC, NCM) are excluded from the guarantee.
- **Mortgaged properties:** Four properties with FMV above the threshold (Schaumburg $85M, Rockford $42M, Greenville $38M, Houston $28M; total $193 million in appraised real property collateral). These are post-closing deliverables due by April 30, 2025.
Issues:
- The W&G draft sets the real property mortgage threshold at $5 million FMV rather than the $10 million agreed in the term sheet. This could pull in additional properties and create unnecessary closing burdens. Needs to be corrected to $10 million.
- **Excluded asset thresholds:** The W&G draft sets the motor vehicle exclusion at $100,000 book value per vehicle (term sheet: $250,000), the letter of credit rights exclusion at $500,000 (term sheet: $1,000,000), and the commercial tort claims exclusion at $1,000,000 (term sheet: $2,500,000). All need to be conformed to the agreed thresholds.
- Deposit account control agreements and securities account control agreements — the W&G draft requires delivery at closing, which is consistent with our plan. Control agreements are being prepared for accounts at Crescent Harbor Bank and operating accounts at Redstone National Bank (accounts ending -4471, -4472, -6633).
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**11. Representations and Warranties**
Mostly standard. Two items to flag:
- The "no material adverse effect" representation is drafted without a current temporal qualifier — it currently reads "since December 31, 2023." This should be updated to reference December 31, 2024, which is the LTM financial reporting date.
- The Sanctions / OFAC representation is broadly drafted to cover not only directors, officers, and employees but also "any agent, affiliate, or representative." The standard formulation — and what the term sheet contemplates — limits agent/affiliate coverage to "to the knowledge of the Loan Parties." The W&G draft omits the knowledge qualifier for agents. We need to add it back.
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**12. Conditions Precedent**
Standard conditions for a Term Loan B — accuracy of reps, no default, delivery of executed documents, opinions, officers' certificates, solvency certificate, etc.
Two issues:
- The W&G draft includes a condition requiring delivery of "satisfactory" environmental reports. The commitment letter uses the formulation "receipt by the Administrative Agent" without a "satisfactory" qualifier, which would effectively give the agent a subjective out. The Phase I ESAs from Clearwater Environmental Sciences (Dr. Nathan Foley, project manager) have already been delivered and reviewed by the agent. Recommend deleting "satisfactory" and conforming to the commitment letter standard.
- The draft requires delivery of appraisals as a condition to closing. The appraisals from Greystone Valuation Services (Daniel Pritchard, lead appraiser) are complete for all four properties. However, the condition should reference receipt "in form and substance reasonably satisfactory to the Administrative Agent" rather than just "satisfactory" — the "reasonably" qualifier is missing. Needs to be added.
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**13. Events of Default**
Mostly standard. One issue:
- **Cross-default threshold:** The W&G draft sets the cross-default trigger at $15 million. For a borrower of Nexford's size ($2.1 billion revenue, $385 million Adjusted EBITDA), this is too low. I recommend pushing to $35–40 million, which is more appropriate and consistent with recent sponsor TLB precedents we've worked on.
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**14. Recommended Strategy for Mark-Up**
I'd recommend the following approach:
1. **Priority issues to escalate to you for the mark-up:** EBITDA definition / add-back caps, cash netting cap on leverage ratio calculations, free-and-clear incremental basket (grower component), ratio incurrence test (4.50x vs. 4.25x), soft call period (6 vs. 12 months), MFN sunset (12 vs. 18 months), mortgage threshold ($10M vs. $5M), excluded asset thresholds, and cross-default threshold. These are the items where W&G has clearly departed from the term sheet or taken aggressive positions, and I want to make sure we're aligned on how hard to push before I mark it up.
2. **Issues to raise with W&G at the working group level:** ECF deductions, default rate application mechanics, restricted payment Default blocker, financial covenant testing threshold (40% vs. 35%), builder basket accumulation timing, MAE date, Sanctions knowledge qualifier, conditions precedent formulations, permitted lien de minimis basket, and change of control IPO carve-out. These are points where I think we can resolve most of the issues attorney-to-attorney without needing to escalate.
3. **Coordination with sponsor counsel:** I'll flag the equity cure right and restricted payment issues for Patricia Voss at Kellner Brandt & Associates, as these are typically sponsor-driven asks and Granite Peak should weigh in on priority.
4. **Timeline:** I propose to have the full marked draft ready to circulate to W&G by end of day Monday, March 3, which gives us a week for the mark-up. I'd ask that you review my mark-up before it goes out. Sophie is working on the schedules and collateral-related sections in parallel, so those should be ready on the same timeline.
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Are you available for a call tomorrow morning (February 26) to walk through these issues and align on positions before I begin the detailed mark-up? I'm flexible on time — whatever works for your schedule. I've looped in Sophie on cc so she's tracking the discussion.
I'll separately circulate the Excel issues list (Version 1.0) once it's finalized — should be ready by midday tomorrow.
Thanks,
Marcus
Marcus Leung Associate Calderwood & Harkness LLP mleung@calderwoodharkness.com
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