MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Claudia Merritt, Responsible Partner, Banking & Finance
FROM: Marcus Leung, Lead Associate, Banking & Finance
DATE: February 26, 2025
RE: Litigation and Contingent Liability Review — Nexford Industrial Holdings Inc. and Subsidiaries
MATTER NO.: 1005-00001
CLIENT/MATTER CODE: IBL-NIH-2025-031
Calderwood & Harkness LLP
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I. Executive Summary
The purpose of this memorandum is to review and summarize all pending and threatened litigation, arbitration, and regulatory proceedings involving Nexford Industrial Holdings Inc. ("Nexford" or the "Borrower") and its direct and indirect subsidiaries (collectively, the "Nexford Group"), in connection with the proposed $1,400,000,000 senior secured Term Loan B refinancing and dividend recapitalization (the "Transaction"). Crescent Harbor Bank, N.A. ("Crescent Harbor") will serve as Administrative Agent and Collateral Agent under the anticipated credit facility. This review is conducted as part of the comprehensive legal due diligence process in advance of the anticipated March 28, 2025 closing date for the Transaction.
The information and analysis contained in this memorandum are based on the following sources:
(i) Responses to Calderwood & Harkness LLP's Due Diligence Request List dated February 4, 2025, as provided by Nexford's General Counsel, David Engstrom, and Vice President, Treasury & Corporate Finance, Priya Mehta, together with supporting documentation delivered through the virtual data room (Thackeray Solutions, Project "Granite Forge");
(ii) Publicly available court records, docket searches, and regulatory filings reviewed by Calderwood & Harkness through its standard litigation search protocol, including federal and state court PACER and docket searches across all relevant jurisdictions;
(iii) Management representations provided during diligence sessions held on February 10, 2025 and February 18, 2025, attended by David Engstrom, Priya Mehta, Michelle Kaplan (Chief Financial Officer), and representatives of Granite Peak Capital Partners, LP ("Granite Peak" or the "Sponsor");
(iv) Review of the existing Credit Agreement dated as of June 14, 2019, among Nexford Industrial Holdings Inc., as Borrower, Granite Peak NIH Holdings, LLC, as Holdings, the Subsidiary Guarantors party thereto, Atlas Meridian Bank, N.A., as Administrative Agent, and the lenders party thereto (the "Existing Credit Agreement"), as amended through the Fourth Amendment dated September 12, 2024, and the Indenture dated November 8, 2021, among Nexford Industrial Holdings Inc., as Issuer, the Guarantors party thereto, and Pinnacle Trust Company, as Trustee (the "Indenture"), governing $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 (the "Senior Notes"); and
(v) Discussions with Nexford's independent auditor, Ashworth & Kendrick LLP, including Helen Yamamoto (engagement partner), regarding the treatment of litigation contingencies in Nexford's audited and interim financial statements.
Overall Assessment. Based on Calderwood & Harkness's review of all available information as of the date of this memorandum, the existing litigation portfolio of the Nexford Group does not present material impediments to the closing of the Transaction. No single pending or threatened matter, nor the aggregate of all identified matters, appears likely to trigger a Material Adverse Effect as that term is expected to be defined in the credit agreement for the Transaction (the "Credit Agreement"). The total aggregate claimed exposure across all identified matters is approximately $15,145,000, of which a significant portion is either insured, resolved, or represents claims in which Nexford entities are plaintiffs rather than defendants. The estimated realistic aggregate exposure, reflecting probability-weighted settlement outcomes, is in the range of $3,000,000 to $4,500,000, representing less than 1.2% of Nexford's last twelve months ("LTM") Adjusted EBITDA of $385,000,000. Notwithstanding this overall favorable assessment, certain matters require ongoing monitoring and appropriate disclosure in the Credit Agreement schedules, as detailed in Sections III and VII below.
Scope of Review. This memorandum covers all entities that are expected to be Loan Parties under the Credit Agreement, consisting of the following:
• Borrower: Nexford Industrial Holdings Inc. (a Delaware corporation; EIN: 36-4178552)
• Holdings Guarantor: Granite Peak NIH Holdings, LLC (a Delaware limited liability company; EIN: 85-3291047)
• Subsidiary Guarantors (11 entities): Nexford Precision Components, Inc.; Nexford Engineered Systems, LLC; Nexford Coatings & Surface Technologies, Inc.; Nexford Manufacturing Services, LLC; Nexford Properties, LLC; Nexford International Holdings, Inc. (CFC Holdco — limited pledge); Clearfield Tool & Die, Inc. (acquired 2021); Summit Industrial Fabrication Co. (acquired 2022); Ridgepoint Specialty Coatings, LLC (acquired 2023); and Lakeshore Precision Engineering, Inc. (acquired 2024)
In addition, this review encompasses the non-guarantor foreign subsidiaries Nexford Canada Holdings ULC (a British Columbia unlimited liability company) and Nexford Canada Manufacturing, Inc. (an Ontario corporation), which, while not expected to be Loan Parties, are material operating subsidiaries whose litigation exposure is relevant to the consolidated financial condition of the Nexford Group.
II. Materiality Thresholds and Disclosure Framework
A. Credit Agreement Materiality Standards
The anticipated Credit Agreement, the first draft of which was circulated by Whitfield & Gage LLP (counsel to Crescent Harbor, acting as Administrative Agent) on February 24, 2025, contains customary representations, warranties, and disclosure requirements with respect to litigation and contingent liabilities. This section sets forth the applicable materiality framework that governs our disclosure recommendations.
Litigation Representation. Consistent with prevailing market practice for Term Loan B facilities in sponsored leveraged finance transactions, the Borrower will be required to represent and warrant that, except as set forth on a designated disclosure schedule, there is no pending or, to the knowledge of the Borrower, threatened litigation, arbitration, investigation, or governmental proceeding against any Loan Party that could reasonably be expected to result in a Material Adverse Effect. This representation is expected to be made as of the closing date and, in the case of certain representations, as of each subsequent borrowing date to the extent provided for in the Credit Agreement (though the Transaction contemplates a single-draw term loan facility without ongoing borrowing mechanics beyond any revolving credit facility that may be included).
Material Adverse Effect Definition. The anticipated definition of "Material Adverse Effect" follows the standard three-prong formulation customarily employed in Term Loan B credit agreements for middle-market and upper-middle-market leveraged buyout and recapitalization transactions. Specifically, a "Material Adverse Effect" is expected to mean a material adverse effect on:
(a) the business, assets, financial condition, or results of operations of the Borrower and its Restricted Subsidiaries, taken as a whole;
(b) the ability of the Loan Parties, taken as a whole, to perform their payment and other material obligations under the Loan Documents; or
(c) the rights and remedies of the Administrative Agent and the Lenders under the Loan Documents.
The definition is expected to include customary carve-outs for industry-wide changes, macroeconomic conditions, changes in law or accounting standards, and similar matters, subject to a disproportionate impact exception. The precise contours of the Material Adverse Effect definition remain subject to negotiation between Calderwood & Harkness (on behalf of Nexford and Granite Peak) and Whitfield & Gage LLP (on behalf of Crescent Harbor), and any revisions to this definition should be reflected in our final disclosure analysis prior to closing.
Disclosure Schedule Thresholds. The anticipated disclosure schedule accompanying the litigation representation (expected to be designated as Schedule 3.06 or a comparable section reference in the Credit Agreement) will list all pending or threatened litigation, arbitration, or governmental proceedings with claimed or reasonably estimated exposure exceeding a specified monetary threshold. Based on the initial draft circulated by Whitfield & Gage and preliminary discussions with the arranger group, the anticipated thresholds are as follows:
• Per-matter threshold: $5,000,000 in claimed or reasonably estimated exposure
• Aggregate threshold: $15,000,000 across all matters
These thresholds remain subject to negotiation, and it is possible that Crescent Harbor or members of the lending syndicate may seek lower thresholds. Calderwood & Harkness's recommendations in this memorandum are calibrated to the anticipated thresholds while also identifying matters that should be considered for disclosure as a prudent measure even if they fall below the applicable threshold. The Credit Agreement Issues List — Version 1.0 (dated February 26, 2025), which is being maintained as a working document by the deal team, tracks the status of the litigation representation language and schedule disclosure threshold negotiations.
B. Existing Indenture Requirements
The Indenture governing the $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 (Pinnacle Trust Company, as Trustee) does not impose ongoing litigation reporting requirements on the Issuer or the Guarantors. The Indenture does, however, require that the offering memorandum prepared in connection with the issuance of the Senior Notes, as well as any periodic reports required to be furnished to noteholders (or filed with the Securities and Exchange Commission if Nexford were a reporting company, which it is not), disclose material contingencies in accordance with applicable accounting standards. Calderwood & Harkness has reviewed the Indenture and confirms that no litigation-related event of default exists under the Indenture based on our current review of all pending and threatened matters. The Transaction is not expected to trigger any consent or waiver requirement under the Indenture with respect to litigation matters, though the refinancing itself will require compliance with the Indenture's debt incurrence covenant and other applicable provisions, which are being addressed separately in the Transaction structuring workstream.
C. Auditor Inquiry Letters
Ashworth & Kendrick LLP, Nexford's independent auditor, has been asked to provide a standard auditor response letter (commonly referred to as an "ABA audit response letter") regarding litigation contingencies as of the last twelve months reporting date of December 31, 2024. The request was transmitted by David Engstrom on February 14, 2025, with a copy to Helen Yamamoto (engagement partner) at Ashworth & Kendrick. As of the date of this memorandum, the response letter has been requested but has not yet been received. Calderwood & Harkness has communicated the importance of receiving this letter in advance of the scheduled closing date, and we are coordinating follow-up through both David Engstrom and directly with Helen Yamamoto's team. The auditor's response letter will serve as an independent verification of the contingency disclosures reflected in Nexford's audited financial statements for the fiscal year ended December 31, 2024, and any variance between the auditor's assessment and the information reflected in this memorandum will be addressed in a supplemental update.
D. Financial Reporting Context
In order to provide appropriate context for the materiality assessments contained in this memorandum, the following key financial metrics for the Nexford Group are set forth below. These figures are derived from the Confidential Information Memorandum dated January 2025 (the "CIM"), management presentations, and the financial model provided by Granite Peak's financial advisor:
• LTM Revenue (as of December 31, 2024): $2,100,000,000
• LTM Adjusted EBITDA (as of December 31, 2024): $385,000,000, consisting of $357,000,000 in reported EBITDA plus $28,000,000 in permitted add-backs, broken down as follows:
• Acquisition-related costs: $12,000,000
• Non-recurring restructuring charges: $8,500,000
• Sponsor management fees: $4,500,000
• Integration costs: $3,000,000
• Pro forma first lien net leverage at closing: Approximately 3.38x (based on $1,400,000,000 Term Loan B principal amount, less estimated unrestricted cash at closing, divided by LTM Adjusted EBITDA of $385,000,000)
• Pro forma total net leverage at closing: Approximately 4.03x (including $250,000,000 in outstanding Senior Unsecured Notes due 2028)
• Enterprise value context: Granite Peak acquired Nexford in January 2019 at an enterprise value of $1,650,000,000, with Granite Peak contributing equity of $725,000,000. Since the acquisition, Nexford has completed four bolt-on acquisitions (Clearfield Tool & Die in 2021, Summit Industrial Fabrication in 2022, Ridgepoint Specialty Coatings in 2023, and Lakeshore Precision Engineering in 2024) that have contributed to revenue and EBITDA growth.
These financial metrics provide the essential backdrop against which the materiality of individual litigation claims and aggregate contingent liabilities must be assessed. As discussed in Section VI below, the total realistic aggregate exposure across all identified matters represents less than 1.2% of LTM Adjusted EBITDA and approximately 0.15% to 0.21% of LTM Revenue, well below any threshold that would reasonably be expected to constitute a Material Adverse Effect under the Credit Agreement.
III. Summary of Pending Litigation
This section provides a detailed analysis of each pending or threatened litigation matter, arbitration proceeding, or regulatory action identified during Calderwood & Harkness's review. Matters are organized by category for ease of reference. For each matter, we provide the identity of the affected entity, the nature and status of the proceeding, the claimed or estimated exposure, our assessment of the probable outcome, and our recommendation regarding disclosure on the Credit Agreement litigation schedule.
A. Commercial Disputes
1. Nexford Precision Components, Inc. — Contract Dispute (Supplier Claim)
Parties and Caption: Artisan Metals & Alloys Corp. v. Nexford Precision Components, Inc., Case No. 2024-L-001847, Circuit Court of Winnebago County, Illinois, Seventeenth Judicial Circuit.
Affected Entity: Nexford Precision Components, Inc. ("NPC"), a Delaware corporation and Subsidiary Guarantor, located at 2750 Commerce Drive, Rockford, IL 61101. NPC operates as a core subsidiary within Nexford's Precision Components segment, manufacturing high-tolerance machined components for aerospace, defense, and industrial customers.
Nature of Claims: Artisan Metals & Alloys Corp. ("Artisan"), a former raw materials supplier to NPC, filed this action on March 15, 2024, alleging breach of contract arising from NPC's termination of a multi-year supply agreement (the "Supply Agreement") originally executed in January 2020. Artisan alleges that NPC's termination of the Supply Agreement in November 2023 was wrongful and without adequate cause, and that NPC failed to provide the contractually required notice period prior to termination. Artisan further alleges that it made substantial capital investments in reliance on the Supply Agreement's multi-year term and that it lost significant revenue and profit opportunities as a result of the termination.
Claimed Damages: Approximately $3,200,000, consisting of alleged lost profits over the remaining term of the Supply Agreement, costs associated with capital investments made in reliance on the contract, and incidental damages.
Status and Procedural History: The case is currently in the discovery phase. NPC filed a motion to dismiss in June 2024, arguing that the termination was for cause pursuant to Section 8.2 of the Supply Agreement based on Artisan's repeated failure to meet quality specifications and delivery timelines. The court granted the motion in part and denied it in part in an order dated October 3, 2024, dismissing Artisan's claim for punitive damages but allowing the breach of contract and lost profits claims to proceed. Written discovery is ongoing, and depositions are expected to commence in Q2 2025. No trial date has been set.
Assessment: Nexford's management, including David Engstrom (General Counsel) and the operational leadership at NPC, believes that the termination was proper and that NPC has meritorious defenses based on the for-cause termination provisions of the Supply Agreement. NPC has documented evidence of quality and delivery deficiencies by Artisan during the period preceding termination. The claimed exposure of $3,200,000 falls below the anticipated Credit Agreement per-matter disclosure threshold of $5,000,000. Reserves of approximately $800,000 have been established in Nexford's financial statements as of December 31, 2024, reflecting a conservative estimate of potential settlement exposure. Calderwood & Harkness's assessment, based on the information available, is that the probable range of loss in this matter is $500,000 to $1,500,000, assuming settlement prior to trial. This matter does not rise to the level of a Material Adverse Effect under any reasonable interpretation of that term.
Recommendation: While the claimed exposure is below the anticipated $5,000,000 per-matter disclosure threshold, we recommend including this matter on the Credit Agreement litigation schedule as a prudent measure, particularly given that the aggregate exposure analysis (Section VI) approaches the anticipated $15,000,000 aggregate threshold when all matters are considered at face value. Disclosure of this matter also provides comfort to the lending syndicate and reduces the risk of any post-closing dispute regarding the accuracy of the litigation representation.
2. Nexford Engineered Systems, LLC — Product Warranty Claim
Parties and Caption: Meridian Infrastructure Partners, LLC v. Nexford Engineered Systems, LLC, Case No. 6:24-cv-02103-RBH, United States District Court, District of South Carolina, Greenville Division.
Affected Entity: Nexford Engineered Systems, LLC ("NES"), a Delaware limited liability company and Subsidiary Guarantor, located at 600 Manufacturers Row, Greenville, SC 29607. NES is a leading provider of custom-engineered industrial components and systems for infrastructure, energy, and heavy industrial applications.
Nature of Claims: Meridian Infrastructure Partners, LLC ("Meridian"), a general contractor and customer of NES, filed this action on July 22, 2024, alleging breach of warranty and consequential damages in connection with engineered components delivered by NES for use in a large-scale water treatment infrastructure project in the southeastern United States. Meridian alleges that certain engineered components manufactured and delivered by NES contained material defects that rendered them unsuitable for their intended purpose, necessitating removal, replacement, and reinstallation. Meridian further alleges that the defective components caused significant delays to the overall project schedule, resulting in liquidated damages and other penalties assessed against Meridian by the project owner.
Claimed Damages: Approximately $7,500,000, consisting of approximately $4,200,000 in alleged replacement costs (including the cost of procuring substitute components from alternative suppliers, removal and reinstallation labor, and related engineering and inspection costs) and approximately $3,300,000 in alleged project delay damages (including liquidated damages passed through from the project owner, extended general conditions, and lost productivity).
Status and Procedural History: The case is in pre-trial proceedings. NES filed its answer in September 2024, denying the material allegations and asserting affirmative defenses including failure to mitigate, contributory negligence in installation, and contractual limitations on consequential damages. Fact discovery is underway, and expert discovery is expected to commence in Q2 2025. The parties have engaged in preliminary settlement discussions, with two formal mediation sessions held to date (December 11, 2024 and February 7, 2025), facilitated by a court-appointed mediator. While the parties have not reached agreement, the discussions have been productive, and both sides have expressed willingness to continue negotiations.
Assessment: This is the most significant pending matter in the Nexford Group's litigation portfolio from a claimed exposure standpoint. The claimed amount of $7,500,000 exceeds the anticipated per-matter disclosure threshold of $5,000,000. However, Nexford's management and David Engstrom believe that the claim is substantially inflated. NES's internal engineering review indicates that only a portion of the delivered components exhibited the alleged defects, and that Meridian's claimed replacement costs include costs attributable to its own design changes and installation errors that are unrelated to NES's products. NES further contends that its standard terms and conditions contain a limitation-of-liability clause that excludes consequential damages, which, if enforced, would eliminate the $3,300,000 delay damages component of the claim. Based on the settlement discussions to date and NES management's assessment, a reasonable settlement range is estimated at $1,500,000 to $2,500,000. Reserves of $2,000,000 have been established in Nexford's financial statements as of December 31, 2024. Even at the full claimed amount of $7,500,000, this matter would represent less than 2.0% of LTM Adjusted EBITDA and would not constitute a Material Adverse Effect on the Nexford Group taken as a whole.
Recommendation: This matter must be disclosed on the Credit Agreement litigation schedule given that the claimed amount exceeds the anticipated $5,000,000 per-matter threshold. We recommend that the schedule disclosure include a brief description of the nature of the claim, the claimed amount, and a statement that NES believes the claim is without merit in significant part and that it is engaged in settlement discussions. This matter should be discussed directly with Crescent Harbor's counsel (Whitfield & Gage LLP) in the context of closing conditions and representations to ensure alignment on the expected treatment. This matter does not constitute a Material Adverse Effect given Nexford's consolidated EBITDA of $385,000,000 and the assessed realistic exposure range of $1,500,000 to $2,500,000.
3. Clearfield Tool & Die, Inc. — Employment Dispute
Parties and Caption: Johnson v. Clearfield Tool & Die, Inc., Case No. 2:24-cv-05872-MJH, United States District Court, Western District of Pennsylvania.
Affected Entity: Clearfield Tool & Die, Inc. ("Clearfield"), a Pennsylvania corporation and Subsidiary Guarantor, located at 175 Clearfield Avenue, Clearfield, PA 16830. Clearfield is a specialty tool and die manufacturer acquired by Nexford in 2021 as part of the Nexford Group's bolt-on acquisition strategy.
Nature of Claims: A former employee of Clearfield filed this action on September 8, 2024, alleging wrongful termination in violation of Title VII of the Civil Rights Act of 1964 and the Pennsylvania Human Relations Act. The plaintiff alleges that his termination was motivated by discriminatory animus based on his national origin, and seeks compensatory damages including back pay, front pay, and emotional distress damages, as well as attorneys' fees and costs.
Claimed Damages: Approximately $1,200,000, inclusive of alleged back pay, front pay (calculated through an assumed retirement date), emotional distress damages, and attorneys' fees.
Status and Procedural History: The case is in the early discovery phase. Clearfield filed its answer in November 2024, denying all material allegations and asserting that the plaintiff's termination was based on documented performance deficiencies and a pattern of insubordination. Initial disclosures have been exchanged, and a scheduling order was entered by the court on January 15, 2025, setting a fact discovery deadline of August 2025 and a trial date in early 2026.
Assessment: Nexford's outside employment counsel, which has been retained to defend this matter, views the claim as having limited merit based on the documented performance history and the absence of any direct evidence of discriminatory intent. The claimed amount of $1,200,000 is below the anticipated per-matter disclosure threshold of $5,000,000. No reserves have been established, as management considers the likelihood of a material loss to be remote. Single-plaintiff employment discrimination claims of this nature, while not uncommon in manufacturing enterprises with significant workforces, typically resolve for amounts substantially below the initial claimed damages, and the availability of documented performance-based justification for the termination strengthens Clearfield's defensive posture.
Recommendation: This matter falls below the anticipated disclosure threshold and, in Calderwood & Harkness's assessment, does not warrant inclusion on the Credit Agreement litigation schedule. If the disclosure threshold is negotiated to a level below $1,200,000, or if the aggregate threshold analysis requires its inclusion, the matter may be added. This matter is not material to the Nexford Group's consolidated operations.
4. Lakeshore Precision Engineering, Inc. — Customer Payment Dispute
Parties and Caption: Lakeshore Precision Engineering, Inc. v. Great Lakes Fabrication & Assembly, Inc., Case No. 24-09145-CZ, Muskegon County Circuit Court, Michigan.
Affected Entity: Lakeshore Precision Engineering, Inc. ("Lakeshore"), a Michigan corporation and Subsidiary Guarantor, located at 3200 Lakeshore Boulevard, Muskegon, MI 49441. Lakeshore is a precision engineering and machining company acquired by Nexford in 2024 as the most recent bolt-on acquisition.
Nature of Claims: Lakeshore, as plaintiff, filed this action on August 19, 2024, seeking to collect approximately $2,100,000 in outstanding invoices for precision-machined components delivered to Great Lakes Fabrication & Assembly, Inc. ("Great Lakes"). The invoices relate to multiple purchase orders placed by Great Lakes over the period from January through May 2024. Great Lakes has disputed certain invoices, alleging quality deficiencies in a subset of delivered components, but has not asserted a formal counterclaim.
Status and Procedural History: Great Lakes filed its answer on October 7, 2024, generally denying liability and asserting affirmative defenses including failure of consideration and setoff. No counterclaim has been asserted to date. Discovery is in early stages.
Assessment: In this matter, Nexford (through its Lakeshore subsidiary) is the plaintiff seeking recovery, not the defendant facing exposure. The absence of a counterclaim to date is favorable, though it remains possible that Great Lakes could assert a counterclaim at a later stage of the proceedings. The potential recovery of $2,100,000 would enhance Nexford's cash position, though we have not factored this recovery into our assessment of the Nexford Group's financial metrics. The matter does not create any defensive exposure at this time and falls below the disclosure threshold as a defensive matter.
Recommendation: No disclosure on the Credit Agreement litigation schedule is required or recommended at this time. However, Calderwood & Harkness recommends monitoring the matter for any counterclaim filing, which would necessitate a reassessment of the disclosure recommendation and potential exposure.
B. Personal Injury / Tort Claims
5. Nexford Manufacturing Services, LLC — Workers' Compensation Claim
Affected Entity: Nexford Manufacturing Services, LLC ("NMS"), an Illinois limited liability company and Subsidiary Guarantor, located at 1400 Industrial Parkway, Schaumburg, IL 60173 (co-located with Nexford's corporate headquarters).
Nature of Claim: An employee of NMS filed a workers' compensation claim in Q4 2024 alleging a workplace injury sustained at the Schaumburg manufacturing facility. The employee alleges injuries to the lower back and shoulder resulting from repetitive motion activities on the production floor.
Claimed Exposure: Approximately $650,000 in medical costs, rehabilitation expenses, temporary total disability benefits, and lost wages.
Status: The claim is being administered through Nexford's workers' compensation insurance program. Nexford's workers' compensation coverage is provided by Continental Shield Underwriters, Inc., with Vantage Risk Advisors, LLC serving as Nexford's insurance broker (Rachel Sorensen, account executive). The claim has been accepted by the carrier and is being managed in the ordinary course. No civil lawsuit has been filed, and the matter is proceeding through the standard workers' compensation administrative process.
Assessment: This claim is fully insured under Nexford's workers' compensation policy, and Nexford has no material uninsured exposure. The claimed amount of $650,000 is below all applicable materiality thresholds, and the insurance coverage eliminates any financial exposure to the Nexford Group. Workers' compensation claims are a routine aspect of manufacturing operations, and this claim is consistent in nature and magnitude with Nexford's historical claims experience.
Recommendation: No disclosure on the Credit Agreement litigation schedule is required. This matter is fully covered by Nexford's insurance program and does not present any material risk to the Nexford Group.
6. Summit Industrial Fabrication Co. — Premises Liability Claim
Affected Entity: Summit Industrial Fabrication Co. ("Summit"), a South Carolina corporation and Subsidiary Guarantor, located at 820 Summit Drive, Spartanburg, SC 29303. Summit is a specialty fabrication company acquired by Nexford in 2022.
Nature of Claim: An independent contractor sustained injuries in a slip-and-fall incident on Summit's premises on or about September 14, 2024. The contractor's attorney has submitted a pre-litigation demand letter to Summit, alleging negligent maintenance of the premises and seeking damages for personal injuries.
Claimed Damages: Approximately $475,000, consisting of medical expenses, lost income, and general damages for pain and suffering.
Status: The matter is in the pre-litigation demand stage. No lawsuit has been filed. Summit tendered the claim to Continental Shield Underwriters, Inc. under its commercial general liability policy, and the insurer has accepted the tender and is managing the claim through its claims department. Settlement negotiations between the insurer and the contractor's counsel are ongoing.
Assessment: This claim is de minimis in amount and is fully insured under Nexford's commercial general liability policy. There is no material uninsured exposure to the Nexford Group. The claim is well within the policy limits and is being handled by the insurer in the ordinary course.
Recommendation: No disclosure on the Credit Agreement litigation schedule is required. This matter is fully insured and de minimis.
C. Intellectual Property Claims
7. Nexford Coatings & Surface Technologies, Inc. — Patent Infringement Allegation
Affected Entity: Nexford Coatings & Surface Technologies, Inc. ("NCST"), a Delaware corporation and Subsidiary Guarantor, located at 9100 Westpark Industrial Boulevard, Houston, TX 77063. NCST is a specialty coatings and surface treatment provider serving the energy, aerospace, and industrial sectors.
Nature of Allegation: On January 8, 2025, NCST received a cease-and-desist letter from outside counsel representing Marlowe Asset Management Surface Sciences, Inc. ("Marlowe Asset Management"), a Texas-based specialty coatings company. The letter alleges that a proprietary thermal barrier coating process utilized by NCST (internally designated as the "TBC-7 Process") may infringe on U.S. Patent No. 10,XXX,XXX (the "Asserted Patent"), which was issued to Marlowe Asset Management in 2022. The cease-and-desist letter demands that NCST immediately cease use of the TBC-7 Process, enter into a royalty-bearing license agreement with Marlowe Asset Management, and pay back royalties for the period during which NCST has allegedly used the infringing process. The letter threatens formal litigation in the United States District Court for the Southern District of Texas if the matter is not resolved within 90 days of the date of the letter (i.e., by approximately April 8, 2025).
Claimed Exposure: The cease-and-desist letter does not specify a precise monetary demand, though it references royalty rates and threatens both damages and injunctive relief. If litigation is commenced, the potential exposure could be significant depending on the scope of the asserted royalty claims, the applicability of the Asserted Patent to the TBC-7 Process, and whether Marlowe Asset Management seeks injunctive relief that could disrupt NCST's operations. At this stage, the exposure is unquantifiable.
Status: No lawsuit has been filed. The matter is currently under review by Nexford's outside intellectual property counsel. David Engstrom has reported to Calderwood & Harkness that NCST's internal assessment is that the claims set forth in the cease-and-desist letter are of questionable validity. Specifically, NCST believes that (a) the TBC-7 Process was developed independently by NCST and has been in commercial use since at least 2019, predating the issuance of the Asserted Patent in 2022; (b) the Asserted Patent may be subject to invalidity challenges based on prior art, including NCST's own prior use; and (c) the scope of the patent claims, as properly construed, may not encompass the TBC-7 Process. Nexford's IP counsel is conducting a detailed claim chart analysis and freedom-to-operate assessment, the results of which are expected by mid-March 2025.
Assessment: This matter is currently threatened but not pending. The absence of a filed lawsuit means that this matter does not fall within the "pending" litigation category for disclosure purposes. However, depending on the scope of the "to the knowledge of the Borrower" qualifier in the Credit Agreement's litigation representation, this matter may need to be disclosed as a "threatened" proceeding. The potential significance of this matter lies in the possibility that, if litigation is commenced, Pemberton Investors seek both substantial monetary damages (in the form of past royalties and ongoing royalties) and injunctive relief that could require NCST to modify or cease its use of the TBC-7 Process. The TBC-7 Process is a significant contributor to NCST's revenue, and any disruption to its use could have a meaningful impact on NCST's operations. That said, the preliminary assessment of NCST's IP counsel is cautiously optimistic regarding the merits of Nexford's position, and the prior art and prior use arguments provide substantial defensive leverage.
Recommendation: Calderwood & Harkness recommends disclosing this matter as a "threatened" proceeding on the Credit Agreement litigation schedule, given the potential significance of the claims if litigation is commenced. Even though no lawsuit has been filed, the formal nature of the cease-and-desist letter and the approaching expiration of the 90-day demand period (coinciding approximately with the anticipated closing date) warrant proactive disclosure. We further recommend discussing with David Engstrom the scope of the "to the knowledge of the Borrower" qualifier in the litigation representation, to ensure that the representation is properly calibrated to capture or exclude this matter as appropriate. Finally, we recommend that the results of the IP counsel's claim chart analysis and freedom-to-operate assessment, expected by mid-March 2025, be incorporated into the supplemental update to this memorandum prior to closing.
D. Environmental Proceedings
Calderwood & Harkness's environmental due diligence review is addressed in detail in the separate Memorandum — Environmental Due Diligence Summary (Phase I ESA Reviews) dated February 22, 2025, prepared by Calderwood & Harkness based on Phase I Environmental Site Assessment reports from Clearwater Environmental Sciences, Inc. (Dr. Nathan Foley, project manager). The following is a summary of the environmental litigation and proceedings findings relevant to this memorandum.
No Active Enforcement Actions. No active environmental enforcement actions, proceedings, or investigations have been identified against any Loan Party or any current or former facility operated by any Loan Party. Calderwood & Harkness's review of publicly available environmental regulatory databases, including the EPA's Enforcement and Compliance History Online (ECHO) database, state environmental agency records in Illinois, South Carolina, Texas, Pennsylvania, and Michigan, and Nexford's internal records, did not reveal any pending or threatened environmental proceedings.
Phase I ESA Results for Mortgaged Properties. Phase I Environmental Site Assessment reports were obtained for the four properties expected to be subject to mortgage liens under the Credit Agreement:
• 1400 Industrial Parkway, Schaumburg, IL 60173 (NMS / Nexford HQ)
• 2750 Commerce Drive, Rockford, IL 61101 (NPC)
• 600 Manufacturers Row, Greenville, SC 29607 (NES)
• 9100 Westpark Industrial Boulevard, Houston, TX 77063 (NCST / Ridgepoint)
The Phase I ESA reports identified certain recognized environmental conditions ("RECs") at two of the four properties, consisting primarily of historical use of solvents and chemicals consistent with industrial manufacturing operations. However, none of the identified RECs were assessed as requiring immediate remediation or as likely to give rise to material environmental liability under applicable federal or state environmental laws. The RECs are being addressed through ongoing monitoring programs, and the associated costs are immaterial.
Ridgepoint Historical Monitoring Obligation. Ridgepoint Specialty Coatings, LLC ("Ridgepoint"), located at 9100 Westpark Industrial Boulevard, Houston, TX 77063 (acquired by Nexford in 2023), has a historical environmental monitoring obligation related to prior operations at the Houston facility that preceded Nexford's acquisition. This monitoring obligation, which involves periodic groundwater sampling and reporting to the Texas Commission on Environmental Quality, has been in place since approximately 2015 and arises from historical solvent use by a prior owner-operator. Annual monitoring costs are approximately $75,000 and are not considered material. The monitoring obligation was identified and assessed during Nexford's acquisition-phase diligence of Ridgepoint, and appropriate indemnification protections were obtained from the seller.
Assessment: No environmental proceedings have been identified that would constitute a Material Adverse Effect. The Nexford Group's environmental compliance posture is consistent with that of a well-managed industrial manufacturing enterprise of comparable size and complexity.
IV. Regulatory Proceedings and Government Investigations
A. OSHA Inspections and Citations
Nexford Manufacturing Services, LLC received a routine inspection by the Occupational Safety and Health Administration ("OSHA") at its Schaumburg, Illinois manufacturing facility (1400 Industrial Parkway, Schaumburg, IL 60173) during the third quarter of 2024. The inspection was initiated as part of OSHA's programmatic planned inspections targeting manufacturing facilities and was not prompted by a specific complaint, accident, or referral.
Following the inspection, OSHA issued two minor citations relating to recordkeeping deficiencies and a machine guarding condition that was promptly corrected. The proposed penalties totaled approximately $18,500 across both citations. Nexford elected not to contest the citations, and the penalties were paid in full in October 2024. All corrective actions identified in the citations have been completed and documented.
No other OSHA inspections, citations, or proceedings are pending against any Loan Party. Calderwood & Harkness reviewed OSHA's online Establishment Search database and confirmed that no open inspections or contested citations exist for any Nexford Group facility.
Assessment: The resolved OSHA citations are de minimis in amount and nature. They do not reflect a systemic safety compliance failure, and the prompt resolution demonstrates effective compliance management by Nexford's Environmental Health & Safety function. No disclosure on the Credit Agreement litigation schedule is required.
B. Tax Proceedings
Based on representations from Michelle Kaplan (Chief Financial Officer) and Priya Mehta (Vice President, Treasury & Corporate Finance), and confirmed through discussions with Ashworth & Kendrick LLP (Helen Yamamoto, engagement partner), no pending tax litigation, disputed tax assessments, or active tax audit proceedings involving any Loan Party could result in material liability.
Nexford Industrial Holdings Inc. is organized under the laws of Delaware and maintains its principal place of business in Schaumburg, Illinois. Its fiscal year end is December 31, and its Employer Identification Number is 36-4178552. Nexford files consolidated federal income tax returns and state income tax returns in all jurisdictions in which it has nexus. All material tax returns have been filed on a timely basis (taking into account applicable extensions), and all material tax obligations have been paid when due.
The Internal Revenue Service conducted a limited-scope examination of Nexford's federal income tax return for the fiscal year ended December 31, 2021, which was closed with no material adjustments in April 2023. No federal or state income tax examinations are currently pending or have been proposed for any open tax year.
Assessment: No material tax contingencies have been identified. This area does not present any concern for the Transaction.
C. OFAC / Sanctions / Anti-Corruption
Calderwood & Harkness's review of sanctions, anti-corruption, and anti-money laundering compliance matters is addressed in greater detail in the separate Memorandum — Regulatory and Compliance Review dated February 27, 2025. The following summary is provided for purposes of this litigation and contingent liability review.
No pending or threatened proceedings have been identified against any Loan Party, any director, officer, or employee of any Loan Party, or, to the knowledge of the Loan Parties, any agent acting on behalf of any Loan Party, under:
• Sanctions laws administered by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury, or comparable sanctions programs administered by the U.S. Department of State, the United Nations Security Council, the European Union, or Her Majesty's Treasury (United Kingdom);
• Anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), and any comparable anti-bribery or anti-corruption legislation in jurisdictions where the Nexford Group operates;
• Anti-money laundering laws, including the USA PATRIOT Act, the Bank Secrecy Act, and applicable regulations promulgated by the Financial Crimes Enforcement Network ("FinCEN").
This finding is significant in the context of the Transaction because the Credit Agreement is expected to contain representations and covenants requiring that no Loan Party, nor any director, officer, employee, or, to the knowledge of the Loan Parties, any agent, is a "Sanctioned Person" (i.e., a person designated on the OFAC Specially Designated Nationals and blocked Persons List or any similar list maintained by the other sanctions authorities referenced above), and that no proceeds of the Transaction will be used, directly or indirectly, in violation of applicable sanctions, anti-corruption, or anti-money laundering laws.
Nexford's Canadian operations, consisting of Nexford Canada Holdings ULC (a British Columbia unlimited liability company based in Vancouver, BC) and Nexford Canada Manufacturing, Inc. (an Ontario corporation based in Mississauga, ON), have been screened against applicable U.S. and Canadian sanctions lists, and no issues have been identified. Nexford's internal compliance program, which includes an anti-corruption policy, a sanctions screening protocol, and periodic training for employees involved in international operations, was reviewed and found to be adequate for a company of Nexford's size and the nature of its international operations.
Assessment: No concerns have been identified in this area. The Nexford Group's compliance posture is consistent with the requirements of the anticipated Credit Agreement.
D. Other Regulatory Matters
Calderwood & Harkness's review did not identify any pending or threatened proceedings against any Loan Party involving:
• Federal or state antitrust laws, including the Sherman Act, the Clayton Act, or the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
• U.S. or Canadian trade laws, including anti-dumping or countervailing duty proceedings;
• Export control laws, including the Export Administration Regulations ("EAR") administered by the Bureau of Industry and Security ("BIS") of the U.S. Department of Commerce, or the International Traffic in Arms Regulations ("ITAR") administered by the Directorate of Defense Trade Controls ("DDTC") of the U.S. Department of State;
• Data privacy laws, including state consumer privacy statutes and any applicable provisions of the General Data Protection Regulation (to the extent applicable to the Nexford Group's limited European customer interactions).
Nexford's operations span 14 manufacturing facilities across North America (12 in the United States and 2 in Canada), with approximately 8,400 employees across the consolidated enterprise. Given the scale and geographic breadth of these operations, routine interactions with various federal, state, provincial, and local regulatory agencies are a normal part of Nexford's business operations. Calderwood & Harkness's review did not identify any such routine interactions that rise to the level of a proceeding, investigation, or enforcement action that would warrant disclosure under the Credit Agreement or that could reasonably be expected to result in a Material Adverse Effect.
V. Contingent Liabilities
In addition to the pending and threatened litigation matters described in Sections III and IV above, Calderwood & Harkness reviewed the following categories of contingent liabilities that are relevant to the Transaction and to the representations and warranties expected to be made by the Borrower under the Credit Agreement.
A. Guarantees and Indemnification Obligations
Calderwood & Harkness reviewed material contracts of the Nexford Group (cross-reference to Memorandum — Material Contract Review Summary dated February 25, 2025) and identified the following categories of guarantee and indemnification obligations:
Customer and Supplier Contracts. Nexford's customer contracts and supplier agreements contain customary indemnification provisions, including obligations to indemnify customers against third-party intellectual property infringement claims and product liability claims arising from Nexford-manufactured components. These indemnification obligations are standard for the industrial manufacturing sector and are consistent with the scope and limits of Nexford's insurance coverage. No material claims have been asserted under these indemnification provisions during the review period.
Acquisition-Related Indemnification. Granite Peak's 2019 acquisition of Nexford for $1,650,000,000 enterprise value was documented pursuant to a Stock Purchase Agreement that included customary seller indemnification provisions, including indemnification for breaches of representations and warranties, pre-closing tax liabilities, and certain identified contingent liabilities. The general indemnification obligations under the Stock Purchase Agreement were subject to a survival period and basket/cap structure, most of which have expired by their terms. Certain fundamental representations (including tax and title representations) survive for longer periods, but no claims have been asserted under these surviving provisions, and no claims are expected to be asserted.
Bolt-On Acquisition Indemnification. Each of the four bolt-on acquisitions completed since the initial Granite Peak acquisition contains acquisition agreement indemnification and escrow provisions with varying survival periods:
• Clearfield Tool & Die, Inc. (2021): General indemnification survival expired Q1 2023; special indemnification (tax, environmental) survives through Q1 2027. Escrow fund of $500,000 fully released.
• Summit Industrial Fabrication Co. (2022): General indemnification survival expired Q3 2024; special indemnification survives through Q3 2028. Escrow fund of $750,000; $500,000 released, $250,000 retained pending resolution of a minor pre-closing tax adjustment.
• Ridgepoint Specialty Coatings, LLC (2023): General indemnification survival expires Q4 2025; special indemnification (including environmental) survives through Q4 2029. Escrow fund of $1,200,000; full amount retained pending expiration of general survival period.
• Lakeshore Precision Engineering, Inc. (2024): General indemnification survival expires Q2 2026; special indemnification survives through Q2 2030. Escrow fund of $600,000; full amount retained.
The aggregate escrow amounts retained across all bolt-on acquisitions total approximately $2,050,000, which is immaterial relative to Nexford's consolidated operations. No material indemnification claims have been asserted under any of the bolt-on acquisition agreements, and none are anticipated.
B. Letters of Credit and Performance Bonds
Nexford has approximately $12,000,000 in outstanding standby letters of credit and performance bonds related to customer contracts, primarily in the Engineered Systems segment (NES). These instruments are issued to support Nexford's contractual obligations to customers on large-scale projects and are a customary requirement in the infrastructure and heavy industrial sectors in which NES operates. The letters of credit are issued under the existing revolving credit facility and will need to be rolled over or reissued under the new credit facility at closing, a matter that is being coordinated with Crescent Harbor and is tracked in the Credit Agreement Issues List. No draws have been made on any outstanding letter of credit or performance bond, and Nexford management does not anticipate any draws based on the current status of the underlying contracts.
C. Pension and Employee Benefit Contingencies
Nexford does not maintain or contribute to any defined benefit pension plan. All retirement benefits are provided through defined contribution plans (principally a 401(k) plan with employer matching contributions). Nexford does not participate in any multiemployer pension plan subject to the Multiemployer Pension Plan Amendments Act of 1980, and accordingly there is no withdrawal liability exposure.
No material ERISA litigation is pending against any Loan Party. Calderwood & Harkness's review of Nexford's employee benefit plans did not identify any operational or compliance deficiencies that could give rise to material liability under ERISA or the Internal Revenue Code.
Nexford's annual employer contributions to its defined contribution plans are approximately $18,000,000, which is a recurring operating expense reflected in the financial projections and does not represent a contingent liability.
D. Insurance Deductibles and Self-Insured Retentions
Nexford maintains comprehensive insurance programs appropriate for an industrial manufacturing enterprise of its scale, including property and casualty insurance, commercial general liability insurance, workers' compensation insurance, automobile liability insurance, umbrella/excess liability insurance, and directors and officers ("D&O") liability insurance. The principal carriers and programs are as follows:
• Property and Casualty / Commercial General Liability / Workers' Compensation / Umbrella: Continental Shield Underwriters, Inc. (brokered by Vantage Risk Advisors, LLC; Rachel Sorensen, account executive)
• Directors and Officers Liability: Meridian Specialty Insurance Co.
These programs carry customary deductibles and self-insured retentions. The aggregate self-insured retention across all insurance programs is approximately $5,000,000 annually, which is within normal parameters for an industrial manufacturing company of Nexford's size (approximately 8,400 employees across 14 facilities) and industry. The self-insured retention is reflected in Nexford's operating budget and historical financial results. Calderwood & Harkness's detailed review of the insurance program is set forth in the separate Memorandum — Insurance Program Review dated February 24, 2025.
VI. Aggregate Exposure Assessment
In order to provide the deal team and Crescent Harbor's counsel with a consolidated view of the Nexford Group's litigation and contingent liability exposure, the following aggregate analysis summarizes the total claimed and estimated realistic exposure across all identified matters.
Total Claimed/Threatened Exposure (All Identified Matters):
Net Defendant-Side Exposure. Excluding the Lakeshore collection action (where Nexford is the plaintiff and no counterclaim has been asserted), the OSHA penalties (already paid and resolved), and the insured claims (workers' compensation and premises liability, which are fully covered by Continental Shield Underwriters, Inc.), the net defendant-side claimed exposure is approximately $11,900,000. If the unquantified patent infringement matter is excluded from the aggregate (as it is threatened but not pending and the exposure cannot presently be quantified), the net defendant-side claimed exposure across quantified matters is approximately $11,900,000.
Established Reserves: Nexford has established reserves totaling approximately $2,800,000 in its financial statements as of December 31, 2024, consisting of:
• Supplier contract dispute (NPC): $800,000
• Product warranty claim (NES): $2,000,000
These reserves reflect management's assessment, in consultation with Ashworth & Kendrick LLP, of the probable range of loss for these matters under ASC 450 (Contingencies).
Estimated Realistic Aggregate Exposure. Based on management's assessment, the settlement discussions in progress, the strength of available defenses, and the insurance coverage applicable to certain claims, the estimated realistic aggregate exposure across all identified matters (reflecting discounted settlement values and probability-weighted outcomes) is approximately $3,000,000 to $4,500,000. This range reflects the following assumptions:
• Supplier contract dispute (NPC): $500,000 to $1,500,000 (probable settlement range)
• Product warranty claim (NES): $1,500,000 to $2,500,000 (probable settlement range)
• Employment discrimination (Clearfield): $0 to $250,000 (low probability; possible nuisance settlement)
• Workers' compensation / premises liability: $0 (fully insured)
• OSHA citations: $0 (resolved; paid)
• Patent infringement: Not quantified (threatened; currently assessed as defensible)
• Collection action (Lakeshore): Net positive (potential recovery)
Comparison to Key Financial Metrics:
The estimated realistic aggregate exposure of $3,000,000 to $4,500,000 represents less than 1.2% of LTM Adjusted EBITDA ($385,000,000) and approximately 0.14% to 0.21% of LTM Revenue ($2,100,000,000). By any reasonable measure, this level of exposure is well below the threshold that would constitute a Material Adverse Effect under the Credit Agreement, whether assessed on an individual matter basis or in the aggregate. The exposure is also well below the anticipated aggregate disclosure threshold of $15,000,000, when measured on a realistic (as opposed to claimed) basis.
VII. Disclosure Recommendations for Credit Agreement Schedules
Based on the analysis set forth in this memorandum, Calderwood & Harkness provides the following recommendations regarding disclosure on the Credit Agreement litigation schedule (anticipated Schedule 3.06 or comparable reference) and related representation and warranty considerations.
A. Matters Recommended for Inclusion on Litigation Schedule
The following three matters are recommended for inclusion on the Credit Agreement litigation schedule:
1. Nexford Engineered Systems, LLC — Product Warranty Claim. Claimed exposure of approximately $7,500,000 exceeds the anticipated per-matter disclosure threshold of $5,000,000. This matter must be disclosed on the litigation schedule. The schedule entry should include a brief description of the nature of the claim, the identity of the claimant, the claimed amount, the current status (pre-trial; settlement discussions ongoing), and a statement that NES believes the claim is substantially without merit and is actively defending the matter while pursuing settlement.
2. Nexford Precision Components, Inc. — Supplier Contract Dispute. Claimed exposure of approximately $3,200,000 falls below the anticipated $5,000,000 per-matter threshold. However, Calderwood & Harkness recommends disclosure as a prudent measure for the following reasons: (a) the matter is in active discovery and its trajectory may evolve before closing; (b) inclusion provides a margin of safety in the event the per-matter threshold is negotiated to a lower level during Credit Agreement negotiations; (c) disclosure demonstrates transparency and good faith to the lending syndicate, which is commercially valuable in the context of a sponsor-backed dividend recapitalization; and (d) inclusion on the schedule ensures that the matter is carved out from the scope of the litigation representation, providing protection against any post-closing claim that the representation was inaccurate.
3. Nexford Coatings & Surface Technologies, Inc. — Threatened Patent Infringement. No lawsuit has been filed, and the exposure is currently unquantified. However, Calderwood & Harkness recommends disclosure as a "threatened" proceeding for the following reasons: (a) the formal cease-and-desist letter from Marlowe Asset Management Surface Sciences creates a documented threat of litigation with a specified deadline (approximately April 8, 2025) that coincides closely with the anticipated closing date; (b) if litigation is commenced, the potential exposure could be significant given the importance of the TBC-7 Process to NCST's operations; (c) disclosure ensures that the matter falls within the scope of the schedule carve-out and is not captured by the "to the knowledge of the Borrower" qualifier in the litigation representation; and (d) proactive disclosure reduces the risk that the lendi