MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Claudia Merritt, Responsible Partner
From: Marcus Leung, Lead Associate
Date: February 14, 2025
Re: Review of Indenture Governing Nexford Industrial Holdings Inc. 7.250% Senior Unsecured Notes due 2028 — Implications for Proposed $1,400,000,000 Term Loan B Refinancing and Dividend Recapitalization
Matter No.: 1005-00001
Client/Matter Code: IBL-NIH-2025-031
I. Executive Summary
This memorandum sets forth the results of our analysis of the Indenture dated as of November 8, 2021 (the "Indenture"), among Nexford Industrial Holdings Inc., a Delaware corporation ("Nexford" or the "Company"), as Issuer, the Guarantors party thereto, and Pinnacle Trust Company, a New York trust company, as Trustee (with its principal corporate trust office located at 101 Park Avenue, New York, New York 10178), governing $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 (the "Notes"). The purpose of this review is to identify any provisions of the Indenture that may restrict, prohibit, or otherwise affect the consummation of the proposed transactions described below.
Calderwood & Harkness LLP represents Nexford in connection with a proposed $1,400,000,000 senior secured Term Loan B (the "Term Loan B") refinancing of the Company's existing credit facilities held by Atlas Meridian Bank, N.A. and a contemporaneous dividend recapitalization distributing approximately $335,000,000 (the "Dividend") to Granite Peak NIH Holdings, LLC ("Holdings") and thence upstream to Granite Peak Capital Partners, LP ("Granite Peak") through its investment vehicles, Granite Peak Capital Fund IV, LP (holding approximately 92% of the equity interests in Holdings) and GP Fund IV Co-Invest, LP (holding approximately 8% of the equity interests in Holdings), together with their respective co-investors. The new Term Loan B will be arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor"), which will also serve as administrative agent and first lien collateral agent under the proposed Credit Agreement.
It is important to note that the Notes are not being refinanced, redeemed, or otherwise retired in connection with the proposed transaction. The Notes will remain outstanding following the closing of the Term Loan B and the payment of the Dividend, and Nexford's obligations under the Indenture will continue in full force and effect. Accordingly, compliance with the Indenture's covenants and other provisions is essential to ensure that the proposed transaction does not result in a breach or event of default under the Indenture.
Based on our review, our key conclusions are as follows:
(i) Incurrence Covenants — Permitted. The proposed refinancing and incurrence of the new $1,400,000,000 Term Loan B are expected to be permitted under the Indenture's incurrence-based covenants restricting additional indebtedness and the incurrence of liens, through a combination of the Permitted Refinancing Indebtedness exception, the Credit Facilities basket, and the ratio-based general incurrence test.
(ii) Restricted Payments — Permitted Subject to Confirmation. The proposed dividend recapitalization of approximately $335,000,000 is expected to be permitted under the Indenture's restricted payments covenant, subject to confirmation that sufficient capacity exists under the builder basket or, alternatively, the ratio-based unrestricted basket, and that all conditions precedent to the making of restricted payments have been satisfied.
(iii) Change of Control — Not Triggered. The proposed transaction does not involve any change in the equity ownership of Nexford or Holdings, and accordingly a Change of Control (as defined in the Indenture) will not be triggered.
(iv) Intercreditor Agreement — Required. An intercreditor agreement (the "First Lien/Unsecured Intercreditor Agreement") between Crescent Harbor Bank, N.A., as first lien collateral agent, and Pinnacle Trust Company, as trustee for the unsecured noteholders, will need to be negotiated, executed, and delivered at or prior to closing.
(v) Notice and Compliance Requirements — To Be Confirmed. Certain notice and compliance certificate delivery obligations under the Indenture should be confirmed and satisfied prior to or concurrently with the closing of the proposed transaction, expected to occur on or about March 28, 2025.
Each of these conclusions, together with the underlying analysis and our recommendations for next steps, is discussed in detail below.
II. Background — The Notes and Indenture
A. Overview of the Notes
The Notes were issued on November 8, 2021 pursuant to the Indenture. The principal terms of the Notes and the Indenture are summarized below:
The Notes rank pari passu in right of payment with all existing and future senior unsecured indebtedness of the Issuer. However, because the Notes are unsecured, they are effectively subordinated to all existing and future secured indebtedness of the Issuer, including indebtedness under the existing credit facilities and the proposed Term Loan B, in each case to the extent of the value of the collateral securing such indebtedness. This structural dynamic is a critical consideration in the proposed transaction, as the incurrence of the $1,400,000,000 Term Loan B, secured by first-priority liens on substantially all assets of the Issuer and the Subsidiary Guarantors, will increase the amount of indebtedness effectively senior to the Notes from the existing first lien indebtedness levels.
The Guarantors under the Indenture are the same domestic subsidiaries that guarantee the existing credit facilities with Atlas Meridian Bank, N.A., providing the noteholders with a claim against the same guarantor group, albeit on an unsecured basis. The guarantor structure is designed to ensure that the noteholders have recourse to the operating entities that generate substantially all of Nexford's consolidated revenues and EBITDA.
The Indenture was entered into on November 8, 2021, in connection with the Second Amendment to the Existing Credit Agreement dated as of the same date (the "Second Amendment") and a prior dividend recapitalization of $275,000,000 distributed to Granite Peak and its co-investors. The Notes were placed privately with qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and with non-U.S. persons in offshore transactions pursuant to Regulation S thereunder. Subsequently, the Notes were exchanged for substantially identical notes registered under the Securities Act pursuant to a registration rights agreement.
B. Context Within Nexford's Capital Structure
An understanding of Nexford's existing and proposed capital structure is essential to the analysis of the Indenture's covenants. The relevant capital structure, both pre-transaction and post-transaction, is set forth below.
Pre-Transaction Capital Structure:
The existing First Lien Term Loan and Revolving Credit Facility were incurred under the Credit Agreement dated as of June 14, 2019 (as amended by the First Amendment and the Second Amendment, the "Existing Credit Agreement"), with Atlas Meridian Bank, N.A. serving as administrative agent and collateral agent. The Revolving Credit Facility is scheduled to mature in June 2025, and the First Lien Term Loan is scheduled to mature in June 2026. Both facilities are scheduled to be repaid in full with the proceeds of the proposed Term Loan B at closing.
Post-Transaction Capital Structure:
The proposed uses of the $1,400,000,000 in Term Loan B proceeds are as follows: (i) approximately $879,375,000 to repay the outstanding principal, accrued interest, and fees under the existing First Lien Term Loan and the Revolving Credit Facility, (ii) approximately $335,000,000 for the Dividend to Holdings (and thence upstream to Granite Peak and its co-investors), (iii) estimated transaction fees and expenses of approximately $85,625,000, and (iv) the remainder, together with existing cash on hand, to fund working capital and general corporate purposes.
Pro Forma Leverage at Closing:
Based on LTM Adjusted EBITDA of $385,000,000 (for the twelve-month period ending December 31, 2024) and pro forma cash of $100,000,000:
• Pro Forma Total Net Leverage Ratio: ($1,400,000,000 + $250,000,000 − $100,000,000) ÷ $385,000,000 = 4.03x
• Pro Forma First Lien Net Leverage Ratio: ($1,400,000,000 − $100,000,000) ÷ $385,000,000 = 3.38x
These pro forma leverage ratios are central to the analysis of the Indenture's incurrence-based covenants, as discussed in Sections III and IV below. The 4.03x total net leverage ratio represents a meaningful increase from the pre-transaction total net leverage, reflecting both the incremental indebtedness incurred to fund the Dividend and the application of balance sheet cash to support the transaction.
C. Parties to the Indenture
The parties to the Indenture are:
• Issuer: Nexford Industrial Holdings Inc., a Delaware corporation.
• Trustee: Pinnacle Trust Company, a New York trust company, serving as trustee, registrar, transfer agent, and paying agent under the Indenture.
• Guarantors: Granite Peak NIH Holdings, LLC (the direct parent of the Issuer, referred to as the "Holdings Guarantor") and each domestic subsidiary of the Issuer that has delivered a supplemental indenture joining as a Subsidiary Guarantor (the same guarantor group as under the Existing Credit Agreement).
It should be noted that any intercreditor agreement entered into in connection with the proposed transaction will involve Crescent Harbor Bank, N.A. (in its capacity as first lien collateral agent under the new Credit Agreement) and Pinnacle Trust Company (in its capacity as trustee under the Indenture on behalf of the noteholders). Nexford, as both borrower under the Credit Agreement and issuer under the Indenture, will also be a party. The specific authority of the Trustee to enter into such intercreditor arrangements on behalf of the noteholders is addressed in Section VII below.
III. Incurrence Covenants — Limitation on Indebtedness
A. General Incurrence Test
The Indenture contains an incurrence-based (as opposed to maintenance-based) covenant restricting the ability of the Issuer and its Restricted Subsidiaries to incur additional Indebtedness (as defined in the Indenture). This distinction is significant: an incurrence covenant is tested only at the time new indebtedness is incurred (and, depending on the covenant language, at the time proceeds are applied), rather than on a continuous or quarterly basis as with maintenance covenants found in many credit agreements. As a result, the Issuer's compliance with the incurrence covenant is measured as of the date of incurrence, giving pro forma effect to such incurrence and the application of proceeds.
Under the general incurrence test, the Issuer may incur additional Indebtedness if, after giving pro forma effect to such incurrence and the application of the net proceeds thereof (including, for purposes of calculating the applicable leverage ratio, any Indebtedness being repaid or refinanced with such proceeds), the consolidated total net leverage ratio does not exceed a specified threshold. For high-yield indentures of this type issued in the 2021 vintage, the general incurrence ratio threshold is typically set in the range of 4.50x to 5.00x total net leverage. We expect the Indenture to set this threshold at approximately 4.75x or 5.00x, although we recommend confirming the exact ratio threshold upon final review of the executed Indenture.
The proposed $1,400,000,000 Term Loan B involves two analytically distinct components for purposes of the incurrence analysis:
(a) Refinancing Component. Approximately $879,375,000 of the Term Loan B proceeds will be applied to repay the outstanding principal, accrued interest, and fees under the existing first lien term loan and revolving credit facility. To the extent the existing indebtedness was originally incurred under one or more of the Indenture's permitted indebtedness baskets or the general incurrence test, the refinancing thereof should be permitted under the Indenture's "Permitted Refinancing Indebtedness" exception, which customarily allows refinancing of existing permitted debt on specified terms (i.e., same or later maturity, same or lesser principal amount unless the excess satisfies other baskets or the ratio test, no additional obligors beyond the original obligors, and no more restrictive covenants than necessary to maintain the same ranking).
(b) Incremental Component. The remaining approximately $520,625,000 of Term Loan B proceeds (the amount in excess of the refinancing payoff) represents new or incremental indebtedness. This amount is being used to fund the Dividend of approximately $335,000,000, transaction fees and expenses of approximately $85,625,000, and the balance for working capital and general corporate purposes. This incremental component must be independently justified under the Indenture's incurrence covenants — either through the general ratio-based incurrence test, through one or more of the Permitted Indebtedness baskets, or through a combination thereof.
With respect to the general incurrence test, the pro forma total net leverage ratio following the proposed transaction is 4.03x, calculated as set forth in Section II.B above. If the Indenture's general incurrence ratio threshold is set at 4.50x, 4.75x, or 5.00x (as we expect), the incurrence of the full $1,400,000,000 Term Loan B would satisfy the general incurrence test with meaningful headroom. We note, however, that the Indenture should be reviewed to confirm whether the ratio test uses "Consolidated Total Net Debt" or a different measure (e.g., gross debt or a secured-only measure) and whether there are any adjustments to the definition of "Consolidated EBITDA" that differ from the calculation methodology used in the proposed Credit Agreement.
B. Permitted Indebtedness Baskets
In addition to the general ratio-based incurrence test, the Indenture customarily includes a series of "Permitted Indebtedness" baskets that allow the Issuer and its Restricted Subsidiaries to incur specified categories of Indebtedness without regard to the general incurrence test. The baskets most relevant to the proposed transaction are as follows:
Credit Facilities Basket. The Indenture is expected to include a basket permitting Indebtedness under "Credit Facilities" (a defined term typically encompassing one or more credit agreements providing for revolving credit borrowings, term loans, receivables financings, and similar arrangements, together with related notes, guarantees, collateral documents, instruments, and agreements) up to a specified dollar amount, a leverage-ratio-based cap, or the greater of a fixed dollar amount and a percentage of total assets. For an issuer of Nexford's size and leverage profile at the time of the 2021 issuance, the Credit Facilities basket is typically set in the range of $1,100,000,000 to $1,500,000,000 or at a ratio-based cap tied to first lien net leverage.
The existing $875,000,000 first lien term loan and $190,000,000 revolving credit facility (totaling $1,065,000,000 in committed capacity, of which $875,000,000 was funded) were incurred under this basket. The proposed $1,400,000,000 Term Loan B replaces these existing facilities. If the Credit Facilities basket is $1,400,000,000 or greater, or is ratio-based with sufficient headroom at the pro forma first lien net leverage of 3.38x, the full amount of the Term Loan B may be incurred under this single basket.
The incremental amount of approximately $335,000,000 — being the net increase in funded credit facility indebtedness over the existing funded amount of $875,000,000 (plus any revolver drawings at closing) — must fit within available basket capacity or satisfy the general ratio-based incurrence test. As noted, the pro forma total net leverage of 4.03x provides meaningful headroom under the expected general incurrence ratio threshold.
Other Relevant Baskets. Additional Permitted Indebtedness baskets that may be relevant to the overall capital structure analysis, though not directly implicated by the Term Loan B incurrence, include:
• General Indebtedness Basket: A fixed dollar amount (typically $50,000,000 to $75,000,000) available for general purposes without covenant compliance.
• Capital Lease and Purchase Money Indebtedness Basket: A fixed dollar amount for capital expenditures and equipment acquisitions.
• Intercompany Indebtedness Basket: Permitting indebtedness among the Issuer and its Restricted Subsidiaries, subject to subordination requirements for indebtedness owed by the Issuer to a Subsidiary.
• Acquired Indebtedness Basket: Permitting indebtedness of entities or assets acquired by the Issuer, subject to certain limitations.
These additional baskets do not directly bear on the permissibility of the Term Loan B but should be considered in the overall compliance analysis, particularly if any portion of the incremental indebtedness is allocated against a specific basket for purposes of the compliance certificate.
C. Secured Indebtedness / Liens Covenant
The Indenture includes a covenant limiting the ability of the Issuer and its Restricted Subsidiaries to incur Liens (as defined in the Indenture) on their properties and assets. Because the Notes are unsecured, the Indenture's liens covenant is of particular importance — it defines the extent to which the Issuer may grant security interests that would result in indebtedness being effectively senior to the Notes to the extent of collateral value.
"Permitted Liens" under the Indenture are expected to include Liens securing Indebtedness permitted under the Credit Facilities basket. This is the standard formulation in high-yield indentures, and it is designed to permit the borrower to grant customary collateral packages to its bank lenders without triggering a covenant violation under the Indenture. Accordingly, the grant of first-priority Liens on substantially all assets of the Borrower and the Subsidiary Guarantors in favor of Crescent Harbor Bank, N.A., as collateral agent under the new Credit Agreement, is expected to fall within the Permitted Liens carve-out, provided the underlying Indebtedness is permitted under the Credit Facilities basket (or another applicable basket or the general incurrence test).
The collateral package securing the proposed Term Loan B is expected to include substantially all personal property assets of the Issuer and the Subsidiary Guarantors (including accounts receivable, inventory, equipment, intellectual property, general intangibles, investment property, and deposit accounts) and fee mortgages on owned real property. Total appraised real property collateral alone is estimated at approximately $193,000,000, broken down as follows:
The security package extends well beyond real property to encompass the personal property assets described above. As a result, the $250,000,000 in unsecured Notes will be effectively subordinated to the $1,400,000,000 Term Loan B to the extent of the full value of the collateral securing the Term Loan B. This effective subordination is a known feature of the existing capital structure (as the existing first lien credit facilities are also secured by a substantially identical collateral package) and is disclosed in the offering memorandum for the Notes.
D. Conclusion on Incurrence Covenants
Based on the foregoing analysis, we expect that the proposed $1,400,000,000 Term Loan B is permitted under the Indenture's incurrence covenants. The Term Loan B may be justified under one or more of the following bases:
(i) Permitted Refinancing Indebtedness — to the extent of the refinancing of the existing first lien term loan and revolving credit facility (payoff amount of approximately $879,375,000), provided the refinancing satisfies the customary conditions (same or later maturity, no additional obligors, same ranking or better);
(ii) Credit Facilities Basket — for the full $1,400,000,000, if the basket capacity is sufficient to accommodate the entire amount, or for the portion of the Term Loan B not covered by the Permitted Refinancing Indebtedness exception; or
(iii) General Ratio-Based Incurrence Test — for the full amount or any incremental portion, on the basis that the pro forma total net leverage ratio of 4.03x is expected to be well within the Indenture's incurrence threshold (expected to be in the range of 4.50x to 5.00x).
The grant of first-priority Liens on substantially all assets in favor of Crescent Harbor Bank, N.A. as collateral agent is expected to fall within the Permitted Liens exceptions under the Indenture.
We recommend confirming the exact dollar thresholds and ratio caps of each relevant basket, reviewing the precise definitions of "Credit Facilities," "Permitted Refinancing Indebtedness," and "Permitted Liens," and running final calculations against the closing-date financials once available. The compliance certificate prepared for delivery to the Trustee should clearly identify which basket or test is being relied upon, and in what amount, for each component of the Term Loan B incurrence.
IV. Restricted Payments Covenant — Dividend Recapitalization Analysis
A. Overview of Restricted Payments Covenant
The Indenture restricts the ability of the Issuer and its Restricted Subsidiaries to make "Restricted Payments," which are defined under the Indenture to include, among other things:
(a) any dividend or distribution on account of equity interests of the Issuer or any Restricted Subsidiary (other than dividends or distributions payable in equity interests of the Issuer or payable to the Issuer or a Restricted Subsidiary);
(b) the purchase, redemption, or other acquisition or retirement of equity interests of the Issuer or any direct or indirect parent of the Issuer;
(c) the purchase, redemption, defeasance, or other acquisition or retirement of subordinated indebtedness prior to its scheduled maturity; and
(d) any Investment (other than a Permitted Investment).
The proposed Dividend of approximately $335,000,000 — to be paid by Nexford to its direct parent, Granite Peak NIH Holdings, LLC, and thereafter distributed upstream by Holdings to Granite Peak Capital Fund IV, LP (92%) and GP Fund IV Co-Invest, LP (8%) — Squarely constitutes a Restricted Payment under clause (a) above. Accordingly, the Dividend must be justified under one or more of the exceptions to the general Restricted Payments prohibition set forth in the Indenture.
B. Builder Basket
The Indenture is expected to include a "builder basket" (sometimes referred to as a "cumulative credit" or "retained earnings" basket) that permits the Issuer to make Restricted Payments in an aggregate amount not to exceed the sum of:
(a) 50% of cumulative Consolidated Net Income (as defined in the Indenture) of the Issuer for the period (treated as one accounting period) commencing on the first day of the first fiscal quarter after the issue date of the Notes (i.e., approximately January 1, 2022) through the end of the most recently completed fiscal quarter prior to the date of the proposed Restricted Payment — or, if Consolidated Net Income for such period is a loss, minus 100% of such loss;
(b) a "starter amount" (typically $25,000,000 to $50,000,000 or a percentage of total assets at the issue date), which provides a base level of capacity even if cumulative net income is insufficient;
(c) 100% of the aggregate net cash proceeds received by the Issuer from the issuance or sale of equity interests (other than Disqualified Stock) or from contributions to the Issuer's common equity capital subsequent to the issue date, to the extent not previously designated as "Contributions Basket" credits; and
(d) certain other additions, including returns on Investments previously made using builder basket capacity, net cash proceeds from the disposition of Investments in Unrestricted Subsidiaries, and similar items.
Since the Notes were issued on November 8, 2021, the builder basket has been accumulating since approximately Q1 2022 (i.e., the fiscal quarter commencing January 1, 2022) through December 31, 2024, representing approximately twelve quarters (twelve fiscal quarters) of Consolidated Net Income accumulation. This is the primary expected source of capacity for the proposed $335,000,000 Dividend.
To confirm the builder basket has sufficient capacity, we will need to obtain from Nexford a schedule of cumulative Consolidated Net Income for the period from January 1, 2022 through December 31, 2024, calculated in accordance with the Indenture's definition (which may differ from GAAP net income by virtue of various Indenture-specified adjustments). We will also need a schedule of all prior Restricted Payments charged against the builder basket during the same period. Notably, the 2021 dividend recapitalization of $275,000,000 was paid on or about November 8, 2021 — contemporaneously with the issuance of the Notes. The treatment of that prior dividend under the builder basket will depend on whether it was charged against the builder basket (which may have had limited or no capacity at the time, given the basket would just have begun to accrue) or was instead funded under a separate permitted basket or as part of the original capital structure at the issue date.
Based on Nexford's reported LTM Adjusted EBITDA of $385,000,000 and LTM revenue of approximately $2,100,000,000, we estimate that cumulative net income over the approximately three-year accumulation period is likely to be substantial — potentially in the range of $400,000,000 to $600,000,000 or more (recognizing that Consolidated Net Income for Indenture purposes will differ from Adjusted EBITDA and may be significantly lower due to interest expense, depreciation, amortization, taxes, and non-recurring charges). If 50% of this cumulative amount is, say, $200,000,000 to $300,000,000, and if a starter amount of $25,000,000 to $50,000,000 is added, plus any equity contribution credits, the total builder basket capacity may be sufficient — but this is not certain without the detailed calculation.
Additional conditions for the use of the builder basket to make Restricted Payments typically include:
(i) No Default. No Default or Event of Default under the Indenture shall have occurred and be continuing at the time of (or immediately after giving effect to) such Restricted Payment.
(ii) Ratio Test. The Issuer could incur at least $1.00 of additional Indebtedness under the general ratio-based incurrence test after giving pro forma effect to such Restricted Payment (i.e., pro forma compliance with the total net leverage incurrence ratio). As discussed in Section III.A, the pro forma total net leverage ratio is 4.03x, and the incurrence ratio threshold is expected to be 4.50x to 5.00x, providing meaningful headroom.
C. Ratio-Based Restricted Payment Basket
In addition to the builder basket, many high-yield indentures contain an unlimited (or very large) restricted payment basket that is available if, after giving pro forma effect to the proposed Restricted Payment, the total net leverage ratio does not exceed a specified threshold. This threshold is typically set at a level lower than the general incurrence ratio threshold, reflecting the heightened concern associated with allowing the issuer to distribute cash to equity holders while maintaining compliance with leverage parameters.
The specific ratio threshold for the unlimited restricted payment basket under the Indenture must be confirmed. Common thresholds in the 2021 high-yield market range from 3.50x to 4.25x total net leverage, depending on the credit profile of the issuer and negotiation dynamics at the time of issuance. We note the following considerations:
• If the ratio threshold in the Indenture is 3.75x — which would be analogous to the unlimited restricted payment basket threshold under the proposed new Credit Agreement with Crescent Harbor Bank — then the pro forma total net leverage of 4.03x would exceed the threshold, and the unlimited ratio-based basket would not be available at closing.
• If the ratio threshold is set at a higher level, such as 4.25x or 4.50x, then the pro forma total net leverage of 4.03x would fall below the threshold, and the unlimited ratio-based basket would be available. In that case, the entire $335,000,000 Dividend could be justified under this basket without reliance on the builder basket.
The availability (or unavailability) of the ratio-based unlimited basket significantly affects the risk profile of the restricted payment analysis. If the ratio-based basket is not available, the Dividend must be justified entirely under the builder basket and/or other fixed-dollar baskets, which introduces additional dependency on the cumulative net income calculation and the historical schedule of prior restricted payments.
D. Other Available Baskets
The Indenture may include additional baskets that could provide partial or supplemental capacity for the Dividend, including:
• General Restricted Payment Basket. A fixed dollar amount available for Restricted Payments without regard to compliance with any ratio test. This basket is typically modest in size (e.g., $25,000,000 annually, or an aggregate amount of $50,000,000 to $75,000,000), and is unlikely to accommodate the full $335,000,000 Dividend on its own. However, it may be used to supplement the builder basket if the builder basket alone is insufficient by a small margin.
• Contributions Basket. An amount equal to the net cash proceeds of equity contributions received by the Issuer from its parent or affiliates that have been designated for restricted payment capacity (rather than credited to the builder basket or another basket). If Granite Peak or its affiliates have made any such equity contributions to Nexford since the issue date and designated them for restricted payment purposes, this basket may provide additional capacity.
• Investment / Return of Investment Baskets. Certain baskets permit Restricted Payments in an amount equal to the return of capital from, or the fair market value of, Investments previously made using restricted payment capacity. If Nexford has made Investments that have been returned or liquidated during the accumulation period, this credit may be available.
The interplay among these baskets — and the ability to "stack" or combine capacity from multiple baskets to support a single Restricted Payment — should be confirmed based on the specific language of the Indenture. Many indentures permit the Issuer to designate which basket is being used for a particular Restricted Payment, and to redesignate among baskets subject to compliance with each basket's conditions at the relevant time.
E. Conditions Precedent to Restricted Payment
Regardless of which basket or combination of baskets is relied upon, the Indenture imposes certain conditions precedent to the making of any Restricted Payment. These conditions typically include:
(a) No Default or Event of Default. No Default or Event of Default under the Indenture shall have occurred and be continuing at the time of the Restricted Payment, or shall result from the making of such Restricted Payment.
(b) Pro Forma Ratio Compliance. The Issuer must be able to satisfy the pro forma ratio test applicable to the relevant basket (e.g., for the builder basket, the ability to incur $1.00 of additional Indebtedness under the general incurrence test; for the ratio-based unlimited basket, compliance with the specified leverage threshold).
(c) Board Authorization. The Restricted Payment must be properly authorized by the Board of Directors of the Issuer. We note that the Nexford Board of Directors approved the proposed Dividend on January 13, 2025, and the Board of Granite Peak Capital Partners, LP (acting through its general partner) approved the transaction on January 6, 2025.
(d) Proper Payment Mechanics. The Dividend will be paid by Nexford to its direct parent, Granite Peak NIH Holdings, LLC (the Holdings Guarantor), and will thereafter be distributed upstream by Holdings to its members: Granite Peak Capital Fund IV, LP (approximately 92%) and GP Fund IV Co-Invest, LP (approximately 8%). The Indenture's definition of "Restricted Payment" should be reviewed to confirm that the payment to Holdings (as opposed to directly to the fund entities) is the relevant transaction for purposes of the covenant analysis. In most cases, the initial payment from the Issuer to its direct parent is the Restricted Payment being tested.
F. Conclusion on Restricted Payments
Based on our analysis, the approximately $335,000,000 Dividend is expected to be permitted under the Indenture's Restricted Payments covenant, subject to confirmation of the following:
(i) Sufficient capacity exists under the builder basket (calculated as 50% of cumulative Consolidated Net Income from Q1 2022 through Q4 2024, plus the starter amount, plus any equity contribution credits, less all prior Restricted Payments charged against the basket during such period); or
(ii) The ratio-based unlimited restricted payment basket is available at the pro forma total net leverage of 4.03x (which requires that the ratio threshold in the Indenture be at or above 4.03x); or
(iii) A combination of the builder basket, the ratio-based basket, and other available baskets provides aggregate capacity of at least $335,000,000.
We note that, when combined with the prior 2021 dividend recapitalization of $275,000,000, cumulative distributions to Granite Peak and its co-investors will total approximately $610,000,000 against an original equity investment of approximately $725,000,000 in connection with the acquisition of Nexford. The restricted payment analysis under the Indenture focuses on basket capacity as of the relevant date of determination, not on cumulative distributions relative to the original equity investment, but this context is relevant to the overall deal narrative and the reasonableness of the transaction from a credit perspective.
We recommend obtaining a compliance certificate from Nexford's Chief Financial Officer, Michelle Kaplan, confirming the availability of sufficient restricted payment basket capacity for the Dividend, together with the underlying calculations, and certifying the absence of any Default or Event of Default under the Indenture, prior to closing. This certificate should be in a form that can be delivered to the Trustee if required under the Indenture.
V. Change of Control Provisions
A. Definition of Change of Control
The Indenture defines "Change of Control" to include one or more of the following triggering events (subject to the specific language of the Indenture):
(i) the acquisition, directly or indirectly, by any "person" or "group" (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than one or more Permitted Holders, of beneficial ownership of more than 35% of the total voting power of all outstanding Voting Stock of the Issuer or Holdings;
(ii) the Issuer ceasing to be a direct or indirect wholly-owned subsidiary of Holdings;
(iii) a sale, lease, transfer, conveyance, or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Issuer and its Restricted Subsidiaries, taken as a whole, to any person other than one or more Permitted Holders; or
(iv) the adoption of a plan relating to the liquidation or dissolution of the Issuer.
The "Permitted Holders" definition is critical to the Change of Control analysis. In the Indenture, "Permitted Holders" is expected to include:
• Granite Peak Capital Partners, LP and its affiliated investment funds, including Granite Peak Capital Fund IV, LP and GP Fund IV Co-Invest, LP;
• the respective general partners, limited partners, members, stockholders, directors, officers, and employees of the foregoing;
• any entity controlled by, controlling, or under common control with any of the foregoing; and
• members of management of the Issuer and its subsidiaries who hold equity interests in Holdings or any parent entity.
The broad scope of the Permitted Holders definition is designed to ensure that normal-course transactions among Granite Peak affiliates, management equity programs, and fund-level restructurings do not inadvertently trigger a Change of Control.
B. Change of Control Put / Repurchase Obligation
Upon the occurrence of a "Change of Control Triggering Event" — which is typically defined as a Change of Control coupled with a ratings decline (i.e., a downgrade of the Notes or the Issuer's corporate credit rating by one or more nationally recognized statistical rating organizations within a specified period following the Change of Control) — each holder of the Notes has the right to require the Issuer to repurchase all or any portion of such holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to (but not including) the date of repurchase.
If triggered, this repurchase obligation would require the Issuer to offer to repurchase up to $250,000,000 aggregate principal amount of the Notes, representing a potential cash outflow of up to $252,500,000 (101% of $250,000,000) plus accrued interest. The occurrence of a Change of Control Triggering Event would also likely constitute an event of default or mandatory prepayment event under the proposed new Credit Agreement, creating cascading liquidity demands. Accordingly, avoiding a Change of Control Triggering Event is essential to the execution of the proposed transaction.
C. Impact of Proposed Transaction on Change of Control
The proposed refinancing and dividend recapitalization do not implicate any of the Change of Control triggers set forth in the Indenture. Specifically:
• No Change in Equity Ownership. The proposed transaction does not involve the acquisition by any person or group of any equity interest in the Issuer or Holdings. Granite Peak Capital Fund IV, LP continues to hold approximately 92% of the equity interests in Granite Peak NIH Holdings, LLC, and GP Fund IV Co-Invest, LP continues to hold approximately 8%. Both entities are Permitted Holders. There is no transfer, issuance, or acquisition of Voting Stock in connection with the transaction.
• Issuer Remains a Subsidiary of Holdings. Nexford Industrial Holdings Inc. will continue to be a direct, wholly-owned subsidiary of Granite Peak NIH Holdings, LLC following the closing. The transaction does not alter the corporate ownership chain.
• No Asset Sale. The transaction does not involve the sale, lease, transfer, or disposition of any assets of the Issuer or its Restricted Subsidiaries. The refinancing of the existing credit facilities and the incurrence of the new Term Loan B do not constitute an asset disposition.
• No Liquidation or Dissolution. The transaction does not involve the adoption of any plan of liquidation or dissolution.
Conclusion: The proposed $1,400,000,000 Term Loan B refinancing and $335,000,000 dividend recapitalization do not trigger a Change of Control under the Indenture.
D. Cross-Reference to New Credit Agreement Change of Control
The proposed Credit Agreement with Crescent Harbor Bank, N.A. contains its own change of control provision, which includes a mandatory prepayment obligation and event of default upon a change of control. Notably, the Credit Agreement's change of control definition includes a cross-trigger to a "change of control" (or functionally equivalent event) under the Indenture. This cross-trigger means that a Change of Control under the Indenture would simultaneously constitute a change of control under the Credit Agreement, potentially resulting in acceleration of the Term Loan B.
The converse is also true: the Indenture may include a cross-default provision that references events of default under the Credit Agreement. Accordingly, it is important to ensure that the Change of Control definitions in the Indenture and the Credit Agreement are properly harmonized, so that:
(a) The same substantive events constitute a Change of Control under both instruments (avoiding a scenario where an event triggers a change of control under one instrument but not the other, causing an inadvertent cross-default);
(b) The "Permitted Holders" definitions are consistent, so that the same entities are treated as Permitted Holders under both instruments; and
(c) Any amendment or waiver of the Change of Control provision in either instrument does not inadvertently create a conflict with the corresponding provision in the other instrument.
We note that the proposed Credit Agreement's change of control is triggered by: (i) the acquisition of more than 35% of the voting equity of Holdings by any person or group other than Granite Peak and its affiliates; (ii) Nexford ceasing to be a direct wholly-owned subsidiary of Holdings; or (iii) a Change of Control (or similar event) under the Indenture. These triggers substantially mirror the Indenture's Change of Control definition, and we do not anticipate any harmonization issues. We will, however, carefully review the final drafts of both instruments to confirm alignment.
VI. Covenants Relevant to the Proposed Transaction
Beyond the incurrence covenants, restricted payments covenant, and change of control provisions addressed in the preceding sections, the Indenture contains several additional covenants that may be implicated by the proposed transaction. Each is addressed below.
A. Limitation on Liens
As discussed in Section III.C above, the Indenture restricts the ability of the Issuer and its Restricted Subsidiaries to incur Liens on their properties and assets. The grant of first-priority Liens on substantially all assets of the Issuer and the Subsidiary Guarantors to Crescent Harbor Bank, N.A. as collateral agent under the new Credit Agreement must fall within the "Permitted Liens" exceptions set forth in the Indenture.
As noted, Permitted Liens are expected to include Liens securing Indebtedness that is permitted under the Credit Facilities basket. Because the Term Loan B is expected to qualify as Indebtedness under the Credit Facilities basket (or, alternatively, as Permitted Refinancing Indebtedness combined with indebtedness permitted under the ratio-based incurrence test), the Liens securing the Term Loan B should constitute Permitted Liens. We will confirm this conclusion upon review of the specific Permitted Liens definitions and any dollar or ratio-based limitations applicable thereto.
B. Limitation on Asset Sales
The Indenture restricts the ability of the Issuer and its Restricted Subsidiaries to sell, lease, convey, or otherwise dispose of assets (an "Asset Sale") unless specified conditions are met, including receipt of fair market value consideration, receipt of at least a specified percentage of consideration in cash or cash equivalents, and application of net proceeds in accordance with specified investment or debt repayment requirements.
The proposed refinancing and dividend recapitalization do not involve any Asset Sale. No properties, businesses, or assets of the Issuer or any Restricted Subsidiary are being sold, leased, or otherwise disposed of in connection with the transaction. The repayment of existing credit facilities and the incurrence of new credit facilities do not constitute asset dispositions. Accordingly, the Limitation on Asset Sales covenant is not implicated.
No issues identified.
C. Limitation on Transactions with Affiliates
The Indenture restricts the ability of the Issuer and its Restricted Subsidiaries to enter into transactions with Affiliates (as defined in the Indenture) unless such transactions are on terms no less favorable to the Issuer than would be obtained in an arm's-length transaction with a non-affiliated party, and, in the case of transactions exceeding specified dollar thresholds, are approved by a majority of disinterested directors or are supported by an independent fairness opinion.
The proposed Dividend of approximately $335,000,000 to Granite Peak NIH Holdings, LLC (and thence upstream to Granite Peak Capital Fund IV, LP and GP Fund IV Co-Invest, LP) constitutes a transaction with Affiliates, as Holdings and the Granite Peak entities are Affiliates of the Issuer.
However, Restricted Payments that are expressly permitted under the Restricted Payments covenant are customarily carved out from the Limitation on Transactions with Affiliates covenant. This standard carve-out recognizes that the Restricted Payments covenant already imposes its own set of conditions and limitations on dividends and distributions to equity holders, and subjecting the same payments to a duplicative arm's-length analysis under the affiliate transactions covenant would be unnecessary and potentially conflicting.
We recommend confirming that the Indenture includes this standard carve-out. If for any reason the carve-out is absent or is drafted more narrowly than expected, additional analysis of the Dividend under the affiliate transactions covenant (including potential board approval requirements and fair value determinations) may be required.
D. Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Indenture may include a covenant (sometimes referred to as the "dividend and other payment restrictions affecting subsidiaries" covenant or "restricted payments from restricted subsidiaries" covenant) that restricts the ability of the Issuer's Restricted Subsidiaries to agree to contractual encumbrances or restrictions on their ability to:
(a) pay dividends or make other distributions to the Issuer or any other Restricted Subsidiary;
(b) make loans or advances to the Issuer or any other Restricted Subsidiary; or
(c) sell, lease, or transfer property to the Issuer or any other Restricted Subsidiary.
The proposed new Credit Agreement with Crescent Harbor Bank, N.A. will contain negative covenants applicable to the Issuer and its subsidiaries, including negative pledge provisions and restricted payment limitations that could be viewed as contractual restrictions on the ability of the Restricted Subsidiaries to make distributions to the Issuer or other Restricted Subsidiaries.
The Indenture is expected to include "Permitted Exceptions" to this covenant, which customarily permit restrictions arising under Credit Facilities (as defined in the Indenture), restrictions existing under agreements in effect on the issue date of the Notes, restrictions arising under applicable law, and restrictions contained in agreements relating to the sale or other disposition of assets or equity interests (pending the consummation of such sale or disposition).
We recommend confirming that the restrictions in the proposed Credit Agreement fall within the "Permitted Exceptions" carved out under the Indenture. Credit facility restrictions are almost universally excepted from this covenant in high-yield indentures, and we do not anticipate an issue. However, we will confirm the scope of the exception and the definition of "Credit Facilities" to ensure the new Term Loan B is covered.
E. Merger / Consolidation Covenant
The Indenture restricts the ability of the Issuer (and, typically, each Guarantor) to merge or consolidate with or into another entity, or to sell, assign, transfer, convey, or otherwise dispose of all or substantially all of its properties or assets, unless specified conditions are satisfied, including:
(a) the surviving or transferee entity is organized under the laws of the United States and assumes all obligations of the Issuer under the Indenture and the Notes;
(b) immediately after giving pro forma effect to such transaction, no Default or Event of Default exists; and
(c) the Issuer delivers to the Trustee an officers' certificate and an opinion of counsel confirming compliance with the Indenture.
The proposed transaction does not involve any merger, consolidation, or sale of all or substantially all assets. The refinancing of existing credit facilities and the incurrence of new credit facilities do not constitute a merger or asset sale. Accordingly, the merger/consolidation covenant is not triggered.
F. Reporting Covenants
The Indenture requires the Issuer to furnish to the Trustee, and to make available to holders of the Notes:
(a) Annual Financial Statements. Audited consolidated financial statements of the Issuer and its subsidiaries for each fiscal year, prepared in accordance with GAAP and audited by an independent registered public accounting firm of recognized national standing. Nexford's auditor is Ashworth & Kendrick LLP, with Helen Yamamoto serving as the engagement partner.
(b) Quarterly Financial Statements. Unaudited consolidated financial statements of the Issuer and its subsidiaries for each of the first three fiscal quarters of each fiscal year, prepared in accordance with GAAP (subject to normal year-end adjustments and the absence of footnotes).
(c) Additional Information. Certain other information that may be required under the Indenture, including compliance certificates, notice of defaults, and other periodic filings.
Post-transaction, the Issuer will continue to comply with these reporting obligations. The refinancing and dividend recapitalization do not alter the Issuer's reporting requirements under the Indenture.
We recommend confirming whether any additional reporting or notice obligations are triggered by the refinancing, the incurrence of the new Term Loan B, the grant of Liens, or the making of the Restricted Payment. Certain indentures require the Issuer to provide prompt written notice to the Trustee upon the incurrence of material additional Indebtedness or the incurrence of material new Liens. If such notice requirements exist, the appropriate notices should be prepared and delivered prior to or concurrently with closing.
VII. Intercreditor Agreement Considerations
A. Requirement for Intercreditor Agreement
Because the Notes are unsecured and the proposed Term Loan B is secured by first-priority Liens on substantially all assets of the Issuer and the Subsidiary Guarantors, an intercreditor agreement (the "First Lien/Unsecured Intercreditor Agreement" or the "ICA") will be executed and delivered at or prior to closing to govern the relative rights and priorities of the secured Term Loan B lenders and the unsecured noteholders with respect to collateral proceeds, enforcement actions, and related matters.
The parties to the First Lien/Unsecured Intercreditor Agreement are expected to be:
• Crescent Harbor Bank, N.A., as first lien collateral agent (representing the Term Loan B lenders);
• Pinnacle Trust Company, as trustee under the Indenture (representing the unsecured noteholders); and
• Nexford Industrial Holdings Inc., as borrower under the Credit Agreement and issuer under the Indenture.
The Indenture may contain provisions requiring or permitting the Trustee to enter into intercreditor arrangements on behalf of the noteholders. These provisions are discussed in Section VII.C below.
B. Key Intercreditor Terms
The First Lien/Unsecured Intercreditor Agreement is expected to address the following key terms:
Relative Priority. The ICA will establish that the first lien secured claims under the Credit Agreement are senior in right of payment from collateral proceeds to the unsecured claims under the Indenture. This priority applies to all proceeds of the Collateral, whether obtained through voluntary disposition, enforcement action, insurance, condemnation, or otherwise.
Enforcement Standstill. The ICA is expected to include provisions governing the ability of the unsecured trustee and the noteholders to take enforcement actions against the Collateral. Customarily, the unsecured party is subject to a standstill period (often 180 days) during which it may not exercise remedies against the Collateral if the first lien collateral agent is diligently pursuing its own remedies. After expiration of the standstill period, the unsecured party may be permitted to exercise certain limited remedies, subject to the continuing priority of the first lien secured claims.
Proceeds Waterfall. The ICA will specify the order of application of collateral proceeds following enforcement, typically as follows: (i) first, to the payment of costs and expenses of the collateral agent; (ii) second, to the payment in full of all first lien obligations (including principal, interest, fees, and other amounts owed under the Credit Agreement); and (iii) third, to the payment of unsecured obligations under the Indenture (to the extent of remaining proceeds).
Adequate Protection. The ICA is expected to address the unsecured party's rights in the event of a bankruptcy filing by the Issuer, including provisions regarding adequate protection, relief from the automatic stay, post-petition financing, and the use of cash collateral. Typically, the unsecured party agrees not to contest the first lien party's right to adequate protection, to consent to the use of cash collateral or post-petition financing subject to certain protections, and to limit its ability to seek relief from the automatic stay with respect to the Collateral during the standstill period.
Insurance and Condemnation Proceeds. The ICA will address the application of insurance proceeds and condemnation awards with respect to the Collateral, establishing that such proceeds are subject to the same priority waterfall as other collateral proceeds.
Amendments and Waivers. The ICA will specify the requirements for amendments and waivers of its terms, including whether consent of the unsecured party is required for specified categories of amendments to the Credit Agreement or the collateral documents.
C. Trustee Authorization