ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP TAX MEMORANDUM
TO: Claudia Merritt, Responsible Partner, Banking & Finance — Calderwood & Harkness LLP Ian Blackwood, Billing Partner, Banking & Finance — Calderwood & Harkness LLP Marcus Leung, Lead Associate, Banking & Finance — Calderwood & Harkness LLP
FROM: Sylvia Hartwell, Specialist Partner, Tax — Calderwood & Harkness LLP
DATE: March 5, 2025
RE: Nexford Industrial Holdings Inc. — Analysis of Interest Deductibility Under IRC Section 163(j) in Connection with the $1,400,000,000 Senior Secured Term Loan B
MATTER NO.: 1005-00001
BILLING CODE: IBL-NIH-2025-031
CLASSIFICATION: Attorney-Client Privileged / Attorney Work Product
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I. Executive Summary
This memorandum analyzes the deductibility of interest expense on the proposed $1,400,000,000 senior secured Term Loan B facility (the "Term Loan B" or the "Facility") under Internal Revenue Code ("IRC" or the "Code") Section 163(j) for Nexford Industrial Holdings Inc. (the "Borrower" or "Nexford"), a Delaware corporation headquartered in Schaumburg, Illinois, with a fiscal year ending December 31. This analysis has been prepared at the request of the Banking & Finance practice group in connection with the firm's representation of the Borrower and its private equity sponsor, Granite Peak Capital Partners, LP ("Granite Peak"), in the Term Loan B financing.
The Term Loan B bears interest at a floating rate equal to Term SOFR plus 400 basis points, subject to a SOFR floor of 0.75% and a credit spread adjustment ("CSA") of 10 basis points for 1-month Term SOFR or 15 basis points for 3-month Term SOFR. Based on current Term SOFR levels (approximately 4.35% as of the date of this memorandum), the estimated all-in interest rate on the Facility is approximately 8.45%. Estimated first-year cash interest expense on the Term Loan B alone is approximately $117.7 million on an annualized basis, calculated using an estimated all-in rate of approximately 8.45% applied to an average outstanding principal balance of approximately $1,393,000,000 (after quarterly amortization of $3,500,000 per quarter, or 1.00% per annum of the original principal amount).
In addition to the Term Loan B, Nexford has outstanding $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 (with Pinnacle Trust Company serving as indenture trustee) (the "Senior Unsecured Notes"), which generate approximately $18,125,000 in annual interest expense. Together, the estimated total annual interest expense on the Term Loan B and the Senior Unsecured Notes is approximately $135.8 million for the first full year following closing of the Facility, before accounting for OID amortization, debt issuance cost amortization, and other items constituting business interest expense for purposes of Section 163(j).
Under Section 163(j), the deduction for "business interest expense" for any taxable year is generally limited to the sum of (a) business interest income for such taxable year, (b) 30% of the taxpayer's adjusted taxable income ("ATI") for such taxable year, and (c) floor plan financing interest for such taxable year (which is not applicable to Nexford's operations). Any business interest expense that exceeds this limitation is disallowed in the current taxable year and carried forward indefinitely as a disallowed business interest expense carryforward.
Critically, for taxable years beginning after December 31, 2021, ATI is computed on an EBIT-based measure — that is, depreciation, amortization, and depletion are no longer added back in computing ATI. This change from the temporary EBITDA-based measure that applied during the CARES Act relief period significantly reduces the Section 163(j) limitation for capital-intensive borrowers like Nexford, which has substantial depreciation and amortization charges (estimated at approximately $130,000,000–$150,000,000 annually) arising from the acquisition basis step-ups created in connection with Granite Peak's leveraged buyout of Nexford in 2019 and subsequent bolt-on acquisitions.
Based on Nexford's last-twelve-months ("LTM") Adjusted EBITDA of $385,000,000 (as defined in the credit agreement) and our estimated ATI of approximately $217,000,000, a meaningful portion of the total business interest expense is expected to be deductible in FY 2025 and subsequent fiscal years. However, a material disallowed interest carryforward is anticipated. Specifically:
• FY 2025 (partial year): Total estimated business interest expense of approximately $128.8 million against an estimated Section 163(j) limitation of approximately $67.1 million, resulting in a disallowed business interest expense carryforward of approximately $61.7 million.
• FY 2026 (first full year): Total estimated business interest expense of approximately $139.8 million against a substantially similar Section 163(j) limitation, resulting in an additional disallowed amount of approximately $72.7 million and a cumulative carryforward of approximately $134.3 million.
The Banking & Finance team should be aware that the Section 163(j) limitation will be a recurring and material constraint for Nexford for the foreseeable future, given the magnitude of the debt load ($1.65 billion in total funded debt on a pro forma basis) and the EBIT-based ATI computation. The disallowed interest carryforward carries forward indefinitely under current law and does not expire. Nexford should establish internal procedures to track the carryforward balance, coordinate with its independent auditor for ASC 740 deferred tax asset recognition, and reevaluate the analysis annually as operating performance, SOFR rates, debt levels, and depreciation schedules evolve.
The analysis set forth in this memorandum, along with the key assumptions, limitations, and qualifications described in Section XII below, should be reviewed in conjunction with the detailed computations in Sections IV and V.
II. Background and Transaction Overview
A. The Borrower and Corporate Structure
Nexford Industrial Holdings Inc. is a corporation organized and existing under the laws of the State of Delaware, federal employer identification number ("EIN") 36-4178552, with its principal executive offices located at 1400 Industrial Parkway, Schaumburg, Illinois 60173. Nexford is a diversified industrials and specialty manufacturing platform that reported LTM revenue of approximately $2.1 billion for the twelve-month period ended December 31, 2024. The company operates across three distinct business segments:
(i) Precision Components (approximately 52% of LTM revenue), which manufactures high-tolerance machined parts, engineered fasteners, and precision assemblies for the aerospace, defense, and automotive end markets;
(ii) Engineered Systems (approximately 31% of LTM revenue), which designs and manufactures custom automation equipment, material handling systems, and integrated process solutions for industrial customers; and
(iii) Industrial Coatings & Surface Technologies (approximately 17% of LTM revenue), which produces specialty protective coatings, thermal barrier applications, and surface treatment solutions for the energy, infrastructure, and general industrial sectors.
Nexford employs approximately 8,400 individuals across 14 manufacturing facilities located throughout North America, with primary operations concentrated in the Midwestern and Southeastern United States.
From a corporate ownership perspective, Nexford is a wholly owned subsidiary of Granite Peak NIH Holdings, LLC, a Delaware limited liability company (EIN 85-3291047). Granite Peak NIH Holdings, LLC is, in turn, held 92% by Granite Peak Capital Fund IV, LP and 8% by GP Fund IV Co-Invest, LP. Granite Peak Capital Partners, LP serves as the private equity sponsor and fund manager, with approximately $14.5 billion of assets under management across multiple vintage fund vehicles. Granite Peak acquired Nexford in a leveraged buyout consummated in August 2019 at an enterprise value of approximately $1.65 billion.
Nexford's direct and indirect domestic subsidiaries, each of which will serve as a Subsidiary Guarantor under the Term Loan B credit agreement, are as follows:
1. Nexford Precision Components, Inc. (Delaware corporation)
2. Nexford Engineered Systems, LLC (Delaware limited liability company)
3. Nexford Coatings & Surface Technologies, Inc. (Delaware corporation)
4. Nexford Manufacturing Services, LLC (Delaware limited liability company)
5. Nexford Properties, LLC (Delaware limited liability company)
6. Nexford International Holdings, Inc. (Delaware corporation; CFC holding company)
7. Clearfield Tool & Die, Inc. (Pennsylvania corporation; acquired 2021)
8. Summit Industrial Fabrication Co. (South Carolina corporation; acquired 2022)
9. Ridgepoint Specialty Coatings, LLC (Texas limited liability company; acquired 2023)
10. Lakeshore Precision Engineering, Inc. (Michigan corporation; acquired 2024)
In addition, Nexford maintains two foreign subsidiaries: Nexford Canada Holdings ULC, an unlimited liability company organized under the laws of British Columbia, and Nexford Canada Manufacturing, Inc., a corporation organized under the Canada Business Corporations Act. These foreign entities are not included in the U.S. consolidated federal income tax return.
Nexford files as a C corporation for federal income tax purposes, with Illinois as its state of tax residence. The company's fiscal year ends on December 31. Nexford and its eligible domestic subsidiaries file a consolidated federal income tax return, with Nexford serving as the common parent of the consolidated group.
B. The Proposed Transaction
The proposed transaction consists of a $1,400,000,000 senior secured Term Loan B facility arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor"), which will serve as the lead left arranger, administrative agent, and collateral agent under the credit agreement. The Facility will be secured by a first-priority lien on substantially all of the assets of the Borrower and the Subsidiary Guarantors, including a pledge of 100% of the equity interests in domestic subsidiaries and 65% of the voting equity interests in first-tier foreign subsidiaries.
The proceeds of the Term Loan B will be applied as follows:
(i) Approximately $879,375,000 to refinance in full the existing first lien term loan facility with Atlas Meridian Bank, N.A. as administrative agent (which currently bears interest at a SOFR-based floating rate and matures in June 2026);
(ii) Termination of the existing $190,000,000 revolving credit facility with Atlas Meridian Bank, N.A. (which matures in June 2025 and is currently undrawn, with no amounts outstanding as of the date of this memorandum);
(iii) Approximately $335,000,000 to fund a dividend recapitalization to Granite Peak NIH Holdings, LLC (the direct parent entity), representing a return of invested capital to the sponsor;
(iv) Approximately $38,625,000 to pay transaction fees and expenses (including the arrangement fee, OID, legal fees, advisory fees, syndication expenses, and other closing costs); and
(v) Approximately $147,000,000 to be delivered to the Borrower's balance sheet as unrestricted cash, contributing to a pro forma cash balance of approximately $100,000,000 (after accounting for existing cash on hand and net of certain closing adjustments).
The key economic terms of the Term Loan B are as follows:
• Interest Rate: Term SOFR plus 400 basis points (with a SOFR floor of 0.75%), subject to a credit spread adjustment of 10 basis points for 1-month Term SOFR and 15 basis points for 3-month Term SOFR.
• Maturity Date: March 28, 2032 (a 7-year term from the anticipated closing date).
• Amortization: 1.00% per annum of the original principal amount, payable in equal quarterly installments of $3,500,000, commencing on June 30, 2025.
• Original Issue discount (OID): 50 basis points, corresponding to an issue price of 99.50, representing aggregate OID of $7,000,000.
• Arrangement Fee: 50 basis points ($7,000,000) payable to Crescent Harbor as lead left arranger at closing.
• Target Closing Date: March 28, 2025.
The existing $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028, issued under an indenture with Pinnacle Trust Company as indenture trustee, will remain outstanding and are not being refinanced, repurchased, or otherwise retired as part of this transaction. The Senior Unsecured Notes mature on October 15, 2028, and bear a fixed annual interest rate of 7.250%, payable semi-annually.
C. Pre-Transaction Capital Structure vs. Pro Forma Capital Structure
A comparison of Nexford's pre-transaction and pro forma capital structures illustrates the incremental leverage being added in connection with the dividend recapitalization:
On a pro forma basis, first lien net leverage is approximately 3.38x, calculated as ($1,400,000,000 minus $100,000,000 cash) divided by $385,000,000 LTM Adjusted EBITDA. Total net leverage is approximately 4.03x, calculated as ($1,400,000,000 plus $250,000,000 minus $100,000,000) divided by $385,000,000 LTM Adjusted EBITDA. The incremental leverage resulting from the dividend recapitalization and related transaction expenses is the primary driver of the increased interest expense that gives rise to the Section 163(j) limitation issues discussed in this memorandum.
III. Applicable Legal Framework — IRC Section 163(j)
A. Overview of the Section 163(j) Limitation
Under IRC Section 163(j)(1), as substantially amended by the Tax Cuts and Jobs Act of 2017 (the "TCJA," Pub. L. No. 115-97) and further modified by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act," Pub. L. No. 116-136), the deduction allowed under Section 163(a) for "business interest expense" paid or accrued during any taxable year is limited to the sum of the following three components:
(1) Business interest income of the taxpayer for such taxable year;
(2) 30% of the taxpayer's adjusted taxable income ("ATI") for such taxable year; and
(3) Floor plan financing interest of the taxpayer for such taxable year.
The floor plan financing interest component, as defined in Section 163(j)(9), applies exclusively to interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease, and is not relevant to Nexford's business operations. Accordingly, the Section 163(j) limitation for Nexford is effectively the sum of business interest income plus 30% of ATI.
The Section 163(j) limitation represents a fundamental constraint on the tax deductibility of interest expense and is one of the most consequential provisions of the TCJA for leveraged companies, particularly those owned by private equity sponsors that employ significant amounts of acquisition-related and recapitalization-related indebtedness. The limitation applies on an annual basis, and the computation must be performed each taxable year based on the taxpayer's actual results of operations for that year.
Any business interest expense that exceeds the Section 163(j) limitation for a given taxable year is treated as "disallowed business interest expense" under Section 163(j)(2) and is carried forward to the succeeding taxable year. The carryforward is treated as business interest expense paid or accrued in the succeeding year, meaning it is again subject to the Section 163(j) limitation in that year. Importantly, under current law, the disallowed business interest expense carryforward carries forward indefinitely — there is no expiration period. This indefinite carryforward provision provides some relief to taxpayers, as the disallowed amounts are preserved for future use and are not permanently lost. However, the carryforward is available only to the extent the taxpayer's Section 163(j) limitation in a future year exceeds its current-year business interest expense.
The Treasury Department and the Internal Revenue Service have issued comprehensive final regulations under Section 163(j), including Treasury Regulation §§ 1.163(j)-1 through 1.163(j)-11, which provide detailed guidance on the application of the limitation, including rules for consolidated groups, partnerships, S corporations, and controlled foreign corporations. These regulations, promulgated in final form in January 2021 (T.D. 9943), are the primary interpretive authority relied upon in this analysis.
B. Definition of Business Interest Expense
Section 163(j)(5) defines "business interest" as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. Treasury Regulation § 1.163(j)-1(b)(3) further clarifies that "business interest expense" includes any amount that is treated as interest for purposes of the Code, including items that are economically equivalent to interest or that are treated as interest under specific Code provisions.
For purposes of this analysis, the following items constitute "business interest expense" of Nexford and its consolidated group:
(a) Cash interest on the Term Loan B. All periodic cash interest payments on the $1,400,000,000 Term Loan B, calculated at Term SOFR plus 400 basis points (plus the applicable CSA), constitute business interest expense. Because the Term Loan B is indebtedness incurred to fund the refinancing of existing term loan debt, the dividend recapitalization, and general corporate purposes — all of which are properly allocable to Nexford's trade or business — the interest on the Facility is entirely "business interest" under Section 163(j)(5).
(b) Cash interest on the Senior Unsecured Notes. The fixed 7.250% coupon payments on the $250,000,000 Senior Unsecured Notes, payable semi-annually, similarly constitute business interest expense allocable to Nexford's trade or business.
(c) Amortization of Original Issue discount (OID). The $7,000,000 of OID on the Term Loan B (representing the 50 basis point discount at issuance) is amortized over the 7-year term of the Facility using the constant yield method prescribed by IRC Sections 1272 through 1275. The annual OID accrual constitutes interest for purposes of Section 163(a) and is therefore "business interest expense" subject to the Section 163(j) limitation.
(d) Amortization of debt issuance costs. Transaction fees, arrangement fees, legal costs, advisory fees, and other capitalized closing costs associated with the Term Loan B — to the extent properly characterized as debt issuance costs under Section 163(e) and treated as interest for federal income tax purposes — are amortized over the life of the indebtedness and constitute additional business interest expense. This includes the $7,000,000 arrangement fee paid to Crescent Harbor and other capitalizable transaction costs estimated at approximately $24,625,000 (net of OID).
(e) Interest on the existing first lien term loan (pre-closing). For FY 2025, interest expense accrued on the existing $875,000,000 first lien term loan with Atlas Meridian Bank, N.A. from January 1 through the closing date of March 28, 2025, constitutes business interest expense subject to the Section 163(j) limitation in FY 2025.
It should be noted that commitment fees on undrawn revolving credit facilities are generally not treated as "interest" for purposes of Section 163(j), as provided under Treasury Regulation § 1.163(j)-1(b)(22)(ii). However, because no new revolving credit facility is being established in connection with this transaction, and the existing revolving facility is being terminated at closing, this distinction is not material to the analysis. To the extent any commitment fees were paid on the existing revolving facility prior to its termination, such fees would not constitute business interest expense.
C. Definition of Adjusted Taxable Income (ATI)
Adjusted taxable income is the key metric that determines the magnitude of the Section 163(j) limitation, as the 30% ATI component typically represents the vast majority of the limitation amount for non-financial companies such as Nexford.
Section 163(j)(8) defines ATI as the taxable income of the taxpayer, computed with the following adjustments:
(i) Add back: any business interest expense for the taxable year (i.e., the interest deduction limitation does not circularly reduce ATI);
(ii) Add back: any business interest income for the taxable year;
(iii) Exclude: any item of income, gain, deduction, or loss that is not properly allocable to a trade or business; and
(iv) Do NOT add back (for taxable years beginning after December 31, 2021): any deduction allowable for depreciation, amortization, or depletion.
The fourth adjustment listed above is of critical importance. Under the original TCJA enactment of Section 163(j), for taxable years beginning before January 1, 2022, ATI was computed on an EBITDA-like basis — that is, depreciation, amortization, and depletion were added back to taxable income in computing ATI. The CARES Act further expanded this more favorable rule by (a) increasing the ATI percentage from 30% to 50% for taxable years beginning in 2019 and 2020, and (b) providing a special election to use 2019 ATI for purposes of computing the 2020 limitation. However, beginning with taxable years commencing after December 31, 2021, the statute reverted to its originally intended form: ATI is now computed on an EBIT-like basis, and depreciation, amortization, and depletion are no longer added back.
This transition from an EBITDA-based to an EBIT-based ATI computation is of profound significance for capital-intensive taxpayers like Nexford. As discussed in greater detail in Section IV.C below, Nexford has estimated annual tax depreciation and amortization of approximately $130,000,000–$150,000,000, driven largely by the acquisition basis step-ups created in connection with Granite Peak's 2019 leveraged buyout and the four subsequent bolt-on acquisitions (Clearfield in 2021, Summit in 2022, Ridgepoint in 2023, and Lakeshore in 2024). These acquisition-related step-ups generate substantial Section 197 intangible amortization and stepped-up fixed asset depreciation that materially reduce ATI (and thus the 30% ATI limitation) relative to what would have been the case under the pre-2022 EBITDA-based measure.
To illustrate the magnitude of this distinction: under an EBITDA-based ATI measure, Nexford's estimated ATI would be approximately $357,000,000 (equal to reported EBITDA), yielding a 30% limitation of approximately $107,100,000. Under the current EBIT-based measure, estimated ATI is approximately $217,000,000, yielding a 30% limitation of approximately $65,100,000 — a reduction of approximately $42,000,000 in the allowable interest deduction, solely attributable to the statutory change in the ATI computation methodology. This difference is a primary driver of the material Section 163(j) limitation that Nexford is expected to face.
D. Small Business Exception — Inapplicability
Section 163(j)(3) provides an exemption from the business interest expense limitation for taxpayers that meet the "small business" threshold. Specifically, the Section 163(j) limitation does not apply to any taxpayer that meets the gross receipts test of Section 448(c) for the taxable year, which requires that the taxpayer's average annual gross receipts for the three preceding taxable years not exceed $29,000,000 (as adjusted for inflation; the threshold for taxable years beginning in 2025 is $30,000,000).
Nexford's LTM revenue for the twelve-month period ended December 31, 2024 was approximately $2,100,000,000, and its average annual gross receipts for the three preceding taxable years (2022, 2023, and 2024) substantially exceeded the $30,000,000 threshold in each year. Accordingly, the small business exception under Section 163(j)(3) is clearly inapplicable, and Nexford is fully subject to the Section 163(j) limitation.
E. Electing Real Property Trade or Business / Electing Farming Business — Inapplicability
Section 163(j)(7) provides two elective exemptions from the Section 163(j) limitation. Under Section 163(j)(7)(A), an "electing real property trade or business" (as defined in Section 163(j)(7)(B)) may irrevocably elect to be exempt from the limitation, in exchange for being required to use the alternative depreciation system ("ADS") under Section 168(g) for certain real property and qualified improvement property. Similarly, under Section 163(j)(7)(C), an "electing farming business" may make an analogous election.
Nexford is a diversified industrials and specialty manufacturing company. It does not qualify as a "real property trade or business" within the meaning of Section 469(c)(7)(C) (which is cross-referenced by Section 163(j)(7)(B)), nor does it engage in any farming business within the meaning of Section 263A(e)(4). Neither election is available to Nexford or any of its consolidated group members. This conclusion applies equally to each of the eleven Subsidiary Guarantors, none of which is engaged in a real property trade or business or a farming business.
IV. Computation of Section 163(j) Limitation for Nexford — Pro Forma Year 1 (FY 2025)
This section sets forth the estimated computation of Nexford's Section 163(j) limitation for fiscal year 2025, the first year in which the Term Loan B will be outstanding. Because the target closing date is March 28, 2025, the Term Loan B will be outstanding for approximately nine months of FY 2025 (from March 28 through December 31, 2025, or approximately 278 days). The existing first lien term loan will be outstanding for the first 87 days of FY 2025 (January 1 through March 28, 2025). The Senior Unsecured Notes are outstanding for the full year.
A. Estimated Business Interest Expense
1. Term Loan B Interest
The Term Loan B will be funded at closing in the aggregate principal amount of $1,400,000,000. Quarterly amortization payments of $3,500,000 are scheduled to commence on June 30, 2025, with subsequent quarterly payments on September 30, 2025 and December 31, 2025 (for the partial fiscal year). Accordingly, for FY 2025, three quarterly amortization payments will be made, totaling $10,500,000 in principal reduction, bringing the outstanding principal to $1,389,500,000 at December 31, 2025.
The average outstanding principal balance for the partial FY 2025 period is estimated at approximately $1,394,750,000, reflecting the midpoint of the principal balance over the period after giving effect to the amortization schedule.
The assumed all-in interest rate is calculated as follows:
• Term SOFR (assumed at 4.35%, the approximate rate as of the date of this memorandum)
• Credit spread adjustment for 1-month Term SOFR: 0.10%
• Applicable margin: 4.00%
• Total all-in rate: approximately 8.45%
The SOFR floor of 0.75% is not triggered at current SOFR levels, as the actual Term SOFR rate of 4.35% substantially exceeds the floor.
Interest expense on the Term Loan B for the partial FY 2025 period (approximately 278 days from March 28 to December 31, 2025) is estimated as follows:
$1,394,750,000 × 8.45% × (278 / 365) ≈ $89,750,000
This estimate assumes a constant Term SOFR rate of 4.35% throughout the period. Actual interest expense will vary based on fluctuations in Term SOFR during the year. For reference, on a full 12-month basis (applicable to FY 2026 and subsequent years), estimated annual interest on the Term Loan B is approximately $117.7 million.
2. Senior Unsecured Notes Interest
The $250,000,000 Senior Unsecured Notes bear a fixed annual interest rate of 7.250%, payable semi-annually. The notes are outstanding for the full fiscal year 2025 and are not affected by the Term Loan B transaction. Accordingly, annual interest expense on the Senior Unsecured Notes is:
$250,000,000 × 7.250% = $18,125,000
3. OID Amortization
The Term Loan B is issued at a price of 99.50 (50 basis points of OID), resulting in $7,000,000 of aggregate original issue discount. Under IRC Sections 1272 through 1275 and the accompanying Treasury Regulations, OID is accrued and deductible by the borrower over the term of the debt obligation using the constant yield method. Over the 7-year term of the Term Loan B (maturing March 28, 2032), the annual OID accrual is approximately $1,000,000 (with the accrual increasing slightly each year under the constant yield method as the adjusted issue price of the obligation increases).
For the partial FY 2025 period (approximately 9 months), the estimated OID accrual is:
~$1,000,000 × (278 / 365) ≈ $750,000
4. Debt Issuance Cost Amortization
Total capitalized transaction fees and expenses are estimated at approximately $38,625,000. Of this amount, $7,000,000 represents the OID (accounted for separately above) and $7,000,000 represents the arrangement fee paid to Crescent Harbor. The remaining $24,625,000 consists of legal fees, advisory fees, syndication costs, and other closing-related expenses that are properly characterized as debt issuance costs.
Under Section 163(e) and related regulations, debt issuance costs incurred in connection with term debt are amortized over the life of the debt instrument. While the constant yield method is technically the correct method for debt issuance cost amortization under the regulations, the straight-line method is often used as a practical simplification and produces similar results over the term. Using straight-line amortization over the 7-year term:
$24,625,000 ÷ 7 years ≈ $3,518,000 per year
For the partial FY 2025 period:
$3,518,000 × (278 / 365) ≈ $2,639,000
It should be noted that the characterization of certain transaction costs as immediately deductible versus capitalizable depends on the specific nature of each cost. Some advisory and legal costs may be currently deductible under Section 162 as ordinary and necessary business expenses if they relate to the borrower's general business activities rather than the creation or origination of indebtedness. However, for purposes of this conservative analysis, we have assumed that all transaction costs (other than OID) are capitalized and amortized as debt issuance costs. To the extent any costs are treated as immediately deductible, the current-year deduction would reduce taxable income (and potentially ATI), but the interest expense calculation would be unaffected.
5. Existing Facility Interest (Pre-Closing, FY 2025)
The existing $875,000,000 first lien term loan with Atlas Meridian Bank, N.A. bears interest at a SOFR-based floating rate and will remain outstanding from January 1, 2025 through the closing date of March 28, 2025 (approximately 87 days). Assuming a similar all-in interest rate to the Term Loan B (approximately 8.00%–8.50%, reflecting the SOFR-based pricing on the existing facility), estimated interest expense on the existing facility for this pre-closing period is:
$875,000,000 × ~8.40% × (87 / 365) ≈ $17,500,000
This pre-closing interest expense constitutes business interest expense of Nexford for FY 2025 and is subject to the Section 163(j) limitation in the same taxable year.
6. Total Estimated Business Interest Expense — FY 2025
Aggregating all components of business interest expense for FY 2025:
This estimate excludes any minor items such as interest on short-term working capital borrowings (none anticipated), late payment charges, or default interest, which are not expected to apply under normal circumstances.
B. Estimated Business Interest Income
Nexford is a manufacturing company, not a lending institution, and accordingly its business interest income is expected to be minimal. The primary source of interest income is the return earned on corporate cash deposits.
On a pro forma basis, Nexford will have approximately $100,000,000 of cash on its balance sheet following the closing of the Term Loan B. Assuming these funds are held in money market accounts or short-term investment vehicles yielding approximately 4.5% per annum (consistent with prevailing short-term interest rates as of the date of this memorandum), gross interest income on these balances would be approximately $4,500,000 annually. However, not all of this interest income may qualify as "business interest income" for Section 163(j) purposes.
Under Treasury Regulation § 1.163(j)-1(b)(4), "business interest income" means the amount of interest includible in the taxpayer's gross income for the taxable year that is properly allocable to a trade or business. Interest earned on passive investment accounts or excess cash holdings may not be considered allocable to a trade or business, depending on the facts and circumstances. Where cash is held for general corporate purposes and is reasonably expected to be used in the business (e.g., for working capital, capital expenditures, or debt service), a reasonable argument can be made that the interest income is business interest income. However, a conservative approach would treat only a portion of this interest as allocable to the trade or business.
Nexford also receives interest on intercompany notes and advances with its domestic subsidiaries. However, because Nexford and its domestic subsidiaries file a consolidated federal income tax return, intercompany interest transactions are eliminated in consolidation and do not create separate items of business interest income or business interest expense at the consolidated group level for Section 163(j) purposes.
Based on the foregoing analysis, we conservatively estimate Nexford's business interest income for FY 2025 at approximately $2,000,000, reflecting interest on short-term cash deposits that are reasonably allocable to the trade or business.
C. Computation of Adjusted Taxable Income (ATI)
1. Starting Point: Estimated Taxable Income Before Interest
The computation of ATI begins with Nexford's taxable income for the fiscal year, before application of the Section 163(j) limitation. Because the Section 163(j) analysis is being performed on a prospective basis prior to the close of FY 2025, we must estimate taxable income based on available financial data and reasonable assumptions.
Nexford's LTM Adjusted EBITDA, as defined in the credit agreement, is $385,000,000. This figure includes $28,000,000 of permitted add-backs, consisting of the following:
• $12,000,000 in acquisition-related costs (legal, advisory, and integration expenses from the Lakeshore acquisition in 2024)
• $8,500,000 in non-recurring restructuring charges (facility consolidation and workforce optimization)
• $4,500,000 in Granite Peak management fees (quarterly advisory fees paid to the sponsor)
• $3,000,000 in integration costs (IT systems harmonization and operational synergy implementation)
LTM Reported EBITDA (before these add-backs) is approximately $357,000,000. For tax ATI purposes, the appropriate starting point is not credit agreement Adjusted EBITDA but rather taxable income computed in accordance with the Code, with the statutory adjustments prescribed by Section 163(j)(8).
Importantly, the credit agreement add-backs receive varying treatment for tax purposes. Acquisition-related costs ($12,000,000) may be required to be capitalized under Section 263 or may be deductible under Section 162 depending on the specific nature of each cost. Non-recurring restructuring charges ($8,500,000) are generally deductible for tax purposes in the year incurred if they meet the requirements of Section 162. Sponsor management fees ($4,500,000) paid to Granite Peak may be deductible as ordinary and necessary business expenses, though certain fees may be recharacterized. Integration costs ($3,000,000) may be deductible or capitalized depending on their nature.
For purposes of this analysis, we use LTM Reported EBITDA of $357,000,000 as a reasonable proxy for EBITDA after removing the credit agreement-specific add-backs, acknowledging that the actual tax computation will differ based on the book-to-tax adjustments applicable to each line item.
2. Estimated Depreciation and Amortization
Nexford's tax depreciation and amortization is a critical input to the ATI computation because, under the post-2021 rules, these amounts are not added back in determining ATI. Nexford's D&A is substantially elevated relative to its ongoing capital expenditure requirements due to the acquisition basis step-ups created in the following transactions:
(a) 2019 Leveraged Buyout by Granite Peak: Granite Peak acquired Nexford at an enterprise value of approximately $1.65 billion. Under Section 338(h)(10) or the applicable acquisition structure, the tax basis of Nexford's assets was stepped up to fair market value, generating substantial amounts of Section 197 intangible amortization (goodwill and other intangibles amortized over 15 years) and stepped-up fixed asset depreciation.
(b) 2021 Clearfield Acquisition: Bolt-on acquisition of Clearfield Tool & Die, Inc., generating additional Section 197 amortization.
(c) 2022 Summit Acquisition: Bolt-on acquisition of Summit Industrial Fabrication Co., generating additional Section 197 amortization.
(d) 2023 Ridgepoint Acquisition: Bolt-on acquisition of Ridgepoint Specialty Coatings, LLC, generating additional Section 197 amortization.
(e) 2024 Lakeshore Acquisition: Bolt-on acquisition of Lakeshore Precision Engineering, Inc., generating additional Section 197 amortization.
In addition, Nexford's annual capital expenditures of approximately $78,000,000 (LTM) generate ongoing depreciation deductions on newly acquired property, plant, and equipment. Depending on the extent to which bonus depreciation is claimed (which is phasing down — 40% for property placed in service in calendar year 2025, 20% in 2026, and 0% in 2027 and thereafter under Section 168(k)), the timing of depreciation deductions may be accelerated.
Based on the foregoing, estimated annual tax depreciation and amortization is in the range of approximately $130,000,000 to $150,000,000. For purposes of the base case computation in this memorandum, we use a midpoint estimate of $140,000,000. This estimate should be refined based on actual depreciation schedules provided by Nexford's tax department and independent auditor, Ashworth & Kendrick LLP.
3. ATI Estimate
For estimation purposes, we approximate ATI using the following simplified approach:
Step 1: Start with LTM Reported EBITDA: $357,000,000
Step 2: Subtract estimated tax depreciation and amortization: ($140,000,000)
Step 3: This yields an approximate EBIT of: $217,000,000
ATI is then computed by making the statutory adjustments to taxable income (which itself approximates EBIT after the interest deduction). Specifically:
• Add back business interest expense (which has already been excluded, since our starting point of EBIT does not include interest deductions);
• Add back business interest income (approximately $2,000,000);
• Remove any items not properly allocable to a trade or business (assumed to be de minimis for purposes of this analysis).
Accordingly, the estimated ATI is approximately $217,000,000. This is a simplification, as the actual ATI computation will be based on Nexford's FY 2025 federal income tax return, which will reflect the precise book-to-tax adjustments, actual D&A schedules, and other items. However, this estimate provides a reasonable basis for assessing the magnitude of the Section 163(j) limitation.
It is important to note that ATI is computed based on the taxpayer's full taxable year, regardless of the date on which the Term Loan B closes. Therefore, the full-year ATI (based on 12 months of operations from January 1 through December 31, 2025) is used to compute the 30% ATI limitation, even though the Term Loan B will be outstanding for only approximately 9 months of the year.
4. 30% of ATI
The 30% ATI component of the Section 163(j) limitation is:
30% × $217,000,000 = approximately $65,100,000
D. Section 163(j) Limitation Calculation — FY 2025
Combining the components computed above, the estimated Section 163(j) limitation for FY 2025 is as follows:
The disallowed business interest expense of approximately $61.7 million would be carried forward indefinitely to future taxable years under Section 163(j)(2). This amount is treated as business interest expense paid or accrued in the succeeding taxable year (FY 2026) and will be subject to the Section 163(j) limitation again in that year and each subsequent year until fully utilized.
It should be emphasized that the FY 2025 disallowed amount is partially mitigated by the fact that the Term Loan B is only outstanding for approximately 9 months of the fiscal year, reducing total interest expense relative to what will be incurred in a full 12-month period. As discussed in Section V below, the full-year disallowed amount for FY 2026 is expected to be materially larger.
E. Sensitivity Analysis
The ATI estimate is sensitive to several key variables, most notably the level of tax depreciation and amortization. The table below illustrates the impact of varying D&A assumptions on the estimated Section 163(j) limitation and disallowed interest:
As the table illustrates, a $10,000,000 change in estimated D&A results in approximately a $3,000,000 change in the Section 163(j) limitation and a corresponding change in the disallowed interest amount. The sensitivity is driven by the 30% ATI multiplier: each $1.00 of additional D&A reduces ATI by $1.00 and reduces the Section 163(j) limitation by $0.30.
Additionally, to the extent Nexford claims bonus depreciation on new capital expenditures placed in service during FY 2025, the accelerated depreciation deductions will further reduce ATI and increase the disallowed interest carryforward. The bonus depreciation phase-down schedule (40% in 2025, 20% in 2026, 0% in 2027 and thereafter) means that this effect will diminish over time, providing a natural tailwind for ATI growth in future years. However, in the near term, Nexford should carefully evaluate the trade-off between the immediate tax benefit of accelerated depreciation and the resulting exacerbation of the Section 163(j) limitation.
V. Full-Year Analysis — FY 2026 (First Full Year Post-Closing)
To provide a complete picture of the ongoing Section 163(j) limitation impact, this section presents the estimated computation for FY 2026, the first full 12-month fiscal year in which the Term Loan B will be outstanding for the entire period.
A. Estimated Business Interest Expense — FY 2026
For FY 2026, the principal components of business interest expense are estimated as follows:
Term Loan B Interest: By the beginning of FY 2026, four quarterly amortization payments will have been made (June 30, September 30, and December 31, 2025, plus March 31, 2026 during FY 2026), reducing the outstanding principal. For FY 2026, four quarterly amortization payments of $3,500,000 each ($14,000,000 total) will be made. The average outstanding principal balance during FY 2026 is estimated at approximately $1,386,000,000 (reflecting the midpoint after accounting for ongoing amortization). Estimated interest expense:
$1,386,000,000 × 8.45% ≈ $117,117,000
Senior Unsecured Notes Interest: $250,000,000 × 7.250% = $18,125,000 (unchanged from FY 2025).
OID Amortization: Full year accrual under the constant yield method: approximately $1,000,000 (with slight increase from the partial-year FY 2025 amount due to increasing accrual under constant yield).
Debt Issuance Cost Amortization: Full year straight-line amortization: $24,625,000 ÷ 7 = approximately $3,518,000.
B. Estimated ATI — FY 2026
For FY 2026, we assume stable operating performance at approximately $357,000,000 of reported EBITDA (consistent with LTM performance as of December 31, 2024) and tax D&A of approximately $140,000,000 (consistent with the midpoint estimate used in the FY 2025 analysis). In the absence of material changes in the business — such as significant organic revenue growth, margin expansion, additional acquisitions, or asset dispositions — the FY 2026 ATI is estimated at approximately:
$357,000,000 – $140,000,000 = approximately $217,000,000
This estimate is consistent with the FY 2025 base case. Over time, ATI may increase as (a) acquisition-related Section 197 intangible amortization from the 2019 leveraged buyout begins to wind down (the 15-year amortization period extends through 2034), (b) the bonus depreciation phase-down reduces the accelerated depreciation component of tax D&A, and (c) Nexford achieves organic revenue and earnings growth. However, for purposes of the near-term FY 2026 projection, we assume a flat ATI.
30% of ATI:
30% × $217,000,000 = approximately $65,100,000
C. Section 163(j) Limitation — FY 2026
The full-year FY 2026 disallowed amount of approximately $72.7 million exceeds the FY 2025 partial-year disallowed amount by approximately $11 million, reflecting the additional interest expense attributable to the Term Loan B being outstanding for a full 12-month period rather than approximately 9 months.
D. Observations on Carryforward Accumulation
Several important observations follow from the foregoing analysis:
Indefinite Carryforward Period. Under current law, the disallowed business interest expense carryforward has no expiration and carries forward indefinitely. This means that the cumulative carryforward — projected at approximately $134.3 million at the end of FY 2026 — is preserved in perpetuity and will be available for deduction in any future taxable year in which Nexford's Section 163(j) limitation exceeds its current-year business interest expense. This situation could arise from a combination of debt reduction, revenue growth, margin expansion, and the natural wind-down of acquisition-related D&A over time.