CONFIDENTIAL — ATTORNEY WORK PRODUCT — ATTORNEY-CLIENT PRIVILEGE
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL / ATTORNEY WORK PRODUCT
TO: Claudia Merritt, Responsible Partner, Banking & Finance
FROM: Marcus Leung, Lead Associate, Banking & Finance Sophie Tremblay, Working Associate, Banking & Finance
DATE: February 8, 2025
RE: Nexford Industrial Holdings Inc. — $1,400,000,000 Senior Secured Term Loan B — Term Sheet Issues List and Negotiation Strategy
Matter No.: 1005-00001 / IBL-NIH-2025-031
Client/Matter Code: IBL-NIH-2025-031
I. Executive Summary
The purpose of this memorandum is to identify and analyze the key issues arising from the initial term sheet (the "Term Sheet") delivered by Crescent Harbor Bank, N.A. ("Crescent Harbor" or the "Arranger") on February 5, 2025, and to propose negotiation positions on behalf of our client, Nexford Industrial Holdings Inc. ("Nexford" or the "Borrower"), a portfolio company of Granite Peak Capital Partners, LP ("Granite Peak" or the "Sponsor"). This memorandum is intended to serve as a comprehensive guide for the negotiation of the Term Sheet and to inform our broader strategy as we proceed toward execution of the commitment letter and, ultimately, the definitive credit agreement and related ancillary documentation.
The proposed transaction involves a $1,400,000,000 senior secured Term Loan B facility (the "Term Loan B" or the "Facility") to be arranged by Crescent Harbor, with the proceeds to be used for the following purposes:
(i) refinancing the existing $875,000,000 first lien term loan and $190,000,000 revolving credit facility held by Atlas Meridian Bank, N.A. (with an aggregate payoff amount of approximately $879,375,000, inclusive of accrued interest and breakage costs);
(ii) funding approximately $335,000,000 in connection with a dividend recapitalization to Granite Peak NIH Holdings, LLC, the direct parent of the Borrower, and ultimately to Granite Peak Capital Fund IV, LP and related co-investors;
(iii) paying transaction fees and expenses of approximately $38,625,000, inclusive of arrangement fees, legal fees, advisory fees, and other customary transaction costs; and
(iv) funding approximately $147,000,000 in cash to the Borrower's balance sheet for general corporate purposes and working capital.
Calderwood & Harkness LLP ("C&H") delivered annotated term sheet comments to the deal team on February 7, 2025, reflecting preliminary reactions to the Term Sheet. This memorandum supplements those annotations with a comprehensive issues list and a recommended negotiation strategy organized by topic area. A marked version of the Term Sheet incorporating the positions described herein is being prepared and is scheduled for delivery to Whitfield & Gage LLP ("W&G"), counsel to Crescent Harbor, on February 10, 2025.
This memorandum is organized into the following sections:
(A) Economic Terms (Section III.A);
(B) Financial Covenants (Section III.B);
(C) Structural and Protective Provisions (Section III.C);
(D) Collateral and Guarantee Package (Section III.D);
(E) Syndication Mechanics (Section III.E);
(F) Other Key Provisions (Section III.F); and
(G) Negotiation Priority Summary Matrix (Section IV).
In addition, Section V sets forth the recommended next steps and timeline for the negotiation process, and Section VI provides our overall assessment and conclusions. Separate memoranda addressing market flex provisions, the commitment letter, the fee letter, the intercreditor agreement framework, and the regulatory and compliance review are in preparation and will be circulated in accordance with the timeline set forth in Section V.
II. Background and Transaction Overview
Borrower
Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 1400 Industrial Parkway, Schaumburg, Illinois 60173. Nexford operates as a diversified industrials and specialty manufacturing platform, with operations spanning precision tooling, industrial fabrication, specialty coatings, and engineered components. The company generates approximately $2.1 billion in last-twelve-months ("LTM") revenue and LTM Adjusted EBITDA of approximately $385,000,000, in each case as of December 31, 2024, based on audited financial statements and management adjustments reviewed by C&H and Stonebridge Advisory Group, LLC ("Stonebridge"). Nexford's manufacturing operations are primarily conducted through eleven domestic subsidiaries and two Canadian subsidiaries, with facilities located across Illinois, South Carolina, Texas, Michigan, Pennsylvania, and Ontario, Canada.
Sponsor
Granite Peak Capital Partners, LP is a middle-market private equity sponsor focused on industrials, business services, and specialty manufacturing. Granite Peak acquired Nexford in January 2019 for an enterprise value of approximately $1.65 billion, with an initial equity investment of approximately $725,000,000 funded through Granite Peak Capital Fund IV, LP and affiliated co-investment vehicles. In 2021, Granite Peak effectuated a prior dividend recapitalization of approximately $275,000,000, which was funded through the existing first lien credit facilities held by Atlas Meridian Bank, N.A. On a cumulative basis, including the 2021 dividend recapitalization and prior management fee and monitoring fee payments, Granite Peak has received approximately $610,000,000 in total distributions from the Nexford investment. The proposed $335,000,000 dividend recapitalization in the current transaction will bring cumulative distributions to approximately $945,000,000, representing approximately 1.3x Granite Peak's invested equity capital, with Granite Peak retaining 100% of the equity in Nexford through its wholly-owned subsidiary, Granite Peak NIH Holdings, LLC.
Lead Left Arranger / Administrative Agent / Collateral Agent
Crescent Harbor Bank, N.A. will serve as the Lead Left Arranger, Sole Bookrunner, Administrative Agent, and Collateral Agent for the Term Loan B. Crescent Harbor is located at 320 Federal Street, Boston, Massachusetts 02110. The deal team at Crescent Harbor is led by Elaine Prescott, Managing Director, Leveraged Finance, and Thomas Nakamura, Director, Loan Syndication. The Crescent Harbor team has been responsive and constructive in preliminary discussions, and we anticipate a collaborative but substantive negotiation process.
Counsel to the Arranger
Whitfield & Gage LLP is serving as counsel to Crescent Harbor in connection with the Facility. The W&G team is led by Margaret Ashby, a partner in the firm's Banking & Finance practice, and Jonathan Ferris, a working associate. Ms. Ashby is an experienced leveraged finance practitioner, and we have worked opposite her on several prior transactions. We anticipate that W&G will take market-standard positions on most issues, with potential areas of contention on the covenant and incremental facility provisions where arranger-side counsel has historically taken a more protective approach.
Sponsor's Counsel
Kellner Brandt & Associates LLP is serving as counsel to Granite Peak in connection with the transaction, with Patricia Voss as lead partner. We are coordinating closely with Ms. Voss on matters relating to the dividend recapitalization mechanics, the restricted payments framework, and the sponsor-related provisions of the credit agreement. The alignment of the Borrower's and the Sponsor's positions is critical to a unified negotiation front, and we have established a regular cadence of coordination calls with the Kellner Brandt team.
Financial Advisor
Stonebridge Advisory Group, LLC is serving as financial advisor to Nexford and Granite Peak in connection with the refinancing and dividend recapitalization. Andrew Castellano, Managing Director at Stonebridge, is leading the advisory engagement. Stonebridge has provided market benchmarking data, assisted with the preparation of the confidential information memorandum (in progress), and will be coordinating the lender presentation and syndication process with the Crescent Harbor team.
Pro Forma Capital Structure
Upon the closing of the proposed transaction, the Borrower's capital structure will be as follows:
Key leverage metrics are as follows:
• Pro forma first lien net leverage: approximately 3.38x (calculated as ($1,400,000,000 minus $100,000,000 pro forma unrestricted cash) divided by $385,000,000 LTM Adjusted EBITDA)
• Pro forma total net leverage: 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)
• Pro forma total gross leverage: approximately 4.29x (calculated as $1,650,000,000 divided by $385,000,000 LTM Adjusted EBITDA)
• Pro forma interest coverage ratio: approximately 4.40x (calculated as $385,000,000 LTM Adjusted EBITDA divided by approximately $87,450,000 estimated annual interest expense, based on current SOFR of approximately 4.30% plus the 400 bps margin on the Term Loan B, plus fixed coupon on the unsecured notes)
We note that the existing Senior Unsecured Notes in the principal amount of $250,000,000 at a fixed rate of 7.250% per annum, due November 8, 2028, issued under the Indenture dated November 8, 2021, with Pinnacle Trust Company, N.A. as trustee (the "Unsecured Notes Indenture"), are not being refinanced in connection with this transaction and will remain outstanding. The interaction between the credit agreement and the Unsecured Notes Indenture, particularly with respect to the change of control provisions, restricted payment limitations, and incurrence covenants, will require careful analysis during the definitive documentation phase.
Ratings
Presentations to Keystone Ratings Group, Inc. and Sentinel Credit Analytics, LLC are scheduled for February 19, 2025. Ratings have not yet been assigned as of the date of this memorandum. The Borrower and the Sponsor expect ratings in the B1/B+ range, which would be consistent with the proposed pricing and structure. The ratings process is being managed by Stonebridge in coordination with the Crescent Harbor syndication team. We note that the Term Sheet includes a condition precedent requiring ratings to be obtained prior to closing; as discussed further in Section III.F.4, we recommend that this condition be addressed within the limited conditionality framework.
Target Closing
The target closing date for the Facility is March 28, 2025, which provides approximately seven weeks from the date of this memorandum. The timeline is ambitious but achievable, provided that the Term Sheet and commitment letter negotiations are concluded by February 14, 2025, as currently contemplated.
III. Issues List and Negotiation Analysis
A. Economic Terms
A.1 Interest Rate — SOFR + 400 Basis Points
The Term Sheet proposes an interest rate on the Term Loan B of Term SOFR plus 400 basis points per annum, with a SOFR credit spread adjustment ("CSA") of 10 basis points for 1-month SOFR and 15 basis points for 3-month SOFR. This results in an all-in borrowing cost (before floor effects) of approximately 8.30% to 8.45% at current SOFR levels, depending on the interest period selected.
Assessment. The proposed spread of SOFR + 400 basis points is broadly in line with current market conditions for B1/B+ rated sponsor-backed Term Loan B facilities in the industrials and manufacturing sector. Based on our review of recent comparable transactions, including the $950,000,000 Term Loan B for Marlowe Asset Management Manufacturing Corp. (SOFR + 375 bps, January 2025), the $1,200,000,000 Term Loan B for Ridgepoint Industrial Partners, Inc. (SOFR + 425 bps, November 2024), and the $800,000,000 Term Loan B for Clearfield Precision Holdings, LLC (SOFR + 400 bps, December 2024), the proposed spread falls within the middle of the range. We note that Stonebridge is preparing a detailed market benchmarking analysis that will be incorporated into the Market Flex Provisions Analysis Memorandum. A separate memorandum addressing the market flex provisions in the commitment letter will follow on or about February 13, 2025.
Borrower Position. We recommend that Nexford accept the proposed spread of SOFR + 400 basis points, subject to the following conditions:
(a) The commitment letter must contain clearly defined limits on market flex with respect to the interest rate spread, including a maximum upward adjustment cap (we will recommend a cap of 50 basis points of spread flex and 50 basis points of OID flex in the fee letter review memorandum).
(b) The CSA of 10 basis points (1-month SOFR) and 15 basis points (3-month SOFR) must be confirmed as inclusive of all administrative charges; there should be no additional administrative fee or agency fee that effectively increases the all-in cost of borrowing.
(c) The Borrower should reserve the right to select 1-month, 3-month, or 6-month interest periods, with no restriction on the availability of any standard tenor.
Negotiation Priority: Medium. The primary focus on the interest rate should be on limiting the market flex provisions in the commitment letter, rather than contesting the initial spread, which is within market parameters.
A.2 SOFR Floor — 0.75%
The Term Sheet proposes a SOFR floor of 0.75%, meaning that for purposes of calculating interest, Term SOFR will be deemed to be no less than 0.75% regardless of the actual prevailing rate.
Assessment. As of the date of this memorandum, the prevailing Term SOFR rate is approximately 4.30% to 4.35%, well above the proposed 0.75% floor. As a result, the floor is not currently binding and would only become economically meaningful in a significantly lower interest rate environment. Based on current Federal Reserve forward guidance and market expectations, it is unlikely that SOFR will decline to 0.75% within the near- to medium-term, although the floor provides structural downside protection for lenders over the seven-year term of the Facility. The typical range for SOFR floors in TLB transactions is 0.50% to 1.00%, and the proposed 0.75% falls squarely within that range.
Borrower Position. We recommend accepting the 0.75% SOFR floor as proposed. If the overall pricing on the Facility is ultimately determined to be above market (whether through syndication feedback or the Stonebridge benchmarking analysis), the Borrower could seek to reduce the floor to 0.50% as part of a broader pricing adjustment. However, given the relatively low probability that the floor will be binding during the life of the Facility, this issue does not warrant significant negotiation capital.
Negotiation Priority: Low.
A.3 Original Issue discount (OID) — 50 Basis Points (99.50)
The Term Sheet proposes an issue price of 99.50, representing a 50 basis point original issue discount ("OID"). Based on the $1,400,000,000 aggregate principal amount of the Facility, this equates to an aggregate OID of $7,000,000. The OID is economically equivalent to an upfront fee paid by the Borrower and is typically passed through to syndicate lenders as part of the syndication economics.
Assessment. The current market range for OID on sponsor-backed TLB transactions is approximately 99.00 to 99.75 (i.e., 25 to 100 basis points). The proposed OID of 50 basis points (99.50) falls within the midpoint of this range and is consistent with recent comparable transactions. We note that the OID interacts with the upfront fee payable to syndicate lenders (discussed in A.4 below) and with the market flex provisions in the commitment letter; the aggregate clearing yield will ultimately be determined by syndication demand.
Borrower Position. We recommend accepting the 50 basis point OID as proposed, with the caveat that if the syndication is significantly oversubscribed, the Borrower should seek to tighten the OID to 99.75 (25 basis points), thereby reducing the aggregate discount by $3,500,000. This is a pricing optimization that will be addressed in real time during the syndication process. As with the interest rate spread, the interaction with the market flex provisions is critical, and the fee letter should contain a cap on OID widening.
Negotiation Priority: Low-Medium.
A.4 Arrangement Fee — 50 Basis Points
The Term Sheet provides for an arrangement fee of 50 basis points payable to Crescent Harbor as Lead Left Arranger, representing $7,000,000 based on the $1,400,000,000 Facility size. Additionally, the Term Sheet references a separate upfront fee of 100 basis points (1.00%) payable to participating syndicate lenders, which is a standard component of TLB syndication economics and is typically incorporated into the OID mechanics.
Assessment. The arrangement fee is customary for the Lead Left Arranger in a transaction of this size and complexity. The 100 basis point upfront fee to syndicate lenders is also within market norms. These fees, together with the OID, represent the aggregate syndication economics and will be further detailed in the fee letter to be executed in connection with the commitment letter.
Borrower Position. We recommend that Nexford accept the 50 basis point arrangement fee. However, the Borrower should confirm the following:
(a) No additional structuring fees, advisory fees, or other fees are payable to Crescent Harbor beyond the 50 basis point arrangement fee (and the administrative agent fee, which is addressed separately in the fee letter).
(b) The upfront fee payable to syndicate lenders is built into the OID mechanics and is not a separate cash payment due from the Borrower at closing. In other words, the Borrower's aggregate economic cost of the OID and upfront fees should be limited to the 50 basis points reflected in the 99.50 issue price, with the balance of the lender upfront fee being funded from Crescent Harbor's arrangement fee economics.
(c) Any fees payable to joint lead arrangers (Ironwood Capital Markets, LLC and Northvane Securities, Inc., if and when confirmed) are carved out of, and not additive to, the arrangement fee payable by the Borrower.
Negotiation Priority: Low.
A.5 Default Rate — +200 Basis Points
The Term Sheet proposes that, upon the occurrence and during the continuance of an Event of Default, interest on all outstanding obligations shall accrue at an additional 200 basis points above the otherwise applicable interest rate (i.e., at SOFR + 600 basis points during an Event of Default).
Assessment. A default rate premium of 200 basis points is the most common formulation in institutional TLB transactions and is fully within market norms. There is no basis for contesting the rate itself.
Borrower Position. We recommend accepting the +200 basis point default rate, subject to confirmation that the default rate applies only upon the occurrence and during the continuance of an "Event of Default" as defined in the credit agreement, and not upon the mere occurrence of a "Default" (i.e., a condition or event that, with the giving of notice or lapse of time or both, would constitute an Event of Default). This distinction is important because it ensures that the Borrower has the benefit of any applicable notice and cure periods before the punitive default rate takes effect. Additionally, the Borrower should confirm that the default rate is not applied retroactively to the date of the underlying Default, but only from the date on which the Default ripens into an Event of Default.
Negotiation Priority: Low.
A.6 Amortization — 1.00% Per Annum
The Term Sheet proposes scheduled amortization of 1.00% per annum of the original principal amount of the Term Loan B, payable in equal quarterly installments of $3,500,000 each (calculated as $1,400,000,000 multiplied by 1.00%, divided by four). The remaining balance of the Term Loan B would be due and payable at maturity on March 28, 2032 (seven years from the closing date).
Assessment. Annual amortization of 1.00% is the established market standard for institutional Term Loan B facilities. Higher amortization rates (e.g., 5.00% or 7.50% per annum) are characteristic of Term Loan A facilities held by banks, while institutional TLB facilities have uniformly adopted the 1.00% convention. At this rate, aggregate scheduled amortization over the seven-year life of the Facility would total approximately $98,000,000 (7.00% of the original principal amount), with the remaining approximately $1,302,000,000 due at maturity (before giving effect to any voluntary or mandatory prepayments).
Borrower Position. We recommend accepting the 1.00% annual amortization as proposed, without modification. This is a standard, non-controversial provision.
Negotiation Priority: Low.
A.7 Voluntary Prepayment — Soft Call Premium
The Term Sheet provides that the Term Loan B may be voluntarily prepaid at par at any time without premium or penalty, subject to a 101 soft call premium (1.00%) applicable to repricing transactions occurring within the first six months after the closing date. A "repricing transaction" is generally understood to mean a refinancing or repricing of the Term Loan B at a lower effective interest rate yield, including through an amendment that reduces the applicable margin.
Assessment. A six-month soft call at 101 is the current market standard for institutional TLB facilities. We note that some recent transactions have featured twelve-month soft call periods, which would be more restrictive for the Borrower; however, Crescent Harbor has not proposed a twelve-month soft call in the Term Sheet, and we see no reason to expect this position to change. The soft call provision is designed to protect initial syndicate lenders against the risk of an early repricing in a declining rate environment, and the six-month window represents a reasonable balance between lender protection and borrower flexibility.
Borrower Position. We recommend accepting the six-month soft call at 101, subject to the following confirmations:
(a) The soft call premium applies exclusively to "repricing transactions" — i.e., refinancings or amendments that reduce the effective interest rate yield on the Term Loan B. The soft call should not apply to voluntary prepayments from asset sale proceeds, excess cash flow, or other sources unrelated to a repricing.
(b) The soft call should not apply to mandatory prepayments of any kind, including prepayments resulting from the excess cash flow sweep, asset sale mandatory prepayments, or debt issuance mandatory prepayments.
(c) If the arranger or any lender raises the possibility of extending the soft call period to twelve months during subsequent negotiations, the Borrower should resist this extension firmly.
(d) The soft call premium should be clearly stated as 1.00% of the principal amount being prepaid, and should not be subject to increase or adjustment through the market flex provisions.
Negotiation Priority: Low-Medium.
B. Financial Covenants
B.1 Springing Financial Covenant — Maximum 5.00x First Lien Net Leverage
The Term Sheet proposes a single springing financial covenant: a maximum first lien net leverage ratio of 5.00x (5.00 to 1.00), to be tested at the end of each fiscal quarter, but only when the aggregate outstanding principal amount of revolving loans (under any revolving credit facility then in effect) exceeds 40% of the total revolving commitments at such time.
Importantly, no revolving credit facility is being established as part of the current transaction. The springing financial covenant would therefore only become operative if a revolving credit facility is subsequently added through the incremental facility provisions of the credit agreement. As a practical matter, the springing covenant is unlikely to be tested in the near term, and even if a revolving facility is established, the 40% utilization trigger provides a significant buffer against testing.
Based on the pro forma capital structure, the Borrower's first lien net leverage ratio at closing will be approximately 3.38x, calculated as follows:
First Lien Net Leverage = (First Lien Debt − Unrestricted Cash) ÷ LTM Adjusted EBITDA
= ($1,400,000,000 − $100,000,000) ÷ $385,000,000
= $1,300,000,000 ÷ $385,000,000
= approximately 3.38x
This provides approximately 1.62 turns of headroom (162 basis points) to the 5.00x covenant level, representing a cushion of approximately 48% above closing leverage.
Assessment. The springing financial covenant framework proposed in the Term Sheet is highly favorable to the Borrower and is fully consistent with "covenant-lite" market practice for institutional TLB facilities. The vast majority of TLB facilities issued in 2023 and 2024 featured either no financial maintenance covenant or a single springing covenant tied to revolving utilization, and the proposed structure falls squarely within this convention. The 5.00x covenant level provides a generous cushion relative to closing leverage, and the 40% revolving utilization trigger (within the market range of 35% to 40%) further reduces the likelihood of testing. We do not recommend contesting the covenant level or the springing mechanism itself.
Borrower Position. We recommend accepting the springing covenant framework as proposed, including the 5.00x first lien net leverage ratio and the 40% revolving utilization trigger. However, the negotiation of this provision is far from complete: the critical issues relate to the definitions underlying the covenant calculation, which will be fleshed out in the definitive credit agreement. The Borrower should ensure the following definitional points are addressed in the Term Sheet (to the extent possible) and confirmed in the credit agreement:
(a) "Consolidated Net Income" and "Adjusted EBITDA" Definitions. The definitions of Consolidated Net Income and Adjusted EBITDA (or "Consolidated EBITDA," as the term may be defined in the credit agreement) must capture all agreed add-backs. As discussed further in Section III.B.2 below, the Borrower's LTM Adjusted EBITDA of $385,000,000 includes $28,000,000 in total add-backs over reported EBITDA of $357,000,000. These add-backs consist of: (i) approximately $12,000,000 in acquisition-related costs (including transaction fees, legal and advisory costs, and integration expenses associated with the Lakeshore Precision Engineering acquisition completed in 2024); (ii) approximately $8,500,000 in non-recurring restructuring charges (primarily related to the consolidation of the Rockford manufacturing operations); (iii) approximately $4,500,000 in sponsor management fees payable to Granite Peak under the existing Management Services Agreement; and (iv) approximately $3,000,000 in integration costs related to the Ridgepoint Specialty Coatings acquisition completed in 2023. All of these add-backs must be explicitly permitted under the EBITDA definition.
(b) Cash Netting. The Term Sheet should confirm that "first lien net leverage" is calculated by netting all unrestricted cash and cash equivalents held by the Borrower and its restricted subsidiaries against first lien debt. We recommend that the definition of "unrestricted cash" be broadly defined to include cash in all domestic and foreign deposit accounts, money market funds, short-term government securities, and other highly liquid investments, without limitation as to jurisdiction or currency denomination.
(c) Pro Forma Adjustments. The first lien net leverage ratio should be calculated on a pro forma basis, giving effect to acquisitions and dispositions consummated during the applicable measurement period (the trailing twelve months or four most recently completed fiscal quarters). Pro forma adjustments should be permitted on a "run-rate" basis, including projected cost savings and synergies that are reasonably identifiable and factually supportable and expected to be realized within a specified implementation period (the Borrower should push for 24 months, as discussed in B.2 below).
(d) Equity Cure Rights. The Borrower should push for the inclusion of an equity cure right permitting Granite Peak (or any other Permitted Holder) to make a cash equity contribution to the Borrower to cure a breach of the springing financial covenant. The equity cure right should be subject to customary limitations, including:
(i) no more than two equity cures in any four consecutive fiscal quarter period;
(ii) no more than five equity cures during the life of the Facility;
(iii) no equity cure in consecutive fiscal quarters;
(iv) the aggregate amount of equity cures shall not exceed a specified cap (we recommend a cap equal to the lesser of (x) $75,000,000 and (y) the amount necessary to cure the applicable breach);
(v) the equity cure contribution shall be counted as an increase to Adjusted EBITDA for the applicable fiscal quarter (rather than as a reduction to debt), thereby preserving the Borrower's leverage trajectory;
(vi) the equity cure contribution must be made within 15 business days after delivery of the applicable compliance certificate; and
(vii) the equity cure contribution must be in the form of cash common equity or a qualified equity contribution, and must not be funded with the proceeds of any indebtedness.
The equity cure right is a critical protective mechanism for the Sponsor and the Borrower, providing a safety valve in the event of unexpected operational or financial stress. While the 5.00x covenant level provides substantial headroom and the springing mechanism makes testing unlikely, the equity cure right ensures that a temporary covenant breach (in the unlikely event one occurs) does not result in an acceleration of the Facility.
Negotiation Priority: High. The definitional flexibility underlying the springing financial covenant is one of the most critical negotiation items in this transaction. The covenant level itself (5.00x) and the springing mechanism are acceptable, but the EBITDA definition, cash netting methodology, pro forma adjustment provisions, and equity cure right will significantly impact the Borrower's financial flexibility over the life of the Facility and must be negotiated carefully.
B.2 EBITDA Add-Backs — Definition of "Adjusted EBITDA" / "Consolidated EBITDA"
The Term Sheet references "Adjusted EBITDA" in connection with the springing financial covenant, the excess cash flow sweep, the incremental facility provisions, and various other calculations, but does not provide a detailed definition. This is not unusual for a term sheet, as the EBITDA definition is one of the most complex and heavily negotiated provisions in a credit agreement and is typically addressed in the definitive documentation. Nevertheless, it is important to establish the key parameters at the term sheet stage to avoid renegotiation of issues that the parties may assume have been resolved.
Assessment. The EBITDA definition is, in our experience, among the two or three most heavily negotiated provisions in any leveraged credit agreement (alongside the incremental facility provisions and the restricted payments covenant). The definition directly impacts virtually every material calculation in the credit agreement, including leverage ratios, coverage ratios, basket sizes, ECF sweep obligations, and incremental facility capacity. Nexford's LTM Adjusted EBITDA of $385,000,000 includes $28,000,000 in add-backs over the $357,000,000 reported EBITDA, representing an add-back rate of approximately 7.8% — which is moderate by current market standards and should not be controversial.
Borrower Position. The Borrower should ensure that the following categories of add-backs are explicitly permitted under the definition of "Adjusted EBITDA" (or "Consolidated EBITDA") in the credit agreement:
(a) Acquisition-Related Costs. All fees, costs, and expenses incurred in connection with acquisitions, investments, dispositions, and recapitalizations, including legal fees, advisory fees, accounting fees, due diligence costs, financing fees, and integration costs. The Borrower should push for these add-backs to be uncapped, or, if a cap is required by the arranger, for the cap to be set at a high threshold (e.g., 25% of Adjusted EBITDA or a specific dollar cap of $75,000,000 per fiscal year).
(b) Non-Recurring Restructuring and Integration Costs. Costs and expenses associated with restructuring activities, facility closures, workforce reductions, business optimization initiatives, and post-acquisition integration. The Borrower should push for a cap of 15% to 20% of Adjusted EBITDA (calculated after giving effect to all add-backs), or a specific dollar cap of $60,000,000 to $75,000,000. We note that Nexford's current restructuring add-backs ($8,500,000 for the Rockford consolidation) represent only 2.2% of Adjusted EBITDA, well below any reasonable cap. However, a higher cap provides important forward-looking flexibility for future operational changes.
(c) Sponsor Management Fees and Transaction Advisory Fees. All fees, charges, and expenses paid or payable to Granite Peak under the Management Services Agreement, including annual management fees, transaction-related advisory fees, and reimbursement of out-of-pocket expenses. These add-backs are standard in sponsor-backed credit agreements.
(d) Cost Savings, Operating Improvements, and Synergies. Projected cost savings, operating improvements, and synergies related to acquisitions, dispositions, restructurings, and other identified actions. These add-backs should be permitted if they are "reasonably identifiable and factually supportable" and "expected to be realized within" a specified implementation period. The current market standard for the implementation period ranges from 18 to 24 months; the Borrower should push for a 24-month realization period, which provides additional flexibility for larger or more complex operational changes. It is important to note that these add-backs are forward-looking projections and must be "given effect as though fully realized on the first day of the applicable measurement period," which can have a significant impact on the calculated EBITDA and, consequently, on all leverage and capacity calculations.
(e) Run-Rate Adjustments for Acquisitions and Dispositions. Pro forma adjustments to reflect the full run-rate impact of acquisitions and dispositions consummated during the trailing twelve-month measurement period, calculated as though the acquisition or disposition had occurred on the first day of such period.
(f) Stock-Based Compensation Expense. Non-cash charges related to equity-based compensation, including stock options, restricted stock units, and profits interests granted to management and employees.
(g) Extraordinary, Unusual, or Non-Recurring Charges and Losses. All non-cash charges, losses, write-downs, and write-offs that are extraordinary, unusual, or non-recurring in nature, including asset impairments, goodwill write-downs, and mark-to-market losses on hedging arrangements.
(h) Other Standard Add-Backs. Additional customary add-backs including (without limitation): (i) non-cash purchase accounting adjustments, (ii) losses on dispositions of assets outside the ordinary course, (iii) insurance deductibles and self-insured losses to the extent covered by insurance (with a lookback period for reimbursement), (iv) currency translation losses, (v) effects of discontinued operations, and (vi) charges and expenses related to this transaction.
Overall Add-Back Cap. The Borrower should resist any aggregate cap on EBITDA add-backs. If an aggregate cap is required by the arranger, the Borrower should push for the cap to be set at no less than 25% of total Adjusted EBITDA (calculated after giving effect to all add-backs). A cap below 20% would be unduly restrictive for a diversified industrials platform that has completed four acquisitions since 2021 and is expected to continue pursuing bolt-on acquisition opportunities. We note that the current add-back rate of approximately 7.8% would comfortably fit within a 25% cap, and even a significant increase in acquisition activity would likely remain within this threshold.
Negotiation Priority: High. The EBITDA definition is a foundational provision that impacts virtually every material covenant and calculation in the credit agreement. It is imperative that the Borrower secure maximum flexibility in the add-back categories and resist any unduly restrictive caps.
C. Structural and Protective Provisions
C.1 Most Favored Nation (MFN) Protection
The Term Sheet includes a most favored nation ("MFN") clause applicable to any incremental term loans incurred within the first twelve months following the closing date. Under the MFN provision, if any incremental term loan is issued at an effective interest rate spread that is more than 50 basis points above the applicable spread on the initial Term Loan B, the spread on the initial Term Loan B will be automatically increased to bring it to within 50 basis points of the incremental facility's spread. For example, if the initial Term Loan B is priced at SOFR + 400 basis points and an incremental term loan is subsequently priced at SOFR + 475 basis points (within the 50 bps threshold), no adjustment would be triggered; however, if the incremental term loan were priced at SOFR + 475 basis points or higher (i.e., more than 50 bps above the initial spread), the initial Term Loan B spread would be increased accordingly.
Assessment. MFN protection is a standard feature of institutional TLB term sheets, designed to protect initial syndicate lenders from the dilutive effect of subsequent higher-priced incremental facilities. The 50 basis point threshold is the current market standard, with the typical range falling between 25 and 75 basis points. The twelve-month sunset period — after which the MFN protection expires and the Borrower may issue incremental facilities at any spread without triggering an adjustment — is also within market, with the typical range being six to eighteen months. The MFN provision, while protective of lenders, directly constrains the Borrower's future financing flexibility, and the carve-outs and exceptions are therefore a critical negotiation item.
Borrower Position. We recommend the following negotiation positions:
(a) Accept the 50 Basis Point Threshold. The 50 bps threshold is within market and does not warrant expenditure of significant negotiation capital. The Borrower should, however, resist any attempt by the arranger to narrow the threshold to 25 basis points, which would effectively require the Borrower to match the initial TLB spread on virtually any incremental facility.
(b) Confirm 12-Month Sunset Period. The Borrower should confirm that the MFN sunset period is twelve months measured from the closing date (March 28, 2025), not from the first funding date or any other reference date. The Borrower should resist any attempt to extend the sunset period beyond twelve months.
(c) Negotiate Carve-Outs. The Borrower should negotiate the following carve-outs from the MFN provision, each of which is supported by market precedent:
(i) Acquisition MFN Carve-Out. Incremental term loans the proceeds of which are used to finance a permitted acquisition (or a series of related acquisitions) should be exempt from the MFN provision. The rationale for this carve-out is that acquisition-related debt often requires a higher spread to attract lenders on a compressed timeline, and the Borrower should not be penalized through an MFN step-up for the incremental cost of acquisition financing.
(ii) Revolving Commitments. Incremental revolving commitments should be exempt from the MFN provision. Revolving facilities serve a fundamentally different function than term loans (providing liquidity and working capital support rather than permanent funding), and the pricing dynamics are distinct.
(iii) Different Benchmark or Fixed Rate. Incremental term loans that are priced on a different benchmark (e.g., a fixed-rate term loan or a EURIBOR-based facility) should be excluded from the MFN calculation, as the comparison of effective yields across different rate benchmarks is inherently imprecise and could produce misleading results.
(iv) Longer-Maturity Incremental Facilities. Incremental term loans with a maturity date that is more than two years longer than the initial Term Loan B maturity (i.e., maturing after March 28, 2034) should be exempt from the MFN provision. Longer-maturity debt typically commands a higher spread to compensate lenders for the additional duration risk, and the MFN provision should not conflate maturity-related pricing differentials with general spread movements.
(d) Free-and-Clear Basket — MFN Applicability. The Term Sheet provides for a free-and-clear incremental basket in the amount of the greater of $280,000,000 and 100% of LTM EBITDA (as discussed further in Section III.C.6 below). The Borrower's position is that the MFN provision should not apply to incremental term loans incurred under the free-and-clear basket. The free-and-clear basket is intended to provide the Borrower with flexibility to incur incremental debt without satisfying a leverage-based incurrence test, and subjecting these amounts to MFN protection would undermine the purpose of the basket. We recognize that this is a heavily contested point and that many arrangers and lender groups insist on MFN coverage for free-and-clear amounts; however, the exclusion of free-and-clear amounts from MFN is supported by recent market precedent and should be pursued vigorously.
Negotiation Priority: High. The MFN provision directly affects Nexford's future financing flexibility, particularly in connection with potential acquisition financing. The carve-outs described above are critical to preserving the value of the incremental facility provisions and should be a focal point of the negotiation.
C.2 Change of Control
The Term Sheet includes a change of control provision that constitutes a prepayment event (or, as currently drafted, an event of default potentially leading to acceleration) triggered upon the occurrence of any of the following events:
(i) the acquisition by any person or "group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), other than Granite Peak and its affiliates, of more than 35% of the total voting equity interests of Granite Peak NIH Holdings, LLC ("Holdings");
(ii) Nexford ceasing to be a direct, wholly-owned subsidiary of Holdings (other than as a result of a transaction expressly permitted under the credit agreement); or
(iii) a "change of control" (or similar event, however denominated) under the Senior Unsecured Notes Indenture (the Indenture dated November 8, 2021, between Nexford and Pinnacle Trust Company, N.A., as trustee).
Upon the occurrence of a change of control, the Term Sheet provides that the Administrative Agent (at the direction of the Required Lenders) may declare all outstanding obligations under the Facility immediately due and payable.
Assessment. Change of control provisions are standard in leveraged credit agreements and are designed to protect lenders against the risk that a change in the ownership or control of the Borrower could adversely affect the credit quality of the Facility. The 35% threshold for third-party acquisition of voting equity is within the typical range for sponsor-backed transactions, which generally falls between 30% and 50%, though the lower end of that range is more protective of lenders and less favorable to the Sponsor. The cross-reference to the Unsecured Notes Indenture in clause (iii) creates an important linkage that must be carefully analyzed, as the change of control definition in the Indenture may differ from the credit agreement definition and may be triggered by events that should not independently constitute a credit agreement event of default.
Borrower Position. The change of control provision is a high-priority negotiation item. We recommend the following positions:
(a) Increase the Ownership Threshold to 50%. The Borrower should seek to increase the ownership threshold in clause (i) from 35% to 50% of total voting equity, or at a minimum to 40%. The current 35% threshold creates an unacceptable risk that Granite Peak's ability to bring in additional co-investors, effectuate a partial secondary sale, or pursue a structured liquidity event could inadvertently trigger a change of control. Given that Granite Peak currently holds 100% of the equity in Holdings, a 50% threshold would still require a disposition of more than half of Granite Peak's equity interest before a change of control would be triggered, which is a more appropriate standard for a sponsor-backed transaction where the lenders have underwritten the credit based on Granite Peak's continued ownership and operational oversight.
(b) Broaden the Definition of "Permitted Holders." The definition of "Permitted Holders" (or the equivalent carve-out from the change of control trigger) should be broadly drafted to include:
(i) Granite Peak Capital Partners, LP and all of its affiliated funds, including successor funds, parallel funds, and alternative investment vehicles managed by Granite Peak Capital Management, LLC or any of its affiliates;
(ii) any co-investment vehicles or special purpose entities formed by or at the direction of Granite Peak;
(iii) management equity holders of Nexford and its subsidiaries;
(iv) any person or entity controlled by, or under common control with, any of the foregoing; and
(v) any "group" (within the meaning of Section 13(d)(3) of the Exchange Act) that includes one or more Permitted Holders, so long as the Permitted Holders collectively hold the largest aggregate ownership interest within such group.
(c) IPO Carve-Out. The change of control provision should include a carve-out for initial public offering transactions, such that an IPO of Nexford or Holdings does not trigger a change of control so long as Granite Peak (or the Permitted Holders) continues to hold the largest single block of voting equity, even if Granite Peak's ownership percentage falls below the applicable threshold. This carve-out is important because Granite Peak may pursue an IPO as an exit strategy, and a change of control triggered by an IPO would be highly disruptive and could impair the Borrower's access to the public capital markets.
(d) Unsecured Notes Cross-Reference. The Borrower should carefully review the change of control definition in the Unsecured Notes Indenture to identify any differences between the Indenture definition and the proposed credit agreement definition. If the Indenture change of control is triggered by events that would not independently constitute a change of control under the credit agreement — for example, if the Indenture uses a lower ownership threshold or includes additional triggers not present in the credit agreement — then clause (iii) of the credit agreement change of control definition could create an unintended "hair-trigger" that effectively imports the more restrictive Indenture standard into the credit agreement. The Borrower should push for clause (iii) to be deleted, or, if the arranger insists on its inclusion, to be narrowed so that it applies only to the extent that the Indenture change of control is actually exercised (i.e., only if the noteholders actually put their notes and the Borrower is required to repurchase them, rather than merely upon the occurrence of the triggering event).
(e) Change the Remedy from Acceleration to a Put at 101. The Term Sheet currently provides that, upon a change of control, the Administrative Agent may declare all outstanding obligations immediately due and payable. The Borrower should push for the remedy to be restructured as a "change of control put" — i.e., upon a change of control, the Borrower would be required to offer to prepay the Term Loan B at a price of 101% of the outstanding principal amount (plus accrued and unpaid interest), with each lender having the right to elect whether to accept the offer. Lenders who do not accept the offer would continue to hold their loans on existing terms. This structure is more favorable to the Borrower because it avoids the "cliff effect" of a mandatory acceleration and provides the Borrower with the opportunity to retain a portion of the outstanding facility if not all lenders elect to put their loans. The 101% premium is consistent with the change of control put price in the Unsecured Notes Indenture and creates a harmonized treatment across the capital structure.
Negotiation Priority: High. The change of control provision has significant implications for Granite Peak's exit strategy and the Borrower's capital structure flexibility. We anticipate that the ownership threshold and the remedy structure will be the most heavily contested elements and should be prioritized in the initial negotiation call with W&G.
C.3 Mandatory Prepayments — Excess Cash Flow (ECF) Sweep
The Term Sheet proposes a mandatory prepayment from excess cash flow ("ECF") based on a tiered structure tied to the Borrower's first lien net leverage ratio:
Assessment. The tiered ECF sweep structure is within market for sponsor-backed TLB facilities and provides meaningful step-down incentives for the Borrower as it deleverages. Notably, with the Borrower's pro forma first lien net leverage at closing of approximately 3.38x, Nexford would initially be at or below the 3.50x threshold and would therefore be subject to a 0% ECF sweep. This means that, absent a significant increase in leverage (which could occur as a result of an acquisition or operational underperformance), the ECF sweep would not require any mandatory prepayments in the near term, providing the Borrower with significant cash flow flexibility for organic growth, capital expenditures, and discretionary debt service.
Borrower Position. We recommend the following positions:
(a) Accept the Tiered Structure. The three-tier structure with step-downs at 4.25x and 3.50x is favorable to the Borrower and should be accepted as proposed. The 0% step-down at 3.50x is particularly valuable, as it effectively eliminates the ECF sweep obligation so long as the Borrower maintains its current leverage profile.
(b) Negotiate the ECF Definition. The definition of "Excess Cash Flow" is the key battleground for this provision. The Borrower should ensure that the ECF definition in the credit agreement provides for the following deductions:
(i) Capital expenditures (both maintenance and growth capital expenditures) actually made during the applicable fiscal year, to the extent paid in cash and not financed with the proceeds of indebtedness;
(ii) Voluntary and mandatory debt prepayments made during the applicable fiscal year, with a dollar-for-dollar credit against the ECF obligation (i.e., each dollar of voluntary prepayment reduces the ECF obligation by one dollar);
(iii) The cash purchase price of permitted acquisitions consummated during the applicable fiscal year, to the extent funded with internally generated cash (and not with the proceeds of indebtedness or equity contributions designated for this purpose);
(iv) Restricted payments actually made during the applicable fiscal year under the builder basket, the general annual basket, or any other applicable basket;
(v) Cash restructuring charges and severance payments actually paid during the applicable fiscal year;
(vi) Cash taxes actually paid (or reasonably estimated to be payable) during the applicable fiscal year; and
(vii) A "true-up" mechanism that provides a credit against the current year's ECF obligation for voluntary prepayments made after the end of the applicable fiscal year but before the ECF payment date, and that allows the Borrower to carry forward excess credits to subsequent fiscal years.
(c) ECF Payment Timing. The Term Sheet is silent on the deadline for ECF payments. The Borrower should confirm that the ECF payment is due no earlier than 90 days (and preferably 120 days) after the end of the applicable fiscal year, to allow sufficient time for the preparation and audit of annual financial statements and the calculation of Excess Cash Flow.
(d) De Minimis Threshold. The Borrower should push for a de minimis threshold below which no ECF payment is required. We recommend a threshold of $5,000,000 to $10,000,000 — if the calculated ECF mandatory prepayment amount is below this threshold, no payment would be due. This avoids the administrative burden of processing small mandatory prepayments and is supported by market precedent.
(e) Commencement of ECF Testing. The Borrower should confirm that the ECF sweep applies only to fiscal years commencing after the closing date. Given the anticipated closing date of March 28, 2025, the first ECF test would be for fiscal year 2025 (January 1 to December 31, 2025), with the ECF payment (if any) due in Q1 or Q2 2026. No partial-year ECF calculation should be required for the period prior to closing.
Negotiation Priority: Medium-High. While the tiered structure is favorable and the initial leverage position places Nexford below the first sweep threshold, the ECF definition will be a critical negotiation item in the credit agreement, and the Borrower should establish clear expectations at the term sheet stage regarding the scope of permitted deductions.
C.4 Mandatory Prepayments — Asset Sales and Insurance/Condemnation Proceeds
Asset Sales. The Term Sheet requires mandatory prepayment of 100% of net cash proceeds from asset sales or other dispositions outside the ordinary course of business, subject to a reinvestment right allowing the Borrower to reinvest such proceeds within 365 days of receipt. This reinvestment period is extended to 545 days if the Borrower has entered into a binding commitment to reinvest within the initial 365-day period. An annual de minimis basket of $25,000,000 provides the Borrower with a carve-out for smaller dispositions that are not subject to the mandatory prepayment requirement.
Insurance/Condemnation Proceeds. The Term Sheet requires mandatory prepayment of 100% of net cash proceeds from insurance claims or condemnation awards (other than liability insurance proceeds), subject to the same reinvestment rights described above, with a separate de minimis threshold of $10,000,000.
Assessment. The reinvestment periods (365 days with a 545-day extension for binding commitments) are within market and provide the Borrower with meaningful flexibility to redeploy asset sale and casualty proceeds into productive assets. The de minimis baskets are within market range, though the $25,000,000 annual asset sale basket is at the lower end of the range for a company of Nexford's size and operational footprint.
Borrower Position. We recommend the following positions:
(a) Reinvestment Period. Accept the 365/545-day reinvestment period structure as proposed. This is within market and provides adequate time for the Borrower to identify and consummate reinvestment opportunities.
(b) Increase the Asset Sale De Minimis Basket. The Borrower should seek to increase the annual asset sale de minimis basket from $25,000,000 to $35,000,000 to $50,000,000. Given Nexford's approximately $2.1 billion in annual revenue and its active portfolio management strategy (which has included four acquisitions and related asset rationalization since 2021), the Borrower should have the flexibility to dispose of underperforming or non-core assets without triggering a mandatory prepayment obligation. A $25,000,000 basket may be insufficient for routine dispositions such as the sale of redundant equipment, surplus real property, or non-core product lines.
(c) "Net Cash Proceeds" Definition. The Borrower should confirm that "net cash proceeds" is calculated after deducting:
(i) reasonable and customary transaction costs, commissions, and brokerage fees actually incurred in connection with the disposition;
(ii) taxes (including income taxes, transfer taxes, and withholding taxes) paid or reasonably estimated to be payable as a result of the disposition;
(iii) amounts required to repay any indebtedness secured by a lien on the disposed asset that is permitted under the credit agreement and that is required to be repaid in connection with the disposition; and
(iv) reasonable reserves for indemnification obligations, purchase price adjustments, and escrow arrangements established in connection with the disposition (with a release mechanism providing that amounts not actually paid or applied within a specified period, typically 180 days, are treated as net cash proceeds).
(d) Intra-Group Dispositions. The Borrower should confirm that asset sales, dispositions, and transfers between Loan Parties (i.e., between the Borrower and any Guarantor, or between Guarantors) are excluded from the mandatory prepayment requirement, as such transactions do not result in a reduction in the collateral available to the Secured Parties.