PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
To: Claudia Merritt, Partner, Banking & Finance
From: Marcus Leung, Lead Associate, Banking & Finance; Sophie Tremblay, Associate, Banking & Finance
Date: March 15, 2023
Re: Cascade Retail Holdings Inc. — $300,000,000 Asset-Based Revolving Credit Facility — Key Negotiation Issues
Matter No.: 1038-00002
Client: Cascade Retail Holdings Inc. ("CRH" or "Cascade")
I. Executive Summary and Background
Calderwood & Harkness LLP represents Cascade Retail Holdings Inc., a Delaware corporation whose common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol "CRHI," and its wholly-owned subsidiary co-borrower, Cascade Retail Operating Company LLC ("CROC"), a Delaware limited liability company, as borrower's counsel in connection with a proposed $300,000,000 senior secured asset-based revolving credit facility (the "Facility"). CROC serves as the primary operating entity through which CRH conducts its brick-and-mortar and wholesale operations, and the co-borrower structure reflects the integrated nature of the Cascade enterprise.
Crescent Harbor Bank, N.A. ("CHB") will serve in the capacities of Administrative Agent, Collateral Agent, Sole Lead Arranger, and Sole Bookrunner for the Facility. In addition to CHB, the proposed lending syndicate includes two additional financial institutions: Northgate Capital Bank ("NCB") and Bridgevale Financial Corporation ("Bridgevale"). The commitment allocation among the syndicate members is as follows:
• Crescent Harbor Bank, N.A.: $135,000,000 (45.0% of total commitments)
• Northgate Capital Bank: $90,000,000 (30.0% of total commitments)
• Bridgevale Financial Corporation: $75,000,000 (25.0% of total commitments)
• Total Aggregate Commitments: $300,000,000
The Facility is intended to refinance CRH's existing $175,000,000 revolving asset-based lending facility with Harborview Lending Group, LLC ("Harborview"), which was originally entered into in June 2019 and most recently amended in March 2021. Based on the most recent loan statement provided by Harborview, the outstanding principal balance under the existing facility is estimated at approximately $112,450,000 at the anticipated payoff date. In addition to the refinancing, the Facility will provide incremental working capital capacity and general corporate liquidity to support Cascade's multi-channel retail operations and planned growth initiatives.
Lenders' counsel for the transaction is Whitfield, Greer & Holloway LLP ("WGH"), with Bernard Ashford serving as the lead partner on the matter. Mr. Ashford circulated notice that the initial draft credit agreement would be distributed on or about March 20, 2023. As of the date of this memorandum, the full draft has not yet been received. Accordingly, the analysis set forth herein is based upon: (i) the executed term sheet and mandate letter dated March 6, 2023, (ii) preliminary draft provisions that WGH shared informally with our team in advance of the full draft, and (iii) our experience with CHB's standard ABL documentation and typical positions taken by WGH in comparable transactions.
The CRH Board of Directors authorized the entry into the Facility and the execution of all related documentation at a meeting of the Board held on February 27, 2023. We have reviewed the board resolutions and are satisfied that they provide adequate corporate authority for the contemplated transactions, including the grant of security interests, guarantees, and the refinancing of the Harborview facility.
Ridgeline Asset Advisors LLC, a nationally recognized inventory appraisal and field examination firm engaged by CHB, commenced its field examination and inventory appraisal of the Cascade enterprise on March 13, 2023. The engagement covers all inventory locations (including the three CFS distribution centers and selected outlet store locations) and the accounts receivable portfolio of each Loan Party. Ridgeline's report is expected to be delivered by March 31, 2023. The borrowing base figures used throughout this memorandum are estimates based on preliminary field exam data and CRH's internal records and are subject to adjustment upon delivery of the final Ridgeline report.
The proposed guarantor group for the Facility will include the following domestic subsidiaries of CRH, each of which is a wholly-owned, direct or indirect subsidiary:
• Cascade Digital Commerce Inc. ("CDC"): A Delaware corporation that operates CRH's e-commerce platform, including its direct-to-consumer website and marketplace channel integrations (Amazon, Dunmore Services Inc., and similar platforms). CDC generated approximately $94,000,000 in net revenue for fiscal year 2022.
• Cascade Outlet Stores LLC ("COS"): A Washington limited liability company that operates 64 outlet retail locations across 17 states, with concentration in the Pacific Northwest, Mountain West, and Southeast regions. COS is CRH's largest subsidiary by revenue, generating approximately $278,000,000 in net revenue for fiscal year 2022.
• Cascade Fulfillment Services Inc. ("CFS"): A Delaware corporation that operates three distribution and fulfillment centers located in Kent, Washington; Reno, Nevada; and Columbus, Ohio. CFS provides logistics and fulfillment services for both the outlet store channel and the e-commerce channel and holds a substantial portion of Cascade's inventory at any given time.
Cascade Retail Canada ULC ("CRC"), an unlimited liability company organized under the laws of British Columbia, Canada, is an excluded foreign subsidiary and will not be a Loan Party or Guarantor. Consistent with standard practice for U.S. asset-based lending facilities, only 65% of the voting equity interests in CRC will be pledged as collateral, and CRC's assets will not be included in the borrowing base.
This memorandum identifies and analyzes the key negotiation issues that we anticipate arising from WGH's initial credit agreement draft. For each issue, we set forth the proposed term as indicated in the mandate letter or preliminary draft provisions, the likely lender position, our recommended borrower position, and a comparison (where relevant) to the corresponding term in the existing Harborview facility. Our analysis is organized to facilitate a prioritized discussion of negotiation strategy with the Cascade management team.
II. Borrowing Base Mechanics
The borrowing base is the central feature of any asset-based lending facility and determines the amount of credit actually available to the Borrower at any given time. The structure and calibration of the borrowing base formula, eligibility criteria, advance rates, and reserves will have a direct and ongoing impact on Cascade's liquidity throughout the five-year term of the Facility. Set forth below is a detailed discussion of the proposed borrowing base mechanics and the negotiation issues we have identified.
A. Overview of Proposed Borrowing Base Formula
The proposed borrowing base formula, as reflected in the March 6, 2023 term sheet, contemplates a two-component structure consisting of eligible accounts receivable and eligible inventory:
Gross Borrowing Base = (Eligible Receivables × AR Advance Rate) + (Eligible Inventory NOLV × Inventory Advance Rate)
Net Borrowing Base = Gross Borrowing Base − Availability Reserves
Available Commitment = the lesser of (x) Aggregate Commitments ($300,000,000) and (y) the Net Borrowing Base
Based on preliminary field examination data provided by CRH's treasury department and reviewed by our team, the estimated borrowing base components at closing are as follows:
• Estimated Eligible Receivables: approximately $187,000,000
• Estimated Eligible Inventory NOLV: approximately $294,000,000
These preliminary figures are subject to material revision upon completion of the Ridgeline field examination and appraisal. In particular, the inventory NOLV will be determined based on Ridgeline's independent appraisal methodology and may differ from CRH's internal estimates. We note that the timing of the field examination (mid-March) coincides with a period when inventory levels are typically at or near their seasonal trough for a multi-channel retail operation of this nature, which may result in a conservative initial NOLV determination.
B. Accounts Receivable Advance Rate (85%)
The proposed advance rate of 85% of Eligible Receivables is consistent with market-standard practice for investment-grade-adjacent retail borrowers and is the rate specified in the mandate letter. Application of the 85% advance rate to the estimated eligible receivables yields the following:
85% × $187,000,000 = $158,950,000
This advance rate is consistent with the rate under the existing Harborview facility and reflects the relatively high quality of CRH's receivables portfolio, which is diversified across wholesale, marketplace, and direct-to-consumer channels.
Negotiation Issue — Agent Discretion to Adjust Advance Rate. We anticipate that WGH's initial draft will include broad discretionary authority for the Administrative Agent to reduce the accounts receivable advance rate or to impose additional reserves against the receivables component of the borrowing base. This type of provision is standard in ABL facilities but is subject to significant negotiation. Our recommended position is as follows:
(a) Any adjustment to the advance rate should be required to satisfy a "reasonable credit judgment exercised in good faith" standard. This formulation, while affording the Agent appropriate flexibility, provides the Borrower with a substantive standard against which to evaluate the Agent's actions and, if necessary, to challenge adjustments that are arbitrary or pretextual.
(b) The Agent should be required to provide the Borrower with not less than five (5) business days' prior written notice before implementing any reduction to the advance rate or imposition of any new reserve against the receivables component. This notice period allows the Borrower an opportunity to present information or arguments to the Agent before the adjustment takes effect and to take steps to mitigate the impact on Availability.
(c) Any adjustment should be accompanied by a written explanation setting forth the factual basis and credit rationale for the change.
Eligibility Criteria. The definition of "Eligible Receivables" is critical and will be heavily negotiated. We need to ensure that the eligibility criteria do not inadvertently exclude receivables that constitute a material portion of Cascade's revenue streams. In particular:
(a) Wholesale Customer Receivables. CRH and CROC maintain wholesale relationships with a number of major retail partners. Receivables from these customers should be included as Eligible Receivables, subject to customary aging criteria (typically, exclusion of receivables outstanding more than 90 days past the original invoice date, or 60 days past the due date).
(b) Marketplace Platform Receivables. CDC generates a significant portion of its revenue through marketplace platforms, including Amazon, and through its integrated Dunmore Services Inc. channels. Receivables arising from these marketplace platforms involve intermediary payment processing arrangements that may cause them to fall outside traditional eligibility definitions. We should ensure that the definition of Eligible Receivables expressly includes receivables arising from marketplace platform sales, provided that the funds are contractually due to a Loan Party and are subject to the Agent's security interest.
(c) Concentration Limits. We anticipate that WGH's draft will include concentration limits that render ineligible any receivables from a single account debtor (or group of affiliated account debtors) exceeding a specified percentage of total eligible receivables. This is standard, but the threshold matters. We should negotiate for a concentration limit of not less than 15% for investment-grade-rated account debtors and 10% for other account debtors, with the ability to request specific higher limits for named account debtors upon Agent consent (not to be unreasonably withheld).
Dilution Reserve. We anticipate that WGH's draft will include a dilution reserve calculated on the basis of CRH's historical dilution rates. Based on our review of CRH's receivables data for fiscal years 2020 through 2022, historical dilution (including returns, allowances, credits, discounts, and write-offs) has ranged from approximately 3.5% to 4.2% of gross receivables, with the higher end of the range correlating to the Q4/Q1 post-holiday return season.
We should resist any dilution reserve formula that creates "double-counting" with the general Availability Reserves bucket described in Section II.D below. The dilution reserve should be clearly defined as a component of the borrowing base formula (reducing the receivables eligible for advance) rather than as a separate overlay reserve that further reduces the Net Borrowing Base after the general Availability Reserves have been applied. Alternatively, if the dilution reserve is structured as a reserve within the Availability Reserves bucket, the borrowing base formula should include a clear anti-duplication provision ensuring that dilution is not also accounted for through the ineligibility criteria (e.g., by excluding aged or diluted receivables and imposing a dilution reserve on the remaining eligible pool).
C. Inventory Advance Rate (65% of NOLV)
The proposed advance rate for inventory is 65% of the net orderly liquidation value ("NOLV") as determined by the appraisal to be delivered by Ridgeline Asset Advisors LLC. The Ridgeline appraisal report is expected by March 31, 2023, and will serve as the baseline for the initial borrowing base calculation at closing. Application of the proposed advance rate to the estimated eligible inventory NOLV yields:
65% × $294,000,000 = $191,100,000
Combining the receivables and inventory components, the estimated Gross Borrowing Base at closing is:
$158,950,000 (AR component) + $191,100,000 (Inventory component) = $350,050,000
Negotiation Issue — NOLV vs. Cost. The use of NOLV as the inventory valuation methodology is standard for ABL facilities and was specified in the CHB term sheet. NOLV represents the estimated gross recovery, net of liquidation costs, that would be achieved in an orderly liquidation conducted over a reasonable period (typically 60 to 120 days). We do not propose to challenge the NOLV methodology; however, we should address the following concern regarding seasonal fluctuations.
CRH is a multi-channel retailer operating in the apparel, home goods, and outdoor/lifestyle product categories. Inventory values in these categories are subject to significant seasonal fluctuation. In particular, inventory builds substantially during Q3 and into Q4 as Cascade prepares for the holiday selling season, with inventory levels typically peaking in October and November. Conversely, inventory levels are at or near their annual trough during Q1 and early Q2, following the holiday sell-through and post-holiday clearance period.
Because the Ridgeline appraisal is being conducted in mid-March — near the seasonal trough — the resulting NOLV determination may understate the inventory values that would be observed during Cascade's peak operating and borrowing periods. We should seek a commitment from the Agent that the NOLV will be reassessed on a rolling basis in connection with each subsequent annual appraisal, and that the initial Ridgeline appraisal will not be treated as a permanent ceiling. Ideally, we would negotiate for the use of a rolling or seasonally adjusted NOLV methodology that accounts for predictable seasonal inventory build patterns. At a minimum, we should ensure that the credit agreement permits the Borrower to request a supplemental "desk appraisal" or "desktop update" during peak inventory periods to capture the higher seasonal NOLV.
Comparison to Harborview Facility. The existing Harborview facility provided for an inventory advance rate of 60% of NOLV. The proposed 65% advance rate represents a 500 basis point improvement that was specifically negotiated and agreed upon in the mandate letter dated March 6, 2023. This improvement was one of the key economic terms that made the CHB proposal attractive to Cascade and was cited in the materials presented to the Board of Directors in connection with the February 27, 2023 authorization. We should ensure that this rate is firmly locked in the credit agreement and is not subject to reduction through Agent discretion or reserve mechanics that would effectively erode the agreed-upon advance rate.
D. Availability Reserves ($23,650,000)
The proposed Availability Reserves at closing are estimated at $23,650,000, comprised of the following components:
(a) Rent Reserves: Estimated at $8,700,000, representing approximately three months' rent for leased retail and distribution center locations where landlord waivers have not yet been obtained as of the date of this memorandum. As landlord waivers or access agreements are obtained during the post-closing period, the corresponding rent reserves will be released. COS operates 64 outlet store locations, and CFS operates three distribution centers, so the landlord waiver process is extensive and will require sustained effort during the post-closing period.
(b) Gift Card / Loyalty Program Reserves: Estimated at $4,200,000, representing the estimated outstanding liability under CRH's gift card program and "Cascade Rewards" loyalty program. These reserves reflect the potential claim on inventory and cash that would arise upon redemption of outstanding gift cards and accrued loyalty points.
(c) Dilution Reserves: Estimated at $5,750,000, based on CRH's historical dilution rates applied to the eligible receivables pool. As discussed in Section II.B above, we should ensure that this reserve does not create double-counting with dilution adjustments already embedded in the eligibility criteria.
(d) Customs / Duty Reserves on In-Transit Inventory: Estimated at $3,100,000, representing estimated customs duties and import taxes payable on inventory in transit from overseas suppliers that has been included in the borrowing base.
(e) Other Customary Reserves: Estimated at $1,900,000, encompassing workers' compensation and employment-related reserves, environmental reserves, and other customary items.
Negotiation Issue. The most significant negotiation issue relating to Availability Reserves is the scope of the Administrative Agent's discretion to establish, increase, modify, or reclassify reserves during the life of the Facility. This is a perennial area of tension in ABL negotiations, and WGH's initial draft will almost certainly include broad Agent discretion to impose new reserves or increase existing reserves at any time.
Our recommended positions on Availability Reserves are as follows:
(a) Post-Closing Standard. New reserves or increases to existing reserves should be required to be based on events, conditions, or circumstances arising after the closing date that were not known to the Agent as of the closing date. Reserves should not be retroactively increased to address conditions that were fully disclosed to the Agent during the due diligence process and implicitly accepted by the Agent when it agreed to the borrowing base formula.
(b) Standard of Discretion. Any exercise of Agent discretion with respect to reserves should be required to satisfy a "commercially reasonable" or "exercised in good faith" standard. We prefer the formulation "exercised in good faith and in a commercially reasonable manner consistent with the Agent's practices for similarly situated borrowers," which provides a substantive benchmark for the Agent's conduct.
(c) Notice Requirement. The Agent should be required to provide the Borrower with not less than ten (10) business days' prior written notice before implementing any new reserve or increasing any existing reserve, together with a written explanation of the basis for the reserve action. An exception may be appropriate for genuinely exigent circumstances (e.g., the discovery of fraud or material misrepresentation in the borrowing base certificate), in which case the Agent may implement the reserve immediately with notice to be provided within two (2) business days thereafter.
(d) Cap on Reserves / No-Duplication Provision. We should seek either (i) a cap on aggregate Availability Reserves (expressed as a percentage of the Gross Borrowing Base or as a fixed dollar amount), or (ii) at a minimum, a "no duplication" provision ensuring that reserves do not overlap with ineligibility criteria that already address the same risk. For example, if aged receivables are excluded from Eligible Receivables through the eligibility criteria, a separate "credit quality reserve" against the remaining eligible receivables should not be imposed to address the same aging concern.
Applying the proposed Availability Reserves to the estimated Gross Borrowing Base, the estimated Net Borrowing Base at closing is:
$350,050,000 − $23,650,000 = $326,400,000
The effective Available Commitment at closing would be the lesser of (x) the Aggregate Commitments of $300,000,000 and (y) the Net Borrowing Base of $326,400,000, yielding an Available Commitment of $300,000,000 — meaning the full facility amount is expected to be available at closing. The excess availability of $26,400,000 provides a cushion against modest declines in the borrowing base without constraining access to the full committed amount.
E. Inventory Eligibility Criteria — In-Transit and E-Commerce Goods
This subsection addresses what we regard as one of the most critical negotiation issues for Cascade, given the nature of its omnichannel business model.
Cascade's Operational Reality. CRH operates a significant omnichannel retail business spanning outlet stores, e-commerce direct-to-consumer, marketplace sales, and wholesale channels. As a result, a substantial volume of inventory is in a state of transit or temporary storage at any given time:
(i) In-Transit Inventory from Overseas Suppliers. CRH sources a significant portion of its apparel and home goods inventory from manufacturers and suppliers located in Asia, primarily in Vietnam, China, Bangladesh, and India. Goods are shipped by ocean freight and are typically in transit for 15 to 45 days depending on the port of origin and destination. At any given time, an estimated $35,000,000 to $55,000,000 of CRH inventory (at cost) is in transit on the water or at ports of entry. Title to these goods typically passes to CRH upon shipment (FOB Origin/FCA terms), meaning that CRH owns the goods while they are in transit and bears the risk of loss.
(ii) Inventory at Third-Party Fulfillment Centers and In Inter-Facility Transit. Although the majority of Cascade's inventory is held at the three CFS distribution centers (Kent, WA; Reno, NV; and Columbus, OH), a portion of inventory is held at third-party logistics ("3PL") providers that supplement CFS's capacity during peak seasons. Additionally, inventory is routinely in transit between CFS distribution centers as it is reallocated to meet regional demand and as e-commerce orders are routed to the nearest available fulfillment point.
(iii) Inventory Allocated to Pending E-Commerce Orders. In the normal course of CDC's e-commerce operations, inventory is reserved or "allocated" to pending customer orders between the time an order is placed and the time the goods are physically shipped. During peak periods, the volume of allocated-but-not-yet-shipped inventory can be significant. This inventory is physically present in a CFS distribution center but has been earmarked for a specific customer order.
Expected WGH Position. Based on our experience with WGH's standard ABL documentation and CHB's typical credit policies, we anticipate that the initial draft will define "Eligible Inventory" in a manner that excludes: (a) all inventory in transit (regardless of title transfer or insurance coverage), (b) inventory held at any location not owned or leased by a Loan Party, and (c) potentially, inventory that has been allocated to a specific customer order but not yet shipped. If these exclusions are adopted without modification, they could reduce Cascade's effective borrowing base by as much as $30,000,000 to $50,000,000, depending on the time of year and the state of the supply chain.
Our Recommended Position. We should negotiate for the inclusion of the following categories of inventory in the definition of "Eligible Inventory," subject to appropriate safeguards and limitations:
(a) In-Transit Inventory (Subject to Cap). In-transit inventory should be eligible where: (i) title to the goods has passed to CRH or CROC under the applicable purchase order or supply agreement, (ii) the goods are covered by marine cargo insurance or transit insurance with the Administrative Agent (or its designee) named as loss payee, (iii) the Agent has been provided with copies of the relevant bills of lading, commercial invoices, and insurance certificates, and (iv) the aggregate amount of in-transit inventory included in the borrowing base does not exceed 15% of total eligible inventory (approximately $44,000,000 based on current estimates). The 15% cap provides the Lenders with meaningful downside protection while recognizing the commercial reality of Cascade's sourcing operations.
(b) Inventory at CFS Distribution Centers (Fully Eligible). Inventory located at the three CFS distribution centers in Kent, WA; Reno, NV; and Columbus, OH should be fully eligible without limitation. These are controlled facilities owned or leased and operated by CFS, a Guarantor and Loan Party. The Agent's security interest in inventory at these locations will be perfected through UCC filings, and the Agent will have access to the premises through collateral access agreements with the applicable landlords (or through CFS's ownership of the facilities, as applicable). There is no credit rationale for treating inventory at these locations differently from inventory at CRH-owned or CROC-leased premises.
(c) Goods at Third-Party Logistics Providers (Subject to Bailee/Collateral Access Agreements). Inventory held at third-party logistics providers should be eligible to the extent that the applicable 3PL provider has executed a bailee agreement or collateral access agreement in form and substance satisfactory to the Agent, acknowledging the Agent's lien on the inventory, waiving any landlord's or warehouseman's lien, and granting the Agent access to the premises for inspection and disposition purposes.
(d) Allocated E-Commerce Inventory. Inventory that has been allocated to pending e-commerce orders but remains physically located at a CFS distribution center should continue to be treated as Eligible Inventory until such time as the goods are shipped and title passes to the customer (at which point the inventory converts to a receivable). Allocation to a pending order does not change the physical location or legal ownership of the goods and should not affect eligibility.
Existing Facility Comparison. The existing Harborview facility excluded all in-transit inventory from the borrowing base. The inclusion of in-transit inventory (subject to appropriate safeguards) was specifically identified in the CHB mandate letter as a negotiated improvement over the Harborview facility and was a material factor in Cascade's decision to proceed with the CHB-led refinancing. We should vigorously defend this point in negotiations with WGH and resist any attempt to walk back this commitment.
III. Springing Fixed Charge Coverage Ratio Covenant
A. Proposed Structure
The Facility contemplates a springing financial covenant structure, which is standard for ABL facilities. Unlike a term loan or cash flow revolver, where financial covenants are tested at all times, the FCCR covenant under the proposed Facility is tested only when the Borrower's Availability falls below a specified threshold (the "FCCR Trigger Threshold"). This structure recognizes that in an ABL facility, the collateral value (as reflected in the borrowing base) serves as the primary credit protection, and financial covenant testing is a backstop mechanism that is activated only when the collateral cushion narrows.
The key parameters of the proposed springing FCCR covenant are:
• Minimum FCCR: 1.10:1.00, tested on a trailing four-quarter (twelve-month) basis
• FCCR Trigger Threshold: The greater of (a) 10% of the lesser of (x) the Aggregate Commitments ($300,000,000) and (y) the Borrowing Base, and (b) $25,000,000
At closing, the FCCR Trigger Threshold would be calculated as follows:
10% × lesser of ($300,000,000, $326,400,000) = 10% × $300,000,000 = $30,000,000
$30,000,000 > $25,000,000, so the FCCR Trigger Threshold = $30,000,000
The threshold is dynamic and recalculates as the Borrowing Base fluctuates. If the Borrowing Base were to decline below $250,000,000 (such that 10% of the lesser of Commitments and the Borrowing Base fell below $25,000,000), the dollar floor of $25,000,000 would become operative, providing a minimum threshold regardless of Borrowing Base movements.
B. FCCR Definition
The Fixed Charge Coverage Ratio, as outlined in the term sheet, is defined as:
FCCR = (Consolidated EBITDA − Unfinanced Capital Expenditures − Cash Taxes Paid) ÷ Fixed Charges
Where "Fixed Charges" is defined as the sum of:
(a) Scheduled payments of principal on Funded Debt (excluding voluntary prepayments and the revolving facility itself); (b) Cash Interest Expense (including the net cash cost of any interest rate hedging arrangements); (c) Restricted Payments actually made in cash during the measurement period; and (d) Capital Lease Obligations (scheduled payments of principal and interest under finance leases).
Based on CRH's audited financial statements for fiscal year 2022, as prepared by Kessler & Hodge LLP (lead audit partner Richard Gundersen), the FCCR for the trailing twelve-month period ended December 31, 2022 was as follows:
• Consolidated EBITDA: $148,500,000
• Unfinanced Capital Expenditures: $26,800,000
• Cash Taxes Paid: $18,400,000
• Numerator (EBITDA − Unfinanced CapEx − Cash Taxes): $103,300,000
• Fixed Charges: $87,200,000
• FCCR: $148,500,000 ÷ $87,200,000 = 1.70:1.00
The FY2022 FCCR of 1.70:1.00 is substantially above the proposed minimum of 1.10:1.00, providing approximately 55% headroom above the covenant threshold. This level of cushion should provide comfort to the Lenders that the FCCR covenant, if triggered, would not immediately result in a default under normal operating conditions. It also provides Cascade with significant room to absorb earnings declines or increases in fixed charges before a covenant violation would occur.
We note that the FCCR numerator and denominator as described above are subject to the precise definitions that will be set forth in the credit agreement. The term sheet provides only a summary-level description, and the detailed definitions of "Consolidated EBITDA," "Unfinanced Capital Expenditures," "Cash Taxes Paid," and "Fixed Charges" will require careful review and negotiation in the credit agreement markup.
C. Key Negotiation Points
EBITDA Add-Backs. The definition of "Consolidated EBITDA" is one of the most heavily negotiated provisions in any credit agreement. We anticipate that WGH's initial draft will propose a conservative EBITDA definition with limited add-backs. Our recommended positions on EBITDA add-backs are as follows:
(a) Non-Cash Charges. EBITDA should include add-backs for all non-cash charges, including stock-based compensation expense (which is significant for CRH as a publicly traded company with equity incentive plans for management and employees), non-cash impairment charges, amortization of intangible assets, and unrealized losses on hedging instruments. This is broadly market-standard and should not face significant resistance.
(b) Restructuring and Integration Costs. EBITDA should include add-backs for restructuring, severance, relocation, and integration costs, capped at $10,000,000 per fiscal year. Cascade is currently evaluating a potential outlet store rationalization program and technology platform consolidation initiative, either of which could give rise to one-time restructuring charges. The $10,000,000 annual cap is within the range of what we have seen in comparable ABL facilities for borrowers of Cascade's size and complexity.
(c) Transaction Costs. All one-time fees, costs, and expenses incurred in connection with the closing of the Facility (including legal fees, appraisal and field examination costs, and lender fees) should be added back to EBITDA. This is a universally accepted add-back.
(d) Pro Forma Cost Savings. EBITDA should include add-backs for pro forma cost savings, operating expense reductions, and synergies projected to result from actions taken, committed to, or expected to be taken during the applicable measurement period, provided that: (i) such cost savings are reasonably identifiable and factually supportable, (ii) the actions giving rise to such cost savings are implemented or expected to be implemented within twelve (12) months following the end of the applicable measurement period, and (iii) the aggregate amount of pro forma cost savings added back in any measurement period does not exceed a specified cap (we suggest 15% of Consolidated EBITDA before giving effect to such add-backs). While some Lenders resist pro forma cost savings add-backs in ABL facilities (where they are less common than in leveraged finance transactions), we believe a limited, capped add-back is appropriate given Cascade's ongoing operational improvement initiatives.
Trigger Threshold Level. The 10% / $25,000,000 floor formulation for the FCCR Trigger Threshold is broadly consistent with market practice for ABL facilities of this size and is the level agreed upon in the mandate letter. We note that CHB initially proposed a threshold of 12.5% of the lesser of Commitments and the Borrowing Base (which at closing would have been $37,500,000), which would have resulted in the FCCR covenant being triggered more frequently and at higher Availability levels. The reduction to 10% was a negotiated concession by CHB in the mandate letter and represents a meaningful improvement for Cascade. We should vigorously defend this threshold level and resist any attempt by WGH to revert to the 12.5% level in the credit agreement draft.
Cure Period. We recommend negotiating a mechanism that provides Cascade with a brief "holiday" or grace period after Availability falls below the FCCR Trigger Threshold before FCCR testing commences. Our preferred position is a ten (10) business day cure period, during which the Borrower would not be required to demonstrate compliance with the FCCR minimum, provided that the Borrower is taking reasonable steps to restore Availability above the threshold (e.g., through ordinary-course collections, reduction of revolver borrowings, or receipt of seasonal receivables).
The rationale for this position is that Availability can fluctuate rapidly in the normal course of a multi-channel retail business, particularly around inventory build periods, payroll dates, and tax payment dates. A brief dip below the trigger threshold that is quickly reversed through normal cash conversion should not subject the Borrower to a financial covenant test that, by its nature, measures performance over a trailing twelve-month period and is not designed to capture short-term Availability fluctuations.
We acknowledge that WGH is likely to resist this position, as cure periods are uncommon in ABL springing covenant structures. However, even a five (5) business day grace period would provide meaningful protection against technical triggers caused by ordinary-course cash flow timing.
Testing Frequency. Once the FCCR covenant is triggered by Availability falling below the threshold, we should negotiate for the following testing mechanics:
(a) The FCCR should be tested monthly on a trailing four-quarter (twelve-month) basis. The first testing date should be the last day of the calendar month in which the trigger occurs (or, if the trigger occurs within the last five business days of a month, the last day of the following month).
(b) Testing should not be required on a weekly or continuous basis. Weekly testing is operationally burdensome and is inconsistent with the trailing twelve-month measurement period — the FCCR result would not change meaningfully from week to week.
(c) Testing should cease automatically once Availability exceeds the FCCR Trigger Threshold for twenty (20) consecutive business days. We note that some lender drafts require Availability to exceed the threshold for thirty (30) consecutive business days before testing ceases; we believe twenty (20) business days is a reasonable and market-standard "springing off" period.
Comparison to Harborview Facility. The existing Harborview facility included a springing FCCR covenant with a minimum ratio of 1.15:1.00, triggered when Availability fell below 12.5% of the revolving commitment ($21,875,000 under the $175,000,000 Harborview facility). The proposed Facility improves upon the Harborview terms in two respects: (i) the minimum FCCR is reduced from 1.15:1.00 to 1.10:1.00, providing additional headroom; and (ii) the trigger threshold, while expressed as a percentage of a larger commitment, is set at the lower 10% level (versus 12.5%), which means the covenant will be triggered less frequently and at a lower Availability level relative to the commitment.
IV. Cash Dominion Mechanics
A. Proposed Trigger
Cash dominion refers to the mechanism by which the Administrative Agent assumes active control over the Borrower's deposit accounts and directs that all collected funds in those accounts be applied to repay outstanding revolving loans. During a cash dominion period, the Borrower loses the ability to direct disbursements from its collection and concentration accounts, and all cash receipts are "swept" to reduce the outstanding balance under the Facility. The Borrower may then re-borrow under the revolving facility to fund its operating needs, subject to Availability. While the net effect may be neutral in terms of total liquidity (the Borrower can re-borrow what is swept, to the extent of Availability), cash dominion imposes significant operational constraints and introduces timing friction into the Borrower's cash management.
Under the proposed terms reflected in the term sheet, cash dominion is triggered under two circumstances:
(a) Availability Trigger: Availability falls below 12.5% of the lesser of (x) the Aggregate Commitments ($300,000,000) and (y) the Borrowing Base. At closing, this would be 12.5% × $300,000,000 = $37,500,000.
(b) Event of Default Trigger: During the continuance of any Event of Default.
The following four deposit accounts are subject to Deposit Account Control Agreements ("DACAs") in connection with the Facility:
(i) CROC Collections Account at Crescent Harbor Bank, N.A. — Account into which proceeds of accounts receivable and other collections of CROC are deposited.
(ii) CRH Concentration Account at Crescent Harbor Bank, N.A. — Master concentration account into which funds from subsidiary accounts are pooled for centralized cash management.
(iii) CDC Collections Account at Northgate Capital Bank — Account into which proceeds of CDC's e-commerce and marketplace receivables are deposited.
(iv) CRH Operating Account at Meridian Trust Company, N.A. (1001 Fourth Avenue, Suite 500, Seattle, WA 98154) — CRH's primary operating account from which day-to-day operating disbursements (payroll, vendor payments, rent, utilities, insurance, and other routine expenses) are made.
B. Negotiation Issues
Trigger Level. The 12.5% cash dominion trigger was proposed by CHB in the term sheet and represents a higher (i.e., less borrower-favorable) threshold than the 10% trigger that was in place under the existing Harborview facility. Under the Harborview facility, cash dominion was triggered at 10% of the $175,000,000 revolving commitment, or $17,500,000. The proposed CHB trigger of 12.5% of $300,000,000 yields a threshold of $37,500,000 — more than double the Harborview trigger in absolute dollar terms and 250 basis points higher as a percentage of commitments.
Our recommended position is to push for a reduction of the cash dominion trigger from 12.5% to 10%, which would yield a trigger level of $30,000,000 at closing. This would align the cash dominion trigger with the FCCR Trigger Threshold, creating a single "stress threshold" below which both the springing financial covenant and cash dominion mechanisms are activated simultaneously. This alignment is conceptually clean and is a structure that has been adopted in a number of recent comparable ABL transactions.
Fallback Position: If CHB is unwilling to move to 10%, we should accept the 12.5% trigger but negotiate for a robust "springing off" mechanism. Specifically, once Availability exceeds the 12.5% trigger level for thirty (30) consecutive calendar days, cash dominion should automatically cease, deposit accounts should revert to the Borrower's control, and the Agent should be required to issue instructions to the depository banks releasing exclusive control. This prevents a situation in which a brief dip below the threshold results in an extended period of cash dominion even after Availability has been restored. We note that some lender drafts require Availability to exceed the threshold for sixty (60) consecutive days before cash dominion "springs off"; we believe thirty (30) days is the appropriate market standard and should resist any period longer than that.
blocking vs. Springing DACAs. There is an important distinction between "Blocking" DACAs (in which the Agent has exclusive control over the account at all times, even during non-dominion periods) and "springing" DACAs (in which the Borrower retains sole control over the account, and the Agent may not exercise exclusive control until the trigger event occurs). Our strong position is that all DACAs should be "springing" in nature.
However, the practical implementation of springing DACAs requires careful attention in the case of the two accounts at CHB, where CHB is simultaneously the depository bank and the Administrative Agent. In this dual capacity, CHB may take the position that it is entitled to exercise control over these accounts at any time by virtue of its status as depository bank, regardless of the contractual provisions in the DACA. To address this concern, we should ensure that:
(a) The Credit Agreement contains an express covenant by CHB (in its capacity as Agent) that it will not exercise exclusive control over any deposit account subject to a DACA absent the occurrence of a Trigger Event (as defined in the DACA).
(b) The DACAs themselves clearly state that the Agent's right to issue "entitlement orders" or "instructions" to the depository bank is conditional upon the occurrence of a Trigger Event and the delivery of a Trigger Notice (or similar activation mechanism).
(c) To the extent practicable, the CHB DACAs should include a provision requiring the Agent to provide contemporaneous written notice to the Borrower when the Agent delivers a Trigger Notice to the depository bank, so that the Borrower has immediate awareness that cash dominion has been activated.
Operating Account at Meridian Trust Company, N.A. CRH's primary operating account is maintained at Meridian Trust Company, N.A., located at 1001 Fourth Avenue, Suite 500, Seattle, Washington 98154. This account is the hub of Cascade's day-to-day disbursement activity and is used to fund payroll for approximately 4,200 employees across the Cascade enterprise, vendor and supplier payments (including payments to the apparel and home goods suppliers that source CRH's inventory), lease payments for the 64 COS outlet store locations and other leased premises, utility and insurance payments, and other ordinary-course operating expenses.
During a cash dominion period, funds deposited into this account would be swept to the CHB concentration account for application against outstanding revolving loans. This creates a significant operational concern: if the sweep occurs on a same-day basis, Cascade could face a timing gap between when funds are swept and when replacement funds are available through re-borrowing under the Facility, potentially causing checks to bounce, ACH payments to fail, or payroll to be delayed.
We recommend negotiating one or more of the following protections with respect to the operating account during cash dominion periods:
(a) Minimum Operating Balance Carve-Out. The DACA and/or Credit Agreement should provide that, during cash dominion, the Agent will not sweep funds from the operating account to the extent such sweep would reduce the balance below a specified minimum operating balance (we suggest $5,000,000). This minimum balance would be sufficient to cover approximately two weeks of ordinary-course payroll and critical vendor payments, ensuring that Cascade's operations are not disrupted during the initial phase of a cash dominion period.
(b) Delayed Sweep Mechanism. As an alternative or supplement to the minimum balance carve-out, we should negotiate a delayed sweep mechanism under which funds deposited into the operating account are swept to the CHB concentration account on a T+1 or T+2 basis (i.e., one or two business days after deposit) rather than on a same-day basis. This delay would allow the Borrower to process ordinary-course disbursements from the operating account before the sweep occurs, reducing the risk of operational disruption.
(c) Re-Borrowing Mechanics. We should confirm that during cash dominion, the Borrower retains the right to submit borrowing requests under the Facility on a same-day basis (or, for swingline loans, on an intraday basis) so that funds swept from the operating account can be promptly replaced through new revolving advances. The Credit Agreement should not impose any additional conditions or limitations on borrowing during a cash dominion period (beyond the standard requirement that no Default exists and the borrowing would not cause Availability to fall below zero).
V. Restricted Payment Covenant
A. Proposed Conditions for Permitted Restricted Payments
The term sheet provides that Restricted Payments — defined to include dividends, share repurchases, redemptions, and other distributions to equity holders — will be permitted only upon the satisfaction of specified conditions. The multi-tiered structure reflected in the term sheet is as follows:
(a) No Default. No Default or Event of Default exists at the time of the Restricted Payment or would result from the making of such Restricted Payment.
(b) Minimum Availability. Pro forma Availability (i.e., Availability calculated after giving effect to the proposed Restricted Payment) must be equal to or greater than 15% of the lesser of (x) the Aggregate Commitments and (y) the Borrowing Base. At closing, this threshold would be 15% × $300,000,000 = $45,000,000.
(c) FCCR Step-Up. If pro forma Availability would be less than 20% of the lesser of (x) the Aggregate Commitments and (y) the Borrowing Base (i.e., less than $60,000,000 at closing), then the Borrower must also demonstrate that its pro forma FCCR is equal to or greater than 1.15:1.00 on a trailing four-quarter basis.
In effect, this creates a three-zone framework:
• Availability ≥ 20% (≥ $60,000,000): Restricted Payments permitted (subject to no Default).
• Availability ≥ 15% but < 20% ($45,000,000 to $60,000,000): Restricted Payments permitted only if pro forma FCCR ≥ 1.15:1.00 (and no Default).
• Availability < 15% (< $45,000,000): Restricted Payments prohibited.
B. Negotiation Issues
Availability Threshold. The 15% / $45,000,000 minimum Availability threshold for Restricted Payments is broadly in line with market practice for investment-grade-adjacent ABL facilities, though we have seen thresholds as low as 12.5% in borrower-favorable transactions. Our preference would be to reduce the floor threshold from 15% to 12.5%, which would yield a minimum Availability requirement of $37,500,000. This would give Cascade meaningfully greater flexibility to maintain its dividend program during periods of lower Availability.
That said, we recognize that this may be a secondary priority relative to other negotiation points (particularly the cash dominion trigger level and the borrowing base mechanics). We should assess the overall negotiation landscape before determining whether to expend political capital on this issue.
FCCR Step-Up for Restricted Payments (1.15:1.00). The requirement to satisfy a 1.15:1.00 pro forma FCCR when Availability is in the 15%–20% zone adds a second testing gate that could constrain Cascade's ability to maintain its dividend program during periods of financial stress. We acknowledge that Cascade's FY2022 FCCR of 1.70:1.00 provides substantial headroom above the 1.15:1.00 threshold, and under current conditions the step-up would not affect Cascade's ability to pay dividends. However, in a downturn scenario — for example, if Consolidated EBITDA were to decline by 30% to approximately $104,000,000 while Fixed Charges remained constant — the FCCR would compress to approximately 1.19:1.00, leaving only 400 basis points of cushion above the 1.15:1.00 minimum. A further modest decline could constrain dividends at precisely the time when maintaining the dividend is most important to supporting the company's equity valuation.
Our recommended positions on the FCCR step-up are as follows, in order of preference:
(a) Eliminate the FCCR Step-Up Entirely. The minimum Availability threshold of 15% (or 12.5%, if negotiated) already provides meaningful protection to the Lenders by ensuring that a substantial collateral cushion exists before any Restricted Payment is permitted. The additional FCCR gate is arguably duplicative and should be eliminated. This is our preferred position but may face strong resistance.
(b) Narrow the Step-Up Zone. If the FCCR step-up cannot be eliminated entirely, we should negotiate to narrow the zone in which it applies. Specifically, we would propose that the FCCR step-up apply only when pro forma Availability is between 15% and 17.5% of the lesser of Commitments and the Borrowing Base (i.e., between $45,000,000 and $52,500,000 at closing). When Availability is between 17.5% and 20%, Restricted Payments would be permitted without an FCCR test. This would reduce the frequency with which the FCCR step-up is operative.
(c) Reduce the Step-Up FCCR Level. As a further fallback, we could propose reducing the FCCR minimum in the step-up zone from 1.15:1.00 to 1.10:1.00 (aligning it with the springing FCCR minimum). However, this would largely eliminate the incremental protection afforded by the step-up and may be viewed by the Lenders as effectively equivalent to eliminating the step-up entirely.
Cascade's Dividend Program. CRH currently pays a regular quarterly cash dividend of approximately $0.28 per share. Based on approximately 52,000,000 shares outstanding, this translates to an annual dividend payment of approximately $58,240,000. Maintaining the dividend program is a high priority for Cascade's management and Board of Directors. Derek Tanaka (General Counsel) and Elena Kowalski (Chief Financial Officer) have communicated to us that Margaret Liu (Chair of the Board) and Nathaniel Voss (Chief Executive Officer) consider the dividend program to be a key component of CRH's equity value proposition and an important signal of financial stability to the public markets. Any interruption or reduction in the dividend could trigger negative analyst and investor reactions and could adversely affect the CRHI stock price.
Accordingly, we should ensure that the Restricted Payment covenant provides Cascade with sufficient flexibility to maintain its current dividend program under a range of operating scenarios, including moderate stress scenarios. We should also confirm that the Restricted Payment covenant includes customary carve-outs for: (i) Restricted Payments paid solely in equity interests of the Borrower (stock dividends), (ii) repurchases of equity interests from departing employees and directors under equity incentive plans (subject to an annual cap, which we suggest at $7,500,000), and (iii) Restricted Payments made by subsidiaries to the Borrower or other Loan Parties (Upstream distributions within the Loan Party group).
VI. Negative Covenants — Selected Other Issues
In addition to the Restricted Payment covenant discussed in Section V, the credit agreement will contain a suite of negative covenants limiting the Borrower's and Guarantors' ability to incur debt, grant liens, make investments, dispose of assets, and engage in other specified activities. The following is a summary of key issues in the other principal negative covenant baskets.
A. Debt Incurrence
The term sheet provides for the following principal permitted indebtedness carve-outs:
• Purchase Money / Capital Lease Indebtedness: Up to $15,000,000 in aggregate principal amount outstanding at any time, incurred to finance the acquisition of fixed or capital assets used in the business. This basket is adequate for CRH's currently planned distribution center equipment upgrades at the Kent, WA and Columbus, OH CFS facilities, which are projected to cost approximately $8,000,000 to $11,000,000 in the aggregate over the next eighteen months.
• Existing Indebtedness: All indebtedness existing as of the closing date and listed on a schedule to the credit agreement (the "Existing Indebtedness Schedule"). This is a standard carve-out and will require compilation of a comprehensive schedule of all outstanding indebtedness of CRH and its subsidiaries as of closing.
• Intercompany Debt Among Loan Parties: Indebtedness owed by any Loan Party to any other Loan Party will be permitted without limitation, subject to customary subordination requirements if the borrower under the intercompany loan is not a Loan Party.
Issue — Intercompany Loans to Cascade Retail Canada ULC. CRC, the Canadian subsidiary, is an excluded foreign subsidiary and is not a Loan Party. CRH periodically advances funds to CRC to support CRC's working capital needs and to fund inventory purchases for the Canadian retail operations. We should ensure that the permitted indebtedness provisions expressly allow intercompany loans and advances from Loan Parties to CRC, subject to a reasonable basket amount.
We anticipate that WGH may attempt to either (a) prohibit intercompany loans to CRC entirely, (b) require that such loans be subordinated to the obligations under the Facility on terms satisfactory to the Agent, or (c) limit such loans to a de minimis amount. Our recommended position is that intercompany loans to CRC should be permitted up to an aggregate outstanding amount of $15,000,000, subject to the following conditions: (i) the intercompany note evidencing such loans is pledged to the Agent as collateral, (ii) the intercompany loan is subordinated to the obligations under the Facility pursuant to a subordination agreement in form reasonably satisfactory to the Agent, and (iii) no Default or Event of Default exists or would result from the making of such intercompany loan.
B. Liens
The credit agreement will contain a negative pledge restricting the ability of the Loan Parties to grant liens on their assets, subject to customary exceptions for Permitted Liens. The principal categories of Permitted Liens are expected to include:
• Purchase money liens securing the permitted purchase money / capital lease indebtedness described above, limited to the assets acquired with the proceeds of such indebtedness (up to $15,000,000, tied to the corresponding debt basket)
• Liens for taxes not yet due or being contested in good faith
• Mechanics', materialmen's, carriers', and other statutory liens arising in the ordinary course
• Liens securing judgments that do not constitute an Event of Default
• Easements, rights-of-way, and other encumbrances on real property that do not materially interfere with the use of the property
• Liens existing on the closing date and listed on a schedule
Issue — Negative Pledge on Registered intellectual Property. As discussed in Section IX.B below, the collateral package excludes intellectual property registered with the United States Patent and Trademark Office ("USPTO") and the United States Copyright Office ("USCO"). In lieu of a security interest in registered IP, the Loan Parties will agree to a negative pledge — a covenant not to grant liens on such intellectual property to third parties.
We should confirm that the negative pledge is drafted with sufficient precision to avoid inadvertently restricting CRH's ordinary-course IP licensing and sublicensing activities. CRH licenses its trademarks and brand names to wholesale partners, marketplace platforms, and retail partners in the ordinary course of business. CDC sublicenses certain software and technology assets to third-party service providers in connection with its e-commerce platform operations. The negative pledge should be clearly limited to the granting of security interests (liens) and should not be construed to restrict ordinary-course licensing, sublicensing, or other non-security-related IP transactions.
C. Investments
The term sheet provides for a general investment basket of $20,000,000, plus an unlimited investment capacity when pro forma Availability exceeds $75,000,000 and the pro forma FCCR exceeds 1.15:1.00.
Issue — Sufficiency of the General Investment Basket. The $20,000,000 general investment basket may be insufficient for Cascade's planned technology platform investments. CDC is currently in the process of evaluating and potentially implementing a next-generation e-commerce platform and order management system, with projected capital and development costs of $12,000,000 to $18,000,000 over the next two fiscal years. If a portion of these costs are structured as investments (e.g., capitalized software development costs, equity contributions to technology joint ventures, or investments in technology platform subsidiaries), the $20,000,000 basket could be quickly consumed.
Our recommended positions, in order of preference, are:
(a) Increase the general investment basket from $20,000,000 to $30,000,000. This would provide adequate headroom for CDC's technology investments while remaining within the range of what we have seen in comparable transactions.
(b) Alternatively, if the Lenders are unwilling to increase the general basket, we should propose a separate carve-out permitting unlimited investments in wholly-owned subsidiaries that are Loan Parties. Investments in Loan Party subsidiaries do not remove assets from the collateral pool (the invested assets remain subject to the Agent's security interest at the subsidiary level) and therefore do not create any incremental credit risk for the Lenders. This carve-out is both economically neutral to the Lenders and practically important to Cascade.
(c) As a further alternative, we could propose a "growing basket" tied to Consolidated EBITDA (e.g., the greater of $20,000,000 and 15% of trailing four-quarter Consolidated EBITDA), which would allow the investment basket to expand as Cascade's earnings grow.
D. Dispositions