Bernard and Megan,
I hope you are both well. Attached please find Calderwood & Harkness's initial borrower-side markup of the Credit Agreement in respect of the $300,000,000 Senior Secured Asset-Based Revolving Credit Facility among Cascade Retail Holdings Inc. and Cascade Retail Operating Company LLC, as Borrowers, the Guarantors party thereto, the Lenders party thereto, and Crescent Harbor Bank, N.A., as Administrative Agent and Collateral Agent (the "Credit Agreement"). The markup is in tracked changes against the draft circulated by Whitfield, Greer & Holloway LLP on March 20, 2023. These comments are submitted on behalf of both Cascade Retail Holdings Inc. and Cascade Retail Operating Company LLC. Claudia Merritt has reviewed and approved the comments reflected in the attached.
**Attachment:** Credit Agreement — Borrower Markup (C&H Redline v. WGH Draft 3.20.23).docx
While the markup is self-explanatory in most respects, I wanted to flag the principal open points below to facilitate discussion. We have organized these by topic.
**(a) Borrowing Base Reserve Methodology**
Cascade's primary concern with the current draft is that the methodology for calculating Availability Reserves (indicated at approximately $23,650,000 at the closing level) relies too heavily on Agent discretion and lacks specificity as to the objective criteria governing the establishment and adjustment of reserves. Our markup requests that the Credit Agreement define with greater particularity the individual reserve components — including rent reserves, gift card reserves, dilution reserves, and other customary reserves — together with the applicable formulae and caps for each. As you know, the advance rates of 85% on Eligible Receivables and 65% of NOLV on Eligible Inventory were agreed in the mandate letter dated March 6, 2023, and it is important to Cascade that those rates not be subject to effective reduction through overly broad or discretionary reserve definitions. We note that the Ridgeline Asset Advisors LLC field examination and appraisal, which commenced on March 13, 2023 (report expected March 31, 2023), will serve as the basis for inventory NOLV values and should help ground this discussion in the near term.
**(b) Inventory Eligibility Criteria — E-Commerce Fulfillment Goods**
As you are aware, Cascade operates a significant and growing e-commerce business through its subsidiary Cascade Digital Commerce Inc. and maintains inventory across three distribution centers operated by Cascade Fulfillment Services Inc. located in Kent, WA; Reno, NV; and Columbus, OH. The current definition of "Eligible Inventory" in the WGH draft appears to exclude, or at minimum creates ambiguity around, in-transit inventory moving between distribution centers and goods held at third-party fulfillment locations. Given the substantial proportion of Cascade's business flowing through e-commerce channels, our markup proposes that inventory in transit between distribution centers and inventory staged for e-commerce fulfillment be expressly included as Eligible Inventory, subject to the standard conditions that such inventory is owned by a Loan Party, covered by insurance, and subject to a perfected security interest in favor of the Collateral Agent. We believe this is critical to ensuring that the Borrowing Base accurately reflects Cascade's asset profile.
**(c) Springing Fixed Charge Coverage Ratio — Trigger Threshold**
We understand the WGH draft sets the FCCR testing trigger at the greater of (x) 10% of the lesser of the Aggregate Commitments and the Borrowing Base and (y) $25,000,000. At closing, this would result in a trigger of $30,000,000 (i.e., 10% × $300,000,000). The minimum FCCR of 1.10:1.00 is acceptable to Cascade — for context, Cascade's FY2022 FCCR was approximately 1.70:1.00 (Consolidated EBITDA of $148,500,000 against Fixed Charges of $87,200,000), well in excess of the covenant level.
However, Cascade proposes that the FCCR testing period commence only after Availability has remained below the trigger threshold for five consecutive business days, rather than springing immediately upon a single-day breach. This "look-back" concept is intended to avoid inadvertent short-term triggers arising from ordinary-course fluctuations in the Borrowing Base. Our markup reflects this change. In addition, we have flagged the definition of "Fixed Charges" for discussion — specifically, Cascade requests confirmation that capital lease obligations are calculated in a manner consistent with the treatment of purchase money and capital lease indebtedness under the $15,000,000 permitted carve-out in Section 7.03.
**(d) Cash Dominion Mechanics**
The WGH draft triggers cash dominion (i.e., sweep of deposit accounts) when Availability falls below 12.5% of the lesser of Aggregate Commitments and the Borrowing Base ($37,500,000 at closing). Consistent with the approach described above for the FCCR trigger, Cascade requests that the cash dominion trigger include a three-consecutive-business-day look-back period before dominion springs into effect and that dominion automatically release once Availability exceeds the threshold for 30 consecutive days. We would note that there are four deposit account control agreements currently contemplated — two at Crescent Harbor Bank (the CROC collections account and the CRH concentration account), one at Northgate Capital Bank (the CDC collections account), and one at Meridian Trust Company, N.A. (the CRH operating account) — and it will be important that the DACAs reflect these springing/release mechanics consistently with the Credit Agreement.
**(e) Other Marked Provisions**
I will briefly flag the following additional comments reflected in the markup:
- **Restricted Payments:** Our markup proposes a pro forma Availability test for restricted payments set at 15% of the lesser of Aggregate Commitments and the Borrowing Base ($45,000,000), which we believe is consistent with your draft. However, Cascade requests deletion of the additional FCCR test (pro forma FCCR ≥ 1.15:1.00) in circumstances where Availability exceeds 20% of the lesser of Aggregate Commitments and the Borrowing Base, where we believe the Availability cushion alone provides adequate protection.
- **Permitted Investments Basket:** Cascade proposes a general basket of $20,000,000 (increased from the $15,000,000 in the WGH draft), along with an unlimited investments carve-out where pro forma Availability exceeds $75,000,000 and the pro forma FCCR exceeds 1.15:1.00.
- **Disposition Basket:** Cascade requests $10,000,000 per fiscal year, which is consistent with the mandate letter, plus a specific carve-out for the disposition of obsolete or worn-out inventory in the ordinary course of business.
- **LC and Swingline Sublimits:** We can confirm that the LC sublimit of $40,000,000 and the Swingline sublimit of $25,000,000 are acceptable. We have minor comments on the LC fronting fee mechanics (12.5 bps), reflected in the markup.
- **SOFR Mechanics:** We can confirm the SOFR credit spread adjustments of 10 bps for 1-month and 15 bps for 3-month Interest Periods. We have requested the addition of an explicit SOFR floor of 0.00%.
- **Interest Rate:** Adjusted Term SOFR + 300 bps is consistent with the mandate letter, and the default rate at +200 bps is standard.
- **Reporting Requirements:** Monthly borrowing base certificates due by the 15th of the following month are workable. Cascade requests that the weekly reporting trigger (when Availability falls below $45,000,000) include a look-back period before the step-up to weekly delivery takes effect, consistent with the approach on the other springing triggers.
- **Collateral Exclusions:** We can confirm that registered intellectual property (USPTO/USCO) is excluded from the collateral grant, subject to a negative pledge, and that equity interests in foreign subsidiaries (specifically Cascade Retail Canada ULC) are limited to 65% of voting stock.
**Next Steps**
We would like to propose a call among counsel and the Crescent Harbor deal team — Thomas and Julianne — later this week to discuss the key open points outlined above. Cascade's in-house team, Derek Tanaka and Elena Kowalski, is available to provide business context on the e-commerce inventory eligibility and reserve methodology issues as needed. The Ridgeline field exam/appraisal report, expected on March 31, should also help inform the inventory eligibility and borrowing base discussions and may resolve certain of the open points.
Separately, Calderwood & Harkness is reviewing the forms of Guaranty Agreement and Security Agreement and will circulate our comments on those documents shortly.
Thank you both for the thorough initial draft — it has given us a strong foundation to work from. Please let us know your availability for a call later this week, and do not hesitate to reach out in the interim with any questions on the markup.
Best regards,
Marcus Leung Lead Associate, Banking & Finance Calderwood & Harkness LLP 599 Lexington Avenue, 42nd Floor New York, NY 10022 Direct: (212) 554-7183 Email: mleung@calderwoodharkness.com
C&H Matter No. 1038-00002
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