1005-00001 · Nexford Industrial Holdings · Transaction Documents/Credit Agreement

internal-memo-ecf-sweep-mechanics.docx DOCUMENT Finance & Banking

114 / 157 ← → ✕

CALDERWOOD & HARKNESS LLP 425 Lexington Avenue New York, New York 10017

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with its representation of Nexford Industrial Holdings Inc. This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressee and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.

MEMORANDUM

TO: Claudia Merritt, Responsible Partner, Banking & Finance

FROM: Marcus Leung, Lead Associate, Banking & Finance Sophie Tremblay, Working Associate, Banking & Finance

DATE: March 12, 2025

RE: Nexford Industrial Holdings Inc. — $1,400,000,000 Senior Secured Term Loan B — Excess Cash Flow Sweep Mechanics and Illustrative Year 1 Modeling

MATTER NO.: 1005-00001

BILLING CODE: IBL-NIH-2025-031

I. Executive Summary

The purpose of this memorandum is to analyze the excess cash flow ("ECF") sweep provisions in the Credit Agreement currently being negotiated between Nexford Industrial Holdings Inc. ("Nexford" or the "Borrower"), Crescent Harbor Bank, N.A., as Administrative Agent and Collateral Agent (the "Administrative Agent"), and the lenders party thereto from time to time (collectively, the "Lenders"), in connection with the $1,400,000,000 senior secured Term Loan B credit facility (the "Term Loan B" or the "Facility"). The ECF sweep is a mandatory prepayment mechanism that requires Nexford to apply a specified percentage of its annual Excess Cash Flow (as defined in the Credit Agreement) to the prepayment of outstanding Term Loan B obligations, with the applicable percentage subject to step-downs tied to first lien net leverage ratios measured at the end of each fiscal year.

The ECF sweep is structured as a three-tiered mechanism. Under the current draft of the Credit Agreement, the Borrower is required to prepay 50% of Excess Cash Flow if the first lien net leverage ratio exceeds 4.25 to 1.00 as of the last day of the applicable fiscal year; 25% of Excess Cash Flow if the first lien net leverage ratio is equal to or less than 4.25 to 1.00 but greater than 3.50 to 1.00; and 0% of Excess Cash Flow if the first lien net leverage ratio is equal to or less than 3.50 to 1.00. This tiered structure is intended to balance the Lenders' interest in accelerated deleveraging with the Borrower's need for cash flow flexibility, rewarding the Borrower with reduced sweep obligations as leverage declines.

At closing, which is anticipated to occur on or about March 28, 2025, pro forma first lien net leverage is approximately 3.38 to 1.00, calculated as $1,300,000,000 of Consolidated First Lien Net Debt (being $1,400,000,000 of outstanding Term Loan B principal less $100,000,000 of pro forma unrestricted cash) divided by $385,000,000 of LTM Consolidated Adjusted EBITDA. This pro forma leverage level would place Nexford in the 0% sweep tier immediately at closing. However, we note that leverage may fluctuate during the first fiscal year depending on Nexford's Adjusted EBITDA performance, cash deployment decisions (including capital expenditures, restricted payments, and voluntary prepayments), and changes in the net debt position. Accordingly, it is not possible to assume with certainty that the 0% tier will apply at December 31, 2025, particularly in downside scenarios where EBITDA performance is weaker than the base case.

This memorandum provides: (a) a detailed analysis of the ECF sweep mechanics as reflected in the draft Credit Agreement, with our analysis based principally on the second draft received from Whitfield & Gage LLP ("W&G") on March 5, 2025, and incorporating comments from the working third draft currently in negotiation as of this date (the third draft having been circulated by W&G on March 7, 2025, with our markup returned on March 10, 2025); (b) an illustrative model of the Year 1 ECF calculation and mandatory prepayment obligation under base case, upside, and downside scenarios; and (c) commentary on key definitional issues and borrower-favorable positions that we recommend pursuing in the next round of negotiations.

We recommend discussing the key negotiation positions identified in Section VI below with you before the next working group call with Margaret Ashby of Whitfield & Gage LLP and Elaine Prescott of Crescent Harbor Bank, which is currently scheduled for March 18, 2025.

II. Background — Transaction Overview

This Section provides a summary of the key terms of the transaction for reference in analyzing the ECF sweep mechanics.

Borrower. Nexford Industrial Holdings Inc., a Delaware corporation headquartered at 1400 Industrial Parkway, Schaumburg, Illinois 60173. Nexford is a diversified industrial manufacturing company with operations across the United States and Canada, generating approximately $2.1 billion in annual revenue. The company operates through three principal business segments: precision components, advanced materials, and industrial systems.

Sponsor and Holdings. Nexford is indirectly held by Granite Peak Capital Partners, LP ("Granite Peak" or the "Sponsor"), a private equity firm focused on industrial and manufacturing investments. Nexford's direct parent is Granite Peak NIH Holdings, LLC ("Holdings"), a Delaware limited liability company that holds 100% of the issued and outstanding equity interests in Nexford. Granite Peak acquired Nexford in 2021 through a leveraged buyout, and the current refinancing is intended to optimize the company's capital structure and provide a distribution to the Sponsor.

Facility. The Facility consists of a $1,400,000,000 Term Loan B, with a seven-year maturity date of March 28, 2032. Interest on the Term Loan B accrues at a rate per annum equal to Term SOFR (as published by CME Group Benchmark Administration Limited) plus a margin of 400 basis points (4.00%), subject to a SOFR floor of 0.75%. The credit spread adjustment for one-month Term SOFR is 0.10%, resulting in an estimated all-in rate of approximately 8.45% based on current SOFR levels (approximately 4.35% as of the date of this memorandum).

Amortization. The Term Loan B amortizes at a rate of 1.00% per annum of the original principal amount, payable in equal quarterly installments of $3,500,000 each, commencing on the last business day of the first full fiscal quarter following the closing date (i.e., June 30, 2025). The balance of the outstanding principal is due and payable on the maturity date. This amortization rate is standard for sponsor-backed Term Loan B facilities and is relatively modest, reflecting the leveraged finance market convention of minimal mandatory amortization supplemented by cash flow sweep mechanics.

Use of Proceeds. The proceeds of the Term Loan B will be used as follows:

(a) approximately $879,375,000 to refinance the existing first lien term loan held by Atlas Meridian Bank, N.A. (the "Existing Term Loan"), which was incurred in connection with the original leveraged buyout in 2021 and has been subsequently repriced;

(b) approximately $335,000,000 as a dividend to Holdings and, indirectly, to the Sponsor;

(c) approximately $38,625,000 to pay transaction fees, costs, and expenses (including arrangement fees, commitment fees, legal fees, and other customary closing costs); and

(d) approximately $147,000,000 to cash to the Borrower's balance sheet for general corporate purposes, resulting in pro forma unrestricted cash of approximately $100,000,000 at closing (after giving effect to the payment of transaction expenses from balance sheet cash and other closing adjustments).

Existing Unsecured Notes. Nexford has outstanding $250,000,000 in aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 (the "Unsecured Notes"), issued pursuant to an indenture dated as of November 15, 2021, with Pinnacle Trust Company, N.A. as trustee. The Unsecured Notes will remain outstanding following the closing of the Term Loan B and constitute unsecured obligations of the Borrower. The Unsecured Notes do not amortize prior to their stated maturity date and are not subject to an excess cash flow sweep or other mandatory prepayment provisions (other than customary change of control and asset sale offers). The Unsecured Notes are included in the calculation of total net leverage but excluded from the calculation of first lien net leverage.

Pro Forma Leverage. Pro forma first lien net leverage at closing is approximately 3.38 to 1.00, calculated as follows: ($1,400,000,000 outstanding Term Loan B principal minus $100,000,000 of pro forma unrestricted cash) divided by $385,000,000 of LTM Consolidated Adjusted EBITDA, equaling $1,300,000,000 / $385,000,000 = approximately 3.38x. Pro forma total net leverage at closing is approximately 4.03 to 1.00, calculated as follows: ($1,400,000,000 outstanding Term Loan B principal plus $250,000,000 outstanding Unsecured Notes minus $100,000,000 of pro forma unrestricted cash) divided by $385,000,000 of LTM Consolidated Adjusted EBITDA, equaling $1,550,000,000 / $385,000,000 = approximately 4.03x.

Administrative Agent and Collateral Agent. Crescent Harbor Bank, N.A., with offices at 320 Federal Street, Boston, Massachusetts 02110, will serve as Administrative Agent and Collateral Agent under the Credit Agreement.

Agent's Counsel. Whitfield & Gage LLP is acting as counsel to the Administrative Agent. The lead partner is Margaret Ashby, with Jonathan Ferris serving as working associate. We have had productive discussions with Ms. Ashby and Mr. Ferris on the principal terms of the Credit Agreement, and the ECF sweep provisions have been the subject of several exchanges of drafts and comments.

Borrower's Counsel. Calderwood & Harkness LLP is acting as counsel to the Borrower in connection with the Term Loan B and all related documentation.

III. Excess Cash Flow Sweep — Contractual Mechanics

A. Overview of the Mandatory Prepayment Provision

The ECF sweep is set forth in anticipated Section 2.05(b)(i) of the Credit Agreement, as drafted in the W&G second draft dated March 5, 2025. Section 2.05(b) of the Credit Agreement sets forth the mandatory prepayment obligations of the Borrower, which include (in addition to the ECF sweep) mandatory prepayments from (x) asset sale proceeds (subject to reinvestment rights) and (y) proceeds of certain debt incurrences. The ECF sweep provision is the primary mechanism by which the Lenders receive the benefit of the Borrower's annual free cash flow generation in excess of what is needed for operations, investment, and permitted uses.

Under the current draft, the Borrower is required, within ninety-five (95) days after the end of each fiscal year (which fiscal year ends on December 31), to prepay the Term Loans in an aggregate principal amount equal to a specified percentage of Excess Cash Flow for such fiscal year, subject to the leverage-based step-downs described in Section III.B below. The 95-day period corresponds approximately to the period within which the Borrower is required to deliver its annual audited financial statements under the reporting covenant (currently set at 90 days after fiscal year-end in the draft). We note that we are negotiating the payment deadline to be tied to the delivery of the annual financial statements plus five (5) business days, rather than a fixed 95-day period, as discussed further in Section V.F below.

The first ECF sweep test period will be the fiscal year ending December 31, 2025, which will be the first full fiscal year after the anticipated closing date of March 28, 2025. Based on the 95-day payment deadline currently in the draft, the first ECF sweep payment, if any, would be due on or before April 5, 2026 (95 calendar days after December 31, 2025), or such shorter or longer period as may be finally agreed in the Credit Agreement.

It is important to note that the ECF sweep applies to the full fiscal year even though the Term Loan B will only be outstanding for approximately nine months of fiscal 2025 (from March 28, 2025 through December 31, 2025). The Excess Cash Flow definition captures the Borrower's cash flow for the entire fiscal year, not merely the portion of the fiscal year during which the Term Loan B is outstanding. This is a standard approach in leveraged credit agreements, and the partial-year nature of the closing is accounted for in the deductions from ECF (e.g., the cash interest deduction will reflect the actual interest paid during the year, which will be lower than a full-year amount due to the March closing date).

B. Tiered Sweep Percentages and Leverage Step-Downs

The ECF sweep percentage is determined by reference to the Borrower's first lien net leverage ratio as of the last day of the applicable fiscal year. The three-tiered structure currently reflected in the draft Credit Agreement is as follows:

Tier 1 — 50% Sweep. If the first lien net leverage ratio as of the last day of the applicable fiscal year exceeds 4.25 to 1.00, the Borrower is required to prepay 50% of Excess Cash Flow for such fiscal year. This represents the highest sweep percentage and applies when the Borrower's leverage is at its most elevated, reflecting the Lenders' expectation of accelerated deleveraging when the credit profile is weakest.

Tier 2 — 25% Sweep. If the first lien net leverage ratio as of the last day of the applicable fiscal year is equal to or less than 4.25 to 1.00 but greater than 3.50 to 1.00 (i.e., the ratio is in the range of greater than 3.50x and up to and including 4.25x), the Borrower is required to prepay 25% of Excess Cash Flow for such fiscal year. This intermediate tier reflects a moderated sweep obligation as leverage approaches the target range.

Tier 3 — 0% Sweep. If the first lien net leverage ratio as of the last day of the applicable fiscal year is equal to or less than 3.50 to 1.00, the Borrower is not required to make any ECF sweep payment, regardless of the amount of Excess Cash Flow generated during such fiscal year. This tier provides a significant incentive for the Borrower to maintain leverage at or below 3.50x, as it effectively eliminates the ECF sweep obligation entirely.

The leverage ratio for purposes of the ECF sweep step-downs is tested as of the last day of the applicable fiscal year, on a pro forma basis. A critical open issue in the current negotiation is whether the leverage test gives pro forma effect to any voluntary prepayments of the Term Loans made during the fiscal year. Our position is that the Borrower should receive pro forma credit for voluntary prepayments when calculating the first lien net leverage ratio for purposes of the ECF sweep step-downs. This pro forma adjustment would reduce the numerator of the leverage ratio (by reducing outstanding first lien debt) and could cause the Borrower to fall into a lower leverage tier (and therefore a lower or zero sweep percentage). We have raised this point with W&G and it remains open as of this date. We consider this a key borrower ask and recommend pressing the issue in the next round of negotiations.

The "First Lien Net Leverage Ratio" is defined as the ratio of (i) Consolidated First Lien Net Debt as of the date of determination to (ii) Consolidated Adjusted EBITDA for the most recently ended period of four consecutive fiscal quarters (i.e., an LTM basis). "Consolidated First Lien Net Debt" is defined as the aggregate outstanding principal amount of all funded Indebtedness of the Borrower and its Restricted Subsidiaries that is secured by a first-priority Lien on any Collateral, minus unrestricted cash and Cash Equivalents of the Borrower and its Restricted Subsidiaries. We note that the current draft does not include a cap on the amount of cash that may be netted against first lien debt in computing Consolidated First Lien Net Debt, which is a borrower-favorable provision that we should seek to preserve. In certain credit agreements, lender counsel will seek to impose a netting cap (e.g., limiting the cash netting to $100,000,000 or $200,000,000), which would result in a higher calculated leverage ratio and a greater likelihood of falling into a higher sweep tier.

C. Definition of Excess Cash Flow

"Excess Cash Flow" is defined in anticipated Section 1.01 of the Credit Agreement. The definition is the foundation of the ECF sweep calculation and determines the pool of cash flow that is subject to the mandatory prepayment. The definition follows the standard construction used in leveraged credit agreements, beginning with Consolidated Net Income and making a series of adjustments to approximate the Borrower's free cash flow available for debt service.

For any fiscal year, Excess Cash Flow is calculated as follows:

Starting Point: Consolidated Net Income. The calculation begins with Consolidated Net Income of the Borrower and its Restricted Subsidiaries for such fiscal year. Consolidated Net Income is itself a defined term in the Credit Agreement and is subject to a number of adjustments and exclusions, including the exclusion of extraordinary gains and losses, gains and losses from asset sales, non-cash impairment charges, and certain other items. The use of Consolidated Net Income (rather than Adjusted EBITDA) as the starting point means that cash interest expense, cash taxes, and depreciation and amortization have already been subtracted. However, because the definition then adds back depreciation, amortization, and other non-cash charges, the practical effect is to start from a cash-flow-like measure.

Additions (items added to Consolidated Net Income):

(i) Depreciation and Amortization. The amount of depreciation, amortization, and other non-cash charges that were deducted in computing Consolidated Net Income for such period are added back, since these are non-cash charges that do not represent actual cash outflows during the period.

(ii) Other Non-Cash Charges. Other non-cash charges or losses deducted in arriving at Consolidated Net Income for such period are added back, to the extent not already captured in clause (i) above. This includes items such as stock-based compensation expense, non-cash write-offs, and non-cash portions of restructuring charges.

(iii) Decreases in Working Capital. The amount of any net decrease in working capital of the Borrower and its Restricted Subsidiaries during such period is added to Excess Cash Flow, since a decrease in working capital represents a release of cash (e.g., through the collection of receivables or the reduction of inventory).

Subtractions (items subtracted from the sum of the above):

(i) Non-Cash Income and Gains. Non-cash income or gains that were included in computing Consolidated Net Income for such period are subtracted, since these items do not represent actual cash inflows. This includes unrealized gains on hedging instruments, non-cash purchase accounting adjustments, and similar items.

(ii) Capital Expenditures. Capital expenditures made in cash during such period are deducted, excluding capital expenditures financed with the proceeds of Indebtedness (other than revolving loans). This deduction recognizes that the Borrower must reinvest in its asset base to maintain and grow the business, and that cash spent on capital expenditures is not available for debt prepayment. We discuss the scope of this deduction in Section V.C below.

(iii) Increases in Working Capital. The amount of any net increase in working capital of the Borrower and its Restricted Subsidiaries during such period is subtracted, since an increase in working capital represents a use of cash (e.g., through the buildup of inventory or the extension of receivables).

(iv) Scheduled Amortization Payments. The aggregate amount of all scheduled amortization payments on the Term Loans actually made during such period is deducted. For fiscal 2025, this amount would be $10,500,000 (three quarterly installments of $3,500,000 each, commencing June 30, 2025).

(v) Voluntary Prepayments of the Term Loans. The aggregate amount of all voluntary prepayments of the Term Loans actually made during such period is deducted (the "voluntary prepayment credit"). This is a critical borrower-favorable deduction, as discussed in detail in Section III.E below.

(vi) Cash Taxes Paid. The aggregate amount of federal, state, local, and foreign income taxes actually paid in cash during such period is deducted, to the extent not already deducted in computing Consolidated Net Income. We note that the treatment of cash taxes in the ECF definition can be complex, as Consolidated Net Income will already reflect tax expense (which may differ from cash taxes paid due to deferred tax items). We will need to review the final definition carefully to avoid double-counting.

(vii) Cash Interest Paid. The aggregate amount of cash interest expense actually paid during such period is deducted, to the extent not otherwise deducted in arriving at Consolidated Net Income. As with cash taxes, the interplay between the Consolidated Net Income starting point and the cash interest deduction requires careful review to ensure consistency.

(viii) Permitted Acquisitions. The aggregate consideration paid in cash in connection with Permitted Acquisitions consummated during such period is deducted, to the extent funded with internally generated cash (and not financed with the proceeds of Indebtedness or equity issuances). This deduction allows the Borrower to pursue acquisition-driven growth without triggering increased ECF sweep obligations.

(ix) Other Permitted Investments. Cash expenditures made during such period in connection with other Permitted Investments (as defined in the Credit Agreement) are deducted, subject to a basket amount that is currently open for negotiation. We recommend seeking a basket of at least $50,000,000 per annum for this deduction, or alternatively, an uncapped deduction for Permitted Investments funded with internally generated cash, subject to pro forma compliance with the applicable leverage test.

The key deductions from Excess Cash Flow — particularly the voluntary prepayment credit, the capital expenditure deduction, and the permitted acquisition/investment deductions — are the principal levers available to the Borrower to reduce the ECF sweep obligation. Each of these deductions merits careful attention in the drafting process, as expansive deductions will directly reduce the mandatory prepayment amount, while narrow or capped deductions will increase it.

D. Application of ECF Sweep Payments

Under the current draft of the Credit Agreement, ECF sweep payments are applied pro rata to all remaining scheduled amortization installments on the Term Loan B. Under this approach, an ECF sweep payment would proportionately reduce each future quarterly installment over the remaining term of the loan, resulting in a modest reduction in each payment. For example, if the Borrower were required to make a $30,000,000 ECF sweep payment, the pro rata application would spread that prepayment credit across all remaining quarterly installments (approximately 26 installments as of the first ECF payment date in April 2026), reducing each installment by approximately $1,153,846.

Our position, which we have communicated to W&G, is that ECF sweep payments should instead be applied in direct order of maturity — that is, to the next succeeding quarterly installments first. Under this approach, a $30,000,000 ECF sweep payment would eliminate the next several quarterly installments entirely (approximately 8-9 installments at $3,500,000 each), thereby freeing the Borrower from mandatory amortization payments for approximately two years. This application method is meaningfully more favorable to the Borrower, as it preserves near-term cash flow flexibility and front-loads the prepayment credit. We note that direct order of maturity application is a common borrower-favorable request in leveraged credit agreements and has been accepted in a number of comparable sponsor-backed transactions.

Regardless of the application methodology, ECF sweep payments are applied without premium or penalty. This is consistent with the treatment of voluntary prepayments under the Credit Agreement, which are also permitted without premium or penalty (other than any applicable soft-call premium during the first six months following closing, which does not apply to mandatory prepayments).

We also note that, unlike mandatory prepayments from asset sale proceeds (which are subject to 365-day and 545-day reinvestment periods under Section 2.05(b)(ii) of the draft Credit Agreement), ECF sweep payments are not subject to any reinvestment right. The absence of a reinvestment right means that the full amount of the applicable ECF sweep percentage must be applied to prepay the Term Loans, without the Borrower having the option to reinvest such amounts in capital expenditures or acquisitions in lieu of prepayment.

Finally, ECF sweep payments reduce the outstanding principal amount of the Term Loans and thereby reduce the numerator in the First Lien Net Leverage Ratio for future periods. This creates a virtuous cycle: ECF sweep payments in early years (if any) reduce leverage, which may cause the Borrower to fall into a lower sweep tier in subsequent years, ultimately reaching the 0% tier where no further ECF sweep payments are required.

E. Voluntary Prepayment Credit

The voluntary prepayment credit is one of the most important borrower-favorable provisions in the ECF sweep mechanics. Under the current draft, the Borrower is permitted to credit voluntary prepayments of the Term Loans made during the applicable fiscal year against the ECF sweep obligation on a dollar-for-dollar basis. This means that if Nexford makes $20,000,000 in voluntary prepayments during fiscal 2025, and the ECF sweep obligation for fiscal 2025 is determined to be $30,000,000, the net ECF sweep payment that the Borrower would actually be required to make would be $10,000,000 ($30,000,000 minus $20,000,000).

The voluntary prepayment credit is critical because it provides the Borrower with flexibility in managing its deleveraging trajectory. Rather than waiting until the ECF sweep payment date (which occurs after fiscal year-end) to apply excess cash flow to debt prepayment, the Borrower can make voluntary prepayments during the year as cash becomes available, and receive credit against the ECF sweep obligation. This is particularly valuable for a company like Nexford, which generates substantial free cash flow throughout the year and may wish to deploy that cash flow toward debt reduction on an ongoing basis rather than holding it until the annual ECF sweep date.

We recommend confirming the following points with respect to the scope of the voluntary prepayment credit:

(a) Scope of Term Loan Prepayments. The credit should apply to all optional prepayments of the Term Loans made under Section 2.05(a) of the Credit Agreement during the applicable fiscal year, regardless of the source of funds used to make such prepayments (including prepayments funded from the Borrower's general operating cash, the builder basket, or other permitted sources).

(b) Scheduled Amortization. The credit should also include scheduled amortization payments actually made during the applicable fiscal year. In fiscal 2025, this amount would be $14,000,000 on an annualized basis (four quarters at $3,500,000 each), or $10,500,000 for the partial year (three quarterly payments commencing June 30, 2025). We note that the inclusion of scheduled amortization in the voluntary prepayment credit is standard in leveraged credit agreements, as scheduled amortization is already deducted in computing Excess Cash Flow, and the voluntary prepayment credit effectively reduces the gross ECF sweep amount. However, the precise interplay between the amortization deduction in the ECF definition (which reduces the calculated ECF amount) and the voluntary prepayment credit (which reduces the ECF sweep obligation) requires careful review to avoid double-counting. In the current draft, it appears that scheduled amortization is deducted in computing ECF (reducing the pool) and is also included in the voluntary prepayment credit (reducing the sweep obligation), which would effectively provide a double benefit. We should confirm this is intentional and push to preserve it.

(c) Prepayments of Pari Passu Indebtedness. The credit should also include voluntary prepayments of any other Indebtedness that is secured by a first-priority Lien on the Collateral and is pari passu with the Term Loans, including any incremental term loans that may be incurred in the future under the incremental facility provisions of the Credit Agreement. Our position is that prepayments of pari passu indebtedness should be credited because they achieve the same deleveraging objective as prepayments of the Term Loans and reduce the numerator in the First Lien Net Leverage Ratio. W&G has not yet responded to this point.

(d) Debt Buybacks Below Par. We also recommend pushing for inclusion of a "deemed voluntary prepayment" credit for debt buybacks conducted below par. If the Borrower repurchases Term Loans in the open market at a discount to par (e.g., at 97 cents on the dollar), the credit should be calculated based on the face amount of debt retired, not the cash purchase price. This is a borrower-favorable position that has been accepted in a number of recent comparable transactions, particularly in the current market environment where leveraged loans have periodically traded below par. We acknowledge that this may be a difficult point to win with W&G and Crescent Harbor Bank, but it is worth raising given the potential upside to the Borrower.

F. Step-Down Interaction with Leverage Ratio

The interaction between the ECF sweep step-downs and the First Lien Net Leverage Ratio creates important strategic dynamics for the Borrower. As discussed above, the applicable sweep percentage is determined by reference to the Borrower's first lien net leverage as of the last day of the applicable fiscal year. This means that the Borrower has the ability to influence the sweep percentage by managing its leverage during the year — for example, by making voluntary prepayments to reduce outstanding debt, by accumulating cash on the balance sheet, or by improving EBITDA performance through operational initiatives.

At closing, pro forma first lien net leverage is approximately 3.38 to 1.00, which places Nexford below the 3.50x threshold and within the 0% sweep tier. If Nexford's leverage remains at or below 3.50x at December 31, 2025, no ECF sweep payment would be required for fiscal 2025 regardless of the amount of Excess Cash Flow generated during the year. This is the expected outcome in the base case, as discussed in Section IV below.

However, several factors could cause leverage to increase above the 3.50x threshold during fiscal 2025, thereby triggering a 25% or even 50% sweep:

(a) EBITDA Decline. If Adjusted EBITDA declines from the base case of $385,000,000 (whether due to macroeconomic conditions, loss of a key customer, supply chain disruptions, or other factors), the denominator of the leverage ratio would decrease, causing leverage to rise. A decline of approximately 10% or more in Adjusted EBITDA could push leverage above 3.50x, as illustrated in the sensitivity analysis in Section IV.D below.

(b) Cash Deployment. If the Borrower deploys cash during the year for purposes that reduce year-end cash balances (e.g., acquisitions, restricted payments, or capital expenditures in excess of the base case assumption), the numerator of the leverage ratio (net of cash) would increase. A significant reduction in year-end cash could contribute to higher leverage.

(c) Additional Debt. If the Borrower incurs additional first lien indebtedness under the incremental facility provisions of the Credit Agreement, the outstanding first lien debt would increase, directly increasing the numerator of the leverage ratio.

The modeling in Section IV below illustrates the sensitivity of the leverage ratio and ECF sweep obligation to changes in Adjusted EBITDA and cash balances under various scenarios.

IV. Illustrative Year 1 ECF Modeling

A. Key Assumptions

The following key assumptions underlie the illustrative ECF model for fiscal year 2025. These assumptions are based on the Borrower's historical financial performance, the pro forma capital structure at closing, and management's current forecasts as communicated to us by the Granite Peak deal team. We note that these assumptions are illustrative only and are not intended to constitute a financial forecast or projection. The actual ECF calculation for fiscal 2025 will depend on Nexford's actual financial performance and the final terms of the Credit Agreement.

Fiscal Year Period. The fiscal year runs from January 1, 2025 through December 31, 2025. The closing of the Term Loan B is anticipated to occur on March 28, 2025, meaning that the Term Loan B will be outstanding for approximately nine months (275 days) of fiscal 2025. For the first approximately three months of fiscal 2025 (January 1 through March 28, 2025), the Borrower's capital structure will reflect the existing Atlas Meridian Bank term loan and the existing Unsecured Notes.

Initial Outstanding Principal. The initial outstanding principal amount of the Term Loan B at closing is $1,400,000,000.

Quarterly Amortization. Quarterly amortization of $3,500,000 per quarter, representing 1.00% per annum of the original principal amount. For fiscal 2025, three quarterly amortization payments are assumed, due on June 30, September 30, and December 31, 2025, for a total of $10,500,000 in scheduled amortization during the year. We note that the first quarterly amortization payment is due on June 30, 2025, which is the last business day of the first full fiscal quarter following the closing date.

Outstanding Principal at Year-End. The outstanding principal amount of the Term Loan B at December 31, 2025 is assumed to be $1,389,500,000 ($1,400,000,000 less $10,500,000 of scheduled amortization), assuming no voluntary prepayments are made during the year.

Existing Senior Unsecured Notes. The $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 is assumed to remain outstanding and unchanged throughout fiscal 2025. The Unsecured Notes do not amortize and are excluded from the first lien net leverage calculation.

Pro Forma Cash at Closing. Unrestricted cash at closing is assumed to be approximately $100,000,000, reflecting the $147,000,000 of cash to the balance sheet from the Term Loan B proceeds less approximately $47,000,000 of additional closing costs, working capital adjustments, and other uses.

LTM Adjusted EBITDA. LTM Consolidated Adjusted EBITDA for the twelve-month period ending December 31, 2024 is $385,000,000. In the base case, we assume that Adjusted EBITDA remains constant at $385,000,000 for the LTM period ending December 31, 2025. Sensitivity analysis is provided for growth and decline scenarios. The $385,000,000 figure includes $28,000,000 in permitted EBITDA add-backs, consisting of $12,000,000 in acquisition-related costs, $8,500,000 in non-recurring restructuring charges, $4,500,000 in sponsor management fees payable to Granite Peak under the Management Agreement, and $3,000,000 in integration costs. Reported EBITDA (before add-backs) is approximately $357,000,000.

Capital Expenditures. Capital expenditures are assumed to be $78,000,000 for fiscal 2025, held constant from the LTM period. This figure includes both maintenance capital expenditures (estimated at approximately $52,000,000) and growth capital expenditures (estimated at approximately $26,000,000).

Cash Interest Expense. Estimated annual cash interest expense is calculated as follows:

Term Loan B interest: The average outstanding principal balance during the period the Term Loan B is outstanding (March 28 through December 31, 2025) is approximately $1,394,750,000 (the midpoint of the opening balance of $1,400,000,000 and the year-end balance of $1,389,500,000). The estimated all-in interest rate is approximately 8.45% (consisting of Term SOFR of approximately 4.35%, plus the 0.10% credit spread adjustment for one-month SOFR, plus the 4.00% applicable margin). Full-year interest on the Term Loan B would be approximately $117,856,375; however, for the approximately nine months from March 28 to December 31, 2025, cash interest on the Term Loan B is estimated at approximately $88,392,281 (9/12 of the full-year amount).

Unsecured Notes interest: Interest on the $250,000,000 Unsecured Notes at 7.250% per annum equals $18,125,000 annually. For the full fiscal year, this amount is payable regardless of the Term Loan B closing date. However, we note that the Unsecured Notes interest is payable semi-annually (on May 15 and November 15), and the full $18,125,000 will be paid during fiscal 2025.

Pre-closing interest on Atlas Meridian facilities: For the period from January 1 through approximately March 28, 2025, the Borrower will continue to pay interest on the existing Atlas Meridian Bank term loan (outstanding balance of approximately $879,375,000 at an assumed rate of approximately 9.00%). Estimated pre-closing interest for this three-month period is approximately $19,787,000.

Total estimated cash interest for fiscal 2025: Approximately $117,000,000 (blended estimate encompassing pre-closing interest on the Atlas Meridian facilities, post-closing interest on the Term Loan B, and the full year of Unsecured Notes interest). This is a blended approximation; the actual figure will depend on the precise closing date, the applicable SOFR rate on each interest payment date, and other factors.

Cash Taxes. Cash taxes paid during fiscal 2025 are estimated at approximately $25,000,000, reflecting the Borrower's estimated effective tax rate applied to taxable income for the period. This estimate takes into account Section 163(j) limitations on the deductibility of business interest expense, which may limit the Borrower's ability to deduct the full amount of cash interest paid during the year. We note that a detailed analysis of the Section 163(j) implications was prepared by Sylvia Hartwell of our Tax Group in her memorandum dated March 5, 2025, and we have relied on her estimated cash tax figure for purposes of this modeling.

Working Capital Changes. In the base case, we assume working capital changes are flat (i.e., no net increase or decrease in working capital during the fiscal year). This is a simplifying assumption; in practice, working capital for a diversified industrial company with $2.1 billion in annual revenue can fluctuate significantly from quarter to quarter and year to year, depending on the timing of receivable collections, inventory management, and payable cycles.

B. Base Case — ECF Calculation (Fiscal Year 2025)

Based on the assumptions set forth in Section IV.A above, we present the following illustrative base case ECF calculation for fiscal 2025. We note that this calculation is necessarily simplified and is intended to provide an order-of-magnitude estimate of the ECF sweep obligation (if any) rather than a precise calculation. The actual ECF calculation will be performed based on the final definitions in the executed Credit Agreement and the Borrower's actual audited financial statements for fiscal 2025.

Derivation of Estimated Consolidated Net Income. As a preliminary step, we derive estimated Consolidated Net Income from Adjusted EBITDA:

Revenue (assumed constant): $2,100,000,000

Adjusted EBITDA: $385,000,000 (including $28,000,000 in permitted add-backs, as described in Section IV.A above)

Less: Depreciation and amortization: ($65,000,000) (estimated based on reported EBITDA of $357,000,000 and typical depreciation and amortization rates for a diversified industrial company of Nexford's size; this figure includes approximately $40,000,000 of depreciation on property, plant, and equipment and approximately $25,000,000 of amortization of intangible assets, including customer relationships and trade names recognized in connection with the 2021 leveraged buyout)

Less: Cash interest expense: ($117,000,000) (blended estimate for fiscal 2025, as described in Section IV.A above)

Less: Cash taxes: ($25,000,000) (estimated, as described in Section IV.A above)

Estimated Consolidated Net Income: $178,000,000 ($385,000,000 - $65,000,000 - $117,000,000 - $25,000,000)

We acknowledge that this derivation involves a number of simplifying assumptions, including the treatment of Adjusted EBITDA add-backs, the estimation of depreciation and amortization, and the use of blended interest and tax figures. The actual Consolidated Net Income figure will be determined from the Borrower's audited financial statements and the specific definition of Consolidated Net Income in the Credit Agreement.

Excess Cash Flow Computation (Base Case).

The above illustrative calculation indicates that Nexford would generate approximately $164,500,000 in Excess Cash Flow for fiscal 2025 under the base case assumptions. This substantial ECF generation reflects Nexford's strong cash flow profile: with $385,000,000 in Adjusted EBITDA and relatively moderate capital expenditures of $78,000,000, the company generates significant free cash flow in excess of its debt service obligations and investment requirements.

We note that the above calculation is illustrative and simplified. The actual ECF definition in the Credit Agreement will incorporate more granular components and adjustments, including detailed specifications of which non-cash charges are eligible for add-back, the precise treatment of cash taxes and cash interest expense, and the specific categories of permitted deductions. The key takeaway from this analysis is that Nexford generates substantial Excess Cash Flow, and the applicable sweep percentage (determined by the leverage test) will be the primary determinant of the mandatory prepayment obligation.

C. Leverage Test at December 31, 2025 (Base Case)

The applicable ECF sweep percentage is determined by the First Lien Net Leverage Ratio at December 31, 2025, the last day of the fiscal year. Under the base case assumptions, we calculate the leverage ratio as follows:

Outstanding First Lien Debt at December 31, 2025: $1,389,500,000 (initial principal of $1,400,000,000 less three quarterly amortization payments totaling $10,500,000, and assuming no voluntary prepayments during the year).

Estimated Unrestricted Cash at Year-End (Base Case): Under the base case, we estimate year-end unrestricted cash of approximately $130,000,000. This estimate begins with pro forma cash of $100,000,000 at closing and adds the incremental cash generated during the approximately nine months of operations following the closing, net of cash interest, cash taxes, capital expenditures, and scheduled amortization. The buildup of cash from $100,000,000 to $130,000,000 reflects the Borrower's strong free cash flow generation during the partial year, offset by the various cash outflows described in Section IV.A. We note that this estimate assumes no dividends or other restricted payments are made to Holdings or the Sponsor during fiscal 2025 and no voluntary prepayments beyond scheduled amortization.

First Lien Net Debt: $1,389,500,000 - $130,000,000 = $1,259,500,000.

LTM Adjusted EBITDA: $385,000,000 (assumed constant for the LTM period ending December 31, 2025).

First Lien Net Leverage Ratio: $1,259,500,000 / $385,000,000 = approximately 3.27x.

Result: The base case first lien net leverage ratio of approximately 3.27x is below the 3.50x threshold for the Tier 3 step-down. Accordingly, Tier 3 applies, and the ECF sweep percentage is 0%. No mandatory prepayment would be required for fiscal 2025, regardless of the $164,500,000 in Excess Cash Flow generated during the year.

This result is consistent with expectations, as the pro forma first lien net leverage at closing of approximately 3.38x already falls below the 3.50x threshold, and the combination of modest amortization payments and cash accumulation during the year provides a further cushion. In the base case, Nexford has ample room within the 0% sweep tier and would need to experience a significant deterioration in EBITDA or a meaningful reduction in cash balances (or both) to be pushed into a higher sweep tier.

D. Sensitivity Analysis — Downside Case (EBITDA Decline of 10%)

To assess the impact of an adverse performance scenario, we model a case in which Adjusted EBITDA declines by 10% from the base case of $385,000,000 to $346,500,000. This decline could result from range factors, including macroeconomic headwinds affecting the industrial sector, the loss of one or more significant customers, input cost inflation that cannot be fully passed through to customers, or a slowdown in end-market demand for Nexford's products.

EBITDA and Cash Flow Impact. A 10% decline in Adjusted EBITDA would directly reduce Consolidated Net Income and, consequently, Excess Cash Flow. We estimate Excess Cash Flow in this scenario at approximately $120,000,000, reflecting the lower net income partially offset by the fixed nature of certain deductions (e.g., capital expenditures, which are assumed to remain at $78,000,000, and scheduled amortization, which remains at $10,500,000). Cash interest and cash taxes would also be somewhat lower due to reduced profitability, but the net effect is a reduction in ECF of approximately $44,500,000 relative to the base case.

Cash Balance Impact. Year-end unrestricted cash would also be lower in the downside scenario, reflecting reduced profitability and lower cash generation during the year. We estimate year-end cash of approximately $100,000,000, representing a decrease of $30,000,000 from the base case estimate of $130,000,000.

Leverage Calculation:

Outstanding First Lien Debt at December 31, 2025: $1,389,500,000

Estimated Unrestricted Cash at Year-End: $100,000,000

First Lien Net Debt: $1,389,500,000 - $100,000,000 = $1,289,500,000

LTM Adjusted EBITDA: $346,500,000

First Lien Net Leverage Ratio: $1,289,500,000 / $346,500,000 = approximately 3.72x

Result: The downside first lien net leverage ratio of approximately 3.72x exceeds the 3.50x threshold but is below the 4.25x threshold. Accordingly, Tier 2 applies, and the ECF sweep percentage is 25%.

Estimated Mandatory Prepayment:

Estimated Excess Cash Flow: $120,000,000

ECF Sweep Percentage: 25%

Gross ECF Sweep Obligation: 25% x $120,000,000 = $30,000,000

Less: Voluntary Prepayment Credit (scheduled amortization of $10,500,000, if the definition permits this credit as discussed in Section III.E): ($10,500,000)

Net ECF Sweep Payment: $30,000,000 - $10,500,000 = $19,500,000

We note that the voluntary prepayment credit in this scenario is limited to the $10,500,000 of scheduled amortization actually paid during fiscal 2025, as we have assumed no additional voluntary prepayments in this downside case. If the Borrower were to make additional voluntary prepayments during the year (e.g., $20,000,000 in voluntary prepayments funded from the $100,000,000 of closing cash), the voluntary prepayment credit would increase correspondingly, potentially reducing or eliminating the net ECF sweep payment. However, the use of cash for voluntary prepayments would also reduce year-end cash balances, potentially increasing the leverage ratio and pushing the Borrower into a higher sweep tier. This interplay between voluntary prepayments, cash balances, and leverage underscores the importance of careful cash flow management throughout the year.

E. Sensitivity Analysis — Severe Downside (EBITDA Decline of 20%)

In a more severe downside scenario, we model a case in which Adjusted EBITDA declines by 20% from the base case of $385,000,000 to $308,000,000. This level of decline would represent a significant deterioration in Nexford's business performance, potentially resulting from a recessionary environment, the loss of multiple significant customers, significant operational disruptions, or a combination of adverse factors.

EBITDA and Cash Flow Impact. A 20% decline in Adjusted EBITDA would significantly reduce Consolidated Net Income and Excess Cash Flow. We estimate Excess Cash Flow in this scenario at approximately $85,000,000, reflecting the substantially lower net income offset by the continued deduction of capital expenditures and other fixed items.

Cash Balance Impact. Year-end unrestricted cash would be further reduced in this severe downside scenario due to significantly lower cash generation. We estimate year-end cash of approximately $80,000,000.

Leverage Calculation:

Outstanding First Lien Debt at December 31, 2025: $1,389,500,000

Estimated Unrestricted Cash at Year-End: $80,000,000

First Lien Net Debt: $1,389,500,000 - $80,000,000 = $1,309,500,000

LTM Adjusted EBITDA: $308,000,000

First Lien Net Leverage Ratio: $1,309,500,000 / $308,000,000 = approximately 4.25x

Result: The severe downside first lien net leverage ratio of approximately 4.25x is exactly at the 4.25x threshold. Under the tiered step-down structure, the Tier 1 sweep percentage of 50% applies only if leverage exceeds 4.25x. Since the ratio is equal to 4.25x, Tier 2 applies, and the ECF sweep percentage is 25%.

Estimated Mandatory Prepayment (at 4.25x):

Estimated Excess Cash Flow: $85,000,000

ECF Sweep Percentage: 25%

Gross ECF Sweep Obligation: 25% x $85,000,000 = $21,250,000

This result highlights the importance of the precise drafting of the leverage tier boundaries. The use of "exceeds" (rather than "equal to or exceeds") for the Tier 1 threshold means that a leverage ratio of exactly 4.25x remains in Tier 2 at the 25% sweep rate, rather than triggering the more punitive 50% sweep. We should confirm that this drafting is maintained in the final Credit Agreement.

Illustration of Tier 1 Trigger. If Adjusted EBITDA were to decline slightly further such that the first lien net leverage ratio exceeded 4.25x — for example, if EBITDA declined to approximately $305,000,000 and year-end cash was approximately $78,000,000, resulting in leverage of approximately $1,311,500,000 / $305,000,000 = 4.30x — Tier 1 would apply and the ECF sweep percentage would increase to 50%. In such a scenario, the estimated mandatory prepayment would be significantly higher:

Estimated Excess Cash Flow (at ~$305,000,000 EBITDA): approximately $85,000,000

ECF Sweep Percentage: 50%

Gross ECF Sweep Obligation: 50% x $85,000,000 = $42,500,000

The difference between the 25% and 50% sweep percentages is significant — an additional $21,250,000 of mandatory prepayment at the 50% tier — underscoring the cliff effect at the 4.25x threshold and the importance of managing leverage to remain at or below that level.

F. Upside Case (EBITDA Growth of 5%)

In an upside scenario, we model a case in which Adjusted EBITDA grows by 5% from the base case of $385,000,000 to $404,250,000. This growth could result from organic revenue growth, successful integration of recent bolt-on acquisitions, realization of operational efficiencies, favorable pricing dynamics, or a combination of positive factors.

EBITDA and Cash Flow Impact. A 5% increase in Adjusted EBITDA would increase Consolidated Net Income and Excess Cash Flow. We estimate Excess Cash Flow in this scenario at approximately $180,000,000, reflecting the higher net income with capital expenditures and other deductions held constant.

Cash Balance Impact. Year-end unrestricted cash would be higher in the upside scenario, reflecting improved profitability and cash generation. We estimate year-end cash of approximately $145,000,000.

Leverage Calculation:

Outstanding First Lien Debt at December 31, 2025: $1,389,500,000

Estimated Unrestricted Cash at Year-End: $145,000,000

First Lien Net Debt: $1,389,500,000 - $145,000,000 = $1,244,500,000

LTM Adjusted EBITDA: $404,250,000

First Lien Net Leverage Ratio: $1,244,500,000 / $404,250,000 = approximately 3.08x

Result: The upside first lien net leverage ratio of approximately 3.08x is well below the 3.50x threshold. Accordingly, Tier 3 applies, and the ECF sweep percentage is 0%. No mandatory prepayment would be required for fiscal 2025. In the upside scenario, Nexford comfortably remains within the 0% sweep tier, with approximately 42 basis points of cushion below the 3.50x threshold (compared to approximately 23 basis points in the base case). This confirms that even modest EBITDA growth provides significant deleveraging benefit and reinforces the expectation that no ECF sweep payment will be required in any scenario other than a meaningful performance decline.

G. Summary of Sensitivity Results

The following table summarizes the ECF sweep analysis under each of the scenarios modeled above:

As illustrated by the table, the ECF sweep obligation is not triggered until EBITDA declines by approximately 10% or more from the base case, and the most punitive 50% sweep tier is not reached unless EBITDA declines by in excess of approximately 20%. The Borrower's strong cash flow generation and moderate leverage at closing provide meaningful cushion against the ECF sweep obligation in all but the most adverse scenarios.

V. Key Drafting and Negotiation Issues

Based on our analysis of the ECF sweep mechanics and the illustrative Year 1 modeling, we have identified the following key drafting and negotiation issues for discussion with Claudia Merritt. Each of these issues represents an area where the current draft of the Credit Agreement may be improved from the Borrower's perspective, or where open issues need to be resolved in the next round of negotiations with W&G.

A. Voluntary Prepayment Credit — Scope and Mechanics

As discussed in Section III.E above, the voluntary prepayment credit is one of the most important borrower-favorable provisions in the ECF sweep mechanics. The credit reduces the ECF sweep obligation dollar-for-dollar by the amount of voluntary prepayments made during the applicable fiscal year. We recommend the following positions:

(i) Breadth of Credit. Confirm that the ECF sweep amount is reduced dollar-for-dollar by all voluntary prepayments of the Term Loans made during the applicable fiscal year, regardless of the source of funds used for such prepayments. The credit should encompass optional prepayments made under Section 2.05(a) of the Credit Agreement, prepayments funded from the builder basket, and prepayments made from any other permitted source.

(ii) Scheduled Amortization and Pari Passu Debt. Confirm that the credit also covers (a) scheduled amortization payments actually made during the fiscal year and (b) voluntary prepayments of any incremental pari passu term loans that may be incurred under the incremental facility provisions. The inclusion of pari passu debt prepayments is important to ensure that the Borrower is not penalized for choosing to prepay incremental term loans rather than the original Term Loan B.

(iii) Deemed Voluntary Prepayment for Below-Par Buybacks. We recommend pushing for inclusion of a "deemed voluntary prepayment" credit for debt buybacks conducted below par, with the credit calculated at the face amount (par value) of debt retired rather than the cash purchase price. This is a meaningful borrower-favorable position, as it would allow the Borrower to retire $100 face value of debt for (for example) $97 in cash while receiving $100 of credit against the ECF sweep obligation. We acknowledge that this position may face resistance from W&G and the Administrative Agent, but it has been accepted in a number of recent comparable transactions in the leveraged loan market.

B. Definition of Consolidated Net Income / EBITDA Add-Backs

The EBITDA add-backs permitted under the Credit Agreement directly affect the ECF calculation through their impact on the Consolidated Net Income starting point. Because Excess Cash Flow begins with Consolidated Net Income, and Consolidated Net Income is derived (in substance) from Adjusted EBITDA minus depreciation, interest, and taxes, the scope of permitted EBITDA add-backs flows through to the ECF definition and influences the size of the Excess Cash Flow pool.

Currently, the Borrower's Adjusted EBITDA includes $28,000,000 in permitted add-backs, consisting of: $12,000,000 in acquisition-related costs (principally investment banking, legal, and accounting fees incurred in connection with the original 2021 leveraged buyout and subsequent bolt-on acquisitions); $8,500,000 in non-recurring restructuring charges (relating to a manufacturing facility consolidation completed in 2024); $4,500,000 in sponsor management fees payable to Granite Peak under the Management Agreement; and $3,000,000 in integration costs (relating to the integration of Nexford's 2024 bolt-on acquisition of Whitmore Precision Components).

We recommend the following positions:

(i) Flow-Through to ECF. Confirm that the EBITDA add-backs are incorporated into the Consolidated Net Income definition in a manner that allows them to flow through to the ECF calculation. Specifically, the add-backs should increase Consolidated Net Income (and therefore Excess Cash Flow) only to the extent they represent non-cash charges or one-time items that do not affect the Borrower's recurring cash flow generation. If the add-backs are excluded from the ECF calculation (i.e., if the ECF definition uses a narrower definition of net income that does not reflect the EBITDA add-backs), the Borrower could face a higher ECF sweep obligation than anticipated.

(ii) EBITDA Add-Back Cap. The definition should incorporate a customary cap on EBITDA add-backs, typically set at 25% of Consolidated Adjusted EBITDA (calculated without giving effect to the add-backs). At $385,000,000 of Adjusted EBITDA, a 25% cap would permit up to approximately $96,250,000 in add-backs — well in excess of the current $28,000,000 in actual add-backs. We should confirm that W&G's draft includes a 25% cap (rather than a lower cap or no cap), and that the cap is sufficient to accommodate the Borrower's anticipated add-backs in future periods.

C. Capital Expenditure Deduction

Capital expenditures are a key deduction in the ECF calculation and directly reduce the Excess Cash Flow pool. The scope of this deduction is an important drafting point. We recommend the following positions:

(i) Maintenance and Growth CapEx. Confirm that the definition permits the deduction of all capital expenditures, including both maintenance capital expenditures (expenditures necessary to maintain the existing asset base) and growth capital expenditures (expenditures made to expand capacity, develop new products, or enter new markets). Some credit agreements limit the CapEx deduction to maintenance CapEx only, which would significantly increase the ECF sweep obligation for a growing company like Nexford. We should ensure that the definition is not so limited.

(ii) Exclusion of Debt-Financed CapEx. Confirm that capital expenditures financed with the proceeds of Indebtedness (other than revolving loans) are excluded from the CapEx deduction, to avoid double-counting. Similarly, capital expenditures financed with asset sale reinvestment proceeds or insurance or condemnation proceeds should be excluded from the deduction, as those proceeds are separately accounted for in the mandatory prepayment provisions.

(iii) Current LTM CapEx Level. The Borrower's current LTM capital expenditure level is $78,000,000, which is moderate relative to its $2.1 billion revenue base (representing approximately 3.7% of revenue). If Nexford increases its capital expenditure program in future years (e.g., to fund expansion projects or new manufacturing facilities), the CapEx deduction will correspondingly reduce the ECF pool. The flexibility to deduct growth CapEx is therefore an important long-te

CALDERWOOD & HARKNESS LLP 425 Lexington Avenue New York, New York 10017
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with its representation of Nexford Industrial Holdings Inc. This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressee and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
MEMORANDUM
TO: Claudia Merritt, Responsible Partner, Banking & Finance
FROM: Marcus Leung, Lead Associate, Banking & Finance Sophie Tremblay, Working Associate, Banking & Finance
DATE: March 12, 2025
RE: Nexford Industrial Holdings Inc. — $1,400,000,000 Senior Secured Term Loan B — Excess Cash Flow Sweep Mechanics and Illustrative Year 1 Modeling
MATTER NO.: 1005-00001
BILLING CODE: IBL-NIH-2025-031
I. Executive Summary
The purpose of this memorandum is to analyze the excess cash flow ("ECF") sweep provisions in the Credit Agreement currently being negotiated between Nexford Industrial Holdings Inc. ("Nexford" or the "Borrower"), Crescent Harbor Bank, N.A., as Administrative Agent and Collateral Agent (the "Administrative Agent"), and the lenders party thereto from time to time (collectively, the "Lenders"), in connection with the $1,400,000,000 senior secured Term Loan B credit facility (the "Term Loan B" or the "Facility"). The ECF sweep is a mandatory prepayment mechanism that requires Nexford to apply a specified percentage of its annual Excess Cash Flow (as defined in the Credit Agreement) to the prepayment of outstanding Term Loan B obligations, with the applicable percentage subject to step-downs tied to first lien net leverage ratios measured at the end of each fiscal year.
The ECF sweep is structured as a three-tiered mechanism. Under the current draft of the Credit Agreement, the Borrower is required to prepay 50% of Excess Cash Flow if the first lien net leverage ratio exceeds 4.25 to 1.00 as of the last day of the applicable fiscal year; 25% of Excess Cash Flow if the first lien net leverage ratio is equal to or less than 4.25 to 1.00 but greater than 3.50 to 1.00; and 0% of Excess Cash Flow if the first lien net leverage ratio is equal to or less than 3.50 to 1.00. This tiered structure is intended to balance the Lenders' interest in accelerated deleveraging with the Borrower's need for cash flow flexibility, rewarding the Borrower with reduced sweep obligations as leverage declines.
At closing, which is anticipated to occur on or about March 28, 2025, pro forma first lien net leverage is approximately 3.38 to 1.00, calculated as $1,300,000,000 of Consolidated First Lien Net Debt (being $1,400,000,000 of outstanding Term Loan B principal less $100,000,000 of pro forma unrestricted cash) divided by $385,000,000 of LTM Consolidated Adjusted EBITDA. This pro forma leverage level would place Nexford in the 0% sweep tier immediately at closing. However, we note that leverage may fluctuate during the first fiscal year depending on Nexford's Adjusted EBITDA performance, cash deployment decisions (including capital expenditures, restricted payments, and voluntary prepayments), and changes in the net debt position. Accordingly, it is not possible to assume with certainty that the 0% tier will apply at December 31, 2025, particularly in downside scenarios where EBITDA performance is weaker than the base case.
This memorandum provides: (a) a detailed analysis of the ECF sweep mechanics as reflected in the draft Credit Agreement, with our analysis based principally on the second draft received from Whitfield & Gage LLP ("W&G") on March 5, 2025, and incorporating comments from the working third draft currently in negotiation as of this date (the third draft having been circulated by W&G on March 7, 2025, with our markup returned on March 10, 2025); (b) an illustrative model of the Year 1 ECF calculation and mandatory prepayment obligation under base case, upside, and downside scenarios; and (c) commentary on key definitional issues and borrower-favorable positions that we recommend pursuing in the next round of negotiations.
We recommend discussing the key negotiation positions identified in Section VI below with you before the next working group call with Margaret Ashby of Whitfield & Gage LLP and Elaine Prescott of Crescent Harbor Bank, which is currently scheduled for March 18, 2025.
II. Background — Transaction Overview
This Section provides a summary of the key terms of the transaction for reference in analyzing the ECF sweep mechanics.
Borrower. Nexford Industrial Holdings Inc., a Delaware corporation headquartered at 1400 Industrial Parkway, Schaumburg, Illinois 60173. Nexford is a diversified industrial manufacturing company with operations across the United States and Canada, generating approximately $2.1 billion in annual revenue. The company operates through three principal business segments: precision components, advanced materials, and industrial systems.
Sponsor and Holdings. Nexford is indirectly held by Granite Peak Capital Partners, LP ("Granite Peak" or the "Sponsor"), a private equity firm focused on industrial and manufacturing investments. Nexford's direct parent is Granite Peak NIH Holdings, LLC ("Holdings"), a Delaware limited liability company that holds 100% of the issued and outstanding equity interests in Nexford. Granite Peak acquired Nexford in 2021 through a leveraged buyout, and the current refinancing is intended to optimize the company's capital structure and provide a distribution to the Sponsor.
Facility. The Facility consists of a $1,400,000,000 Term Loan B, with a seven-year maturity date of March 28, 2032. Interest on the Term Loan B accrues at a rate per annum equal to Term SOFR (as published by CME Group Benchmark Administration Limited) plus a margin of 400 basis points (4.00%), subject to a SOFR floor of 0.75%. The credit spread adjustment for one-month Term SOFR is 0.10%, resulting in an estimated all-in rate of approximately 8.45% based on current SOFR levels (approximately 4.35% as of the date of this memorandum).
Amortization. The Term Loan B amortizes at a rate of 1.00% per annum of the original principal amount, payable in equal quarterly installments of $3,500,000 each, commencing on the last business day of the first full fiscal quarter following the closing date (i.e., June 30, 2025). The balance of the outstanding principal is due and payable on the maturity date. This amortization rate is standard for sponsor-backed Term Loan B facilities and is relatively modest, reflecting the leveraged finance market convention of minimal mandatory amortization supplemented by cash flow sweep mechanics.
Use of Proceeds. The proceeds of the Term Loan B will be used as follows:
(a) approximately $879,375,000 to refinance the existing first lien term loan held by Atlas Meridian Bank, N.A. (the "Existing Term Loan"), which was incurred in connection with the original leveraged buyout in 2021 and has been subsequently repriced;
(b) approximately $335,000,000 as a dividend to Holdings and, indirectly, to the Sponsor;
(c) approximately $38,625,000 to pay transaction fees, costs, and expenses (including arrangement fees, commitment fees, legal fees, and other customary closing costs); and
(d) approximately $147,000,000 to cash to the Borrower's balance sheet for general corporate purposes, resulting in pro forma unrestricted cash of approximately $100,000,000 at closing (after giving effect to the payment of transaction expenses from balance sheet cash and other closing adjustments).
Existing Unsecured Notes. Nexford has outstanding $250,000,000 in aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 (the "Unsecured Notes"), issued pursuant to an indenture dated as of November 15, 2021, with Pinnacle Trust Company, N.A. as trustee. The Unsecured Notes will remain outstanding following the closing of the Term Loan B and constitute unsecured obligations of the Borrower. The Unsecured Notes do not amortize prior to their stated maturity date and are not subject to an excess cash flow sweep or other mandatory prepayment provisions (other than customary change of control and asset sale offers). The Unsecured Notes are included in the calculation of total net leverage but excluded from the calculation of first lien net leverage.
Pro Forma Leverage. Pro forma first lien net leverage at closing is approximately 3.38 to 1.00, calculated as follows: ($1,400,000,000 outstanding Term Loan B principal minus $100,000,000 of pro forma unrestricted cash) divided by $385,000,000 of LTM Consolidated Adjusted EBITDA, equaling $1,300,000,000 / $385,000,000 = approximately 3.38x. Pro forma total net leverage at closing is approximately 4.03 to 1.00, calculated as follows: ($1,400,000,000 outstanding Term Loan B principal plus $250,000,000 outstanding Unsecured Notes minus $100,000,000 of pro forma unrestricted cash) divided by $385,000,000 of LTM Consolidated Adjusted EBITDA, equaling $1,550,000,000 / $385,000,000 = approximately 4.03x.
Administrative Agent and Collateral Agent. Crescent Harbor Bank, N.A., with offices at 320 Federal Street, Boston, Massachusetts 02110, will serve as Administrative Agent and Collateral Agent under the Credit Agreement.
Agent's Counsel. Whitfield & Gage LLP is acting as counsel to the Administrative Agent. The lead partner is Margaret Ashby, with Jonathan Ferris serving as working associate. We have had productive discussions with Ms. Ashby and Mr. Ferris on the principal terms of the Credit Agreement, and the ECF sweep provisions have been the subject of several exchanges of drafts and comments.
Borrower's Counsel. Calderwood & Harkness LLP is acting as counsel to the Borrower in connection with the Term Loan B and all related documentation.
III. Excess Cash Flow Sweep — Contractual Mechanics
A. Overview of the Mandatory Prepayment Provision
The ECF sweep is set forth in anticipated Section 2.05(b)(i) of the Credit Agreement, as drafted in the W&G second draft dated March 5, 2025. Section 2.05(b) of the Credit Agreement sets forth the mandatory prepayment obligations of the Borrower, which include (in addition to the ECF sweep) mandatory prepayments from (x) asset sale proceeds (subject to reinvestment rights) and (y) proceeds of certain debt incurrences. The ECF sweep provision is the primary mechanism by which the Lenders receive the benefit of the Borrower's annual free cash flow generation in excess of what is needed for operations, investment, and permitted uses.
Under the current draft, the Borrower is required, within ninety-five (95) days after the end of each fiscal year (which fiscal year ends on December 31), to prepay the Term Loans in an aggregate principal amount equal to a specified percentage of Excess Cash Flow for such fiscal year, subject to the leverage-based step-downs described in Section III.B below. The 95-day period corresponds approximately to the period within which the Borrower is required to deliver its annual audited financial statements under the reporting covenant (currently set at 90 days after fiscal year-end in the draft). We note that we are negotiating the payment deadline to be tied to the delivery of the annual financial statements plus five (5) business days, rather than a fixed 95-day period, as discussed further in Section V.F below.
The first ECF sweep test period will be the fiscal year ending December 31, 2025, which will be the first full fiscal year after the anticipated closing date of March 28, 2025. Based on the 95-day payment deadline currently in the draft, the first ECF sweep payment, if any, would be due on or before April 5, 2026 (95 calendar days after December 31, 2025), or such shorter or longer period as may be finally agreed in the Credit Agreement.
It is important to note that the ECF sweep applies to the full fiscal year even though the Term Loan B will only be outstanding for approximately nine months of fiscal 2025 (from March 28, 2025 through December 31, 2025). The Excess Cash Flow definition captures the Borrower's cash flow for the entire fiscal year, not merely the portion of the fiscal year during which the Term Loan B is outstanding. This is a standard approach in leveraged credit agreements, and the partial-year nature of the closing is accounted for in the deductions from ECF (e.g., the cash interest deduction will reflect the actual interest paid during the year, which will be lower than a full-year amount due to the March closing date).
B. Tiered Sweep Percentages and Leverage Step-Downs
The ECF sweep percentage is determined by reference to the Borrower's first lien net leverage ratio as of the last day of the applicable fiscal year. The three-tiered structure currently reflected in the draft Credit Agreement is as follows:
Tier 1 — 50% Sweep. If the first lien net leverage ratio as of the last day of the applicable fiscal year exceeds 4.25 to 1.00, the Borrower is required to prepay 50% of Excess Cash Flow for such fiscal year. This represents the highest sweep percentage and applies when the Borrower's leverage is at its most elevated, reflecting the Lenders' expectation of accelerated deleveraging when the credit profile is weakest.
Tier 2 — 25% Sweep. If the first lien net leverage ratio as of the last day of the applicable fiscal year is equal to or less than 4.25 to 1.00 but greater than 3.50 to 1.00 (i.e., the ratio is in the range of greater than 3.50x and up to and including 4.25x), the Borrower is required to prepay 25% of Excess Cash Flow for such fiscal year. This intermediate tier reflects a moderated sweep obligation as leverage approaches the target range.
Tier 3 — 0% Sweep. If the first lien net leverage ratio as of the last day of the applicable fiscal year is equal to or less than 3.50 to 1.00, the Borrower is not required to make any ECF sweep payment, regardless of the amount of Excess Cash Flow generated during such fiscal year. This tier provides a significant incentive for the Borrower to maintain leverage at or below 3.50x, as it effectively eliminates the ECF sweep obligation entirely.
The leverage ratio for purposes of the ECF sweep step-downs is tested as of the last day of the applicable fiscal year, on a pro forma basis. A critical open issue in the current negotiation is whether the leverage test gives pro forma effect to any voluntary prepayments of the Term Loans made during the fiscal year. Our position is that the Borrower should receive pro forma credit for voluntary prepayments when calculating the first lien net leverage ratio for purposes of the ECF sweep step-downs. This pro forma adjustment would reduce the numerator of the leverage ratio (by reducing outstanding first lien debt) and could cause the Borrower to fall into a lower leverage tier (and therefore a lower or zero sweep percentage). We have raised this point with W&G and it remains open as of this date. We consider this a key borrower ask and recommend pressing the issue in the next round of negotiations.
The "First Lien Net Leverage Ratio" is defined as the ratio of (i) Consolidated First Lien Net Debt as of the date of determination to (ii) Consolidated Adjusted EBITDA for the most recently ended period of four consecutive fiscal quarters (i.e., an LTM basis). "Consolidated First Lien Net Debt" is defined as the aggregate outstanding principal amount of all funded Indebtedness of the Borrower and its Restricted Subsidiaries that is secured by a first-priority Lien on any Collateral, minus unrestricted cash and Cash Equivalents of the Borrower and its Restricted Subsidiaries. We note that the current draft does not include a cap on the amount of cash that may be netted against first lien debt in computing Consolidated First Lien Net Debt, which is a borrower-favorable provision that we should seek to preserve. In certain credit agreements, lender counsel will seek to impose a netting cap (e.g., limiting the cash netting to $100,000,000 or $200,000,000), which would result in a higher calculated leverage ratio and a greater likelihood of falling into a higher sweep tier.
C. Definition of Excess Cash Flow
"Excess Cash Flow" is defined in anticipated Section 1.01 of the Credit Agreement. The definition is the foundation of the ECF sweep calculation and determines the pool of cash flow that is subject to the mandatory prepayment. The definition follows the standard construction used in leveraged credit agreements, beginning with Consolidated Net Income and making a series of adjustments to approximate the Borrower's free cash flow available for debt service.
For any fiscal year, Excess Cash Flow is calculated as follows:
Starting Point: Consolidated Net Income. The calculation begins with Consolidated Net Income of the Borrower and its Restricted Subsidiaries for such fiscal year. Consolidated Net Income is itself a defined term in the Credit Agreement and is subject to a number of adjustments and exclusions, including the exclusion of extraordinary gains and losses, gains and losses from asset sales, non-cash impairment charges, and certain other items. The use of Consolidated Net Income (rather than Adjusted EBITDA) as the starting point means that cash interest expense, cash taxes, and depreciation and amortization have already been subtracted. However, because the definition then adds back depreciation, amortization, and other non-cash charges, the practical effect is to start from a cash-flow-like measure.
Additions (items added to Consolidated Net Income):
(i) Depreciation and Amortization. The amount of depreciation, amortization, and other non-cash charges that were deducted in computing Consolidated Net Income for such period are added back, since these are non-cash charges that do not represent actual cash outflows during the period.
(ii) Other Non-Cash Charges. Other non-cash charges or losses deducted in arriving at Consolidated Net Income for such period are added back, to the extent not already captured in clause (i) above. This includes items such as stock-based compensation expense, non-cash write-offs, and non-cash portions of restructuring charges.
(iii) Decreases in Working Capital. The amount of any net decrease in working capital of the Borrower and its Restricted Subsidiaries during such period is added to Excess Cash Flow, since a decrease in working capital represents a release of cash (e.g., through the collection of receivables or the reduction of inventory).
Subtractions (items subtracted from the sum of the above):
(i) Non-Cash Income and Gains. Non-cash income or gains that were included in computing Consolidated Net Income for such period are subtracted, since these items do not represent actual cash inflows. This includes unrealized gains on hedging instruments, non-cash purchase accounting adjustments, and similar items.
(ii) Capital Expenditures. Capital expenditures made in cash during such period are deducted, excluding capital expenditures financed with the proceeds of Indebtedness (other than revolving loans). This deduction recognizes that the Borrower must reinvest in its asset base to maintain and grow the business, and that cash spent on capital expenditures is not available for debt prepayment. We discuss the scope of this deduction in Section V.C below.
(iii) Increases in Working Capital. The amount of any net increase in working capital of the Borrower and its Restricted Subsidiaries during such period is subtracted, since an increase in working capital represents a use of cash (e.g., through the buildup of inventory or the extension of receivables).
(iv) Scheduled Amortization Payments. The aggregate amount of all scheduled amortization payments on the Term Loans actually made during such period is deducted. For fiscal 2025, this amount would be $10,500,000 (three quarterly installments of $3,500,000 each, commencing June 30, 2025).
(v) Voluntary Prepayments of the Term Loans. The aggregate amount of all voluntary prepayments of the Term Loans actually made during such period is deducted (the "voluntary prepayment credit"). This is a critical borrower-favorable deduction, as discussed in detail in Section III.E below.
(vi) Cash Taxes Paid. The aggregate amount of federal, state, local, and foreign income taxes actually paid in cash during such period is deducted, to the extent not already deducted in computing Consolidated Net Income. We note that the treatment of cash taxes in the ECF definition can be complex, as Consolidated Net Income will already reflect tax expense (which may differ from cash taxes paid due to deferred tax items). We will need to review the final definition carefully to avoid double-counting.
(vii) Cash Interest Paid. The aggregate amount of cash interest expense actually paid during such period is deducted, to the extent not otherwise deducted in arriving at Consolidated Net Income. As with cash taxes, the interplay between the Consolidated Net Income starting point and the cash interest deduction requires careful review to ensure consistency.
(viii) Permitted Acquisitions. The aggregate consideration paid in cash in connection with Permitted Acquisitions consummated during such period is deducted, to the extent funded with internally generated cash (and not financed with the proceeds of Indebtedness or equity issuances). This deduction allows the Borrower to pursue acquisition-driven growth without triggering increased ECF sweep obligations.
(ix) Other Permitted Investments. Cash expenditures made during such period in connection with other Permitted Investments (as defined in the Credit Agreement) are deducted, subject to a basket amount that is currently open for negotiation. We recommend seeking a basket of at least $50,000,000 per annum for this deduction, or alternatively, an uncapped deduction for Permitted Investments funded with internally generated cash, subject to pro forma compliance with the applicable leverage test.
The key deductions from Excess Cash Flow — particularly the voluntary prepayment credit, the capital expenditure deduction, and the permitted acquisition/investment deductions — are the principal levers available to the Borrower to reduce the ECF sweep obligation. Each of these deductions merits careful attention in the drafting process, as expansive deductions will directly reduce the mandatory prepayment amount, while narrow or capped deductions will increase it.
D. Application of ECF Sweep Payments
Under the current draft of the Credit Agreement, ECF sweep payments are applied pro rata to all remaining scheduled amortization installments on the Term Loan B. Under this approach, an ECF sweep payment would proportionately reduce each future quarterly installment over the remaining term of the loan, resulting in a modest reduction in each payment. For example, if the Borrower were required to make a $30,000,000 ECF sweep payment, the pro rata application would spread that prepayment credit across all remaining quarterly installments (approximately 26 installments as of the first ECF payment date in April 2026), reducing each installment by approximately $1,153,846.
Our position, which we have communicated to W&G, is that ECF sweep payments should instead be applied in direct order of maturity — that is, to the next succeeding quarterly installments first. Under this approach, a $30,000,000 ECF sweep payment would eliminate the next several quarterly installments entirely (approximately 8-9 installments at $3,500,000 each), thereby freeing the Borrower from mandatory amortization payments for approximately two years. This application method is meaningfully more favorable to the Borrower, as it preserves near-term cash flow flexibility and front-loads the prepayment credit. We note that direct order of maturity application is a common borrower-favorable request in leveraged credit agreements and has been accepted in a number of comparable sponsor-backed transactions.
Regardless of the application methodology, ECF sweep payments are applied without premium or penalty. This is consistent with the treatment of voluntary prepayments under the Credit Agreement, which are also permitted without premium or penalty (other than any applicable soft-call premium during the first six months following closing, which does not apply to mandatory prepayments).
We also note that, unlike mandatory prepayments from asset sale proceeds (which are subject to 365-day and 545-day reinvestment periods under Section 2.05(b)(ii) of the draft Credit Agreement), ECF sweep payments are not subject to any reinvestment right. The absence of a reinvestment right means that the full amount of the applicable ECF sweep percentage must be applied to prepay the Term Loans, without the Borrower having the option to reinvest such amounts in capital expenditures or acquisitions in lieu of prepayment.
Finally, ECF sweep payments reduce the outstanding principal amount of the Term Loans and thereby reduce the numerator in the First Lien Net Leverage Ratio for future periods. This creates a virtuous cycle: ECF sweep payments in early years (if any) reduce leverage, which may cause the Borrower to fall into a lower sweep tier in subsequent years, ultimately reaching the 0% tier where no further ECF sweep payments are required.
E. Voluntary Prepayment Credit
The voluntary prepayment credit is one of the most important borrower-favorable provisions in the ECF sweep mechanics. Under the current draft, the Borrower is permitted to credit voluntary prepayments of the Term Loans made during the applicable fiscal year against the ECF sweep obligation on a dollar-for-dollar basis. This means that if Nexford makes $20,000,000 in voluntary prepayments during fiscal 2025, and the ECF sweep obligation for fiscal 2025 is determined to be $30,000,000, the net ECF sweep payment that the Borrower would actually be required to make would be $10,000,000 ($30,000,000 minus $20,000,000).
The voluntary prepayment credit is critical because it provides the Borrower with flexibility in managing its deleveraging trajectory. Rather than waiting until the ECF sweep payment date (which occurs after fiscal year-end) to apply excess cash flow to debt prepayment, the Borrower can make voluntary prepayments during the year as cash becomes available, and receive credit against the ECF sweep obligation. This is particularly valuable for a company like Nexford, which generates substantial free cash flow throughout the year and may wish to deploy that cash flow toward debt reduction on an ongoing basis rather than holding it until the annual ECF sweep date.
We recommend confirming the following points with respect to the scope of the voluntary prepayment credit:
(a) Scope of Term Loan Prepayments. The credit should apply to all optional prepayments of the Term Loans made under Section 2.05(a) of the Credit Agreement during the applicable fiscal year, regardless of the source of funds used to make such prepayments (including prepayments funded from the Borrower's general operating cash, the builder basket, or other permitted sources).
(b) Scheduled Amortization. The credit should also include scheduled amortization payments actually made during the applicable fiscal year. In fiscal 2025, this amount would be $14,000,000 on an annualized basis (four quarters at $3,500,000 each), or $10,500,000 for the partial year (three quarterly payments commencing June 30, 2025). We note that the inclusion of scheduled amortization in the voluntary prepayment credit is standard in leveraged credit agreements, as scheduled amortization is already deducted in computing Excess Cash Flow, and the voluntary prepayment credit effectively reduces the gross ECF sweep amount. However, the precise interplay between the amortization deduction in the ECF definition (which reduces the calculated ECF amount) and the voluntary prepayment credit (which reduces the ECF sweep obligation) requires careful review to avoid double-counting. In the current draft, it appears that scheduled amortization is deducted in computing ECF (reducing the pool) and is also included in the voluntary prepayment credit (reducing the sweep obligation), which would effectively provide a double benefit. We should confirm this is intentional and push to preserve it.
(c) Prepayments of Pari Passu Indebtedness. The credit should also include voluntary prepayments of any other Indebtedness that is secured by a first-priority Lien on the Collateral and is pari passu with the Term Loans, including any incremental term loans that may be incurred in the future under the incremental facility provisions of the Credit Agreement. Our position is that prepayments of pari passu indebtedness should be credited because they achieve the same deleveraging objective as prepayments of the Term Loans and reduce the numerator in the First Lien Net Leverage Ratio. W&G has not yet responded to this point.
(d) Debt Buybacks Below Par. We also recommend pushing for inclusion of a "deemed voluntary prepayment" credit for debt buybacks conducted below par. If the Borrower repurchases Term Loans in the open market at a discount to par (e.g., at 97 cents on the dollar), the credit should be calculated based on the face amount of debt retired, not the cash purchase price. This is a borrower-favorable position that has been accepted in a number of recent comparable transactions, particularly in the current market environment where leveraged loans have periodically traded below par. We acknowledge that this may be a difficult point to win with W&G and Crescent Harbor Bank, but it is worth raising given the potential upside to the Borrower.
F. Step-Down Interaction with Leverage Ratio
The interaction between the ECF sweep step-downs and the First Lien Net Leverage Ratio creates important strategic dynamics for the Borrower. As discussed above, the applicable sweep percentage is determined by reference to the Borrower's first lien net leverage as of the last day of the applicable fiscal year. This means that the Borrower has the ability to influence the sweep percentage by managing its leverage during the year — for example, by making voluntary prepayments to reduce outstanding debt, by accumulating cash on the balance sheet, or by improving EBITDA performance through operational initiatives.
At closing, pro forma first lien net leverage is approximately 3.38 to 1.00, which places Nexford below the 3.50x threshold and within the 0% sweep tier. If Nexford's leverage remains at or below 3.50x at December 31, 2025, no ECF sweep payment would be required for fiscal 2025 regardless of the amount of Excess Cash Flow generated during the year. This is the expected outcome in the base case, as discussed in Section IV below.
However, several factors could cause leverage to increase above the 3.50x threshold during fiscal 2025, thereby triggering a 25% or even 50% sweep:
(a) EBITDA Decline. If Adjusted EBITDA declines from the base case of $385,000,000 (whether due to macroeconomic conditions, loss of a key customer, supply chain disruptions, or other factors), the denominator of the leverage ratio would decrease, causing leverage to rise. A decline of approximately 10% or more in Adjusted EBITDA could push leverage above 3.50x, as illustrated in the sensitivity analysis in Section IV.D below.
(b) Cash Deployment. If the Borrower deploys cash during the year for purposes that reduce year-end cash balances (e.g., acquisitions, restricted payments, or capital expenditures in excess of the base case assumption), the numerator of the leverage ratio (net of cash) would increase. A significant reduction in year-end cash could contribute to higher leverage.
(c) Additional Debt. If the Borrower incurs additional first lien indebtedness under the incremental facility provisions of the Credit Agreement, the outstanding first lien debt would increase, directly increasing the numerator of the leverage ratio.
The modeling in Section IV below illustrates the sensitivity of the leverage ratio and ECF sweep obligation to changes in Adjusted EBITDA and cash balances under various scenarios.
IV. Illustrative Year 1 ECF Modeling
A. Key Assumptions
The following key assumptions underlie the illustrative ECF model for fiscal year 2025. These assumptions are based on the Borrower's historical financial performance, the pro forma capital structure at closing, and management's current forecasts as communicated to us by the Granite Peak deal team. We note that these assumptions are illustrative only and are not intended to constitute a financial forecast or projection. The actual ECF calculation for fiscal 2025 will depend on Nexford's actual financial performance and the final terms of the Credit Agreement.
Fiscal Year Period. The fiscal year runs from January 1, 2025 through December 31, 2025. The closing of the Term Loan B is anticipated to occur on March 28, 2025, meaning that the Term Loan B will be outstanding for approximately nine months (275 days) of fiscal 2025. For the first approximately three months of fiscal 2025 (January 1 through March 28, 2025), the Borrower's capital structure will reflect the existing Atlas Meridian Bank term loan and the existing Unsecured Notes.
Initial Outstanding Principal. The initial outstanding principal amount of the Term Loan B at closing is $1,400,000,000.
Quarterly Amortization. Quarterly amortization of $3,500,000 per quarter, representing 1.00% per annum of the original principal amount. For fiscal 2025, three quarterly amortization payments are assumed, due on June 30, September 30, and December 31, 2025, for a total of $10,500,000 in scheduled amortization during the year. We note that the first quarterly amortization payment is due on June 30, 2025, which is the last business day of the first full fiscal quarter following the closing date.
Outstanding Principal at Year-End. The outstanding principal amount of the Term Loan B at December 31, 2025 is assumed to be $1,389,500,000 ($1,400,000,000 less $10,500,000 of scheduled amortization), assuming no voluntary prepayments are made during the year.
Existing Senior Unsecured Notes. The $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028 is assumed to remain outstanding and unchanged throughout fiscal 2025. The Unsecured Notes do not amortize and are excluded from the first lien net leverage calculation.
Pro Forma Cash at Closing. Unrestricted cash at closing is assumed to be approximately $100,000,000, reflecting the $147,000,000 of cash to the balance sheet from the Term Loan B proceeds less approximately $47,000,000 of additional closing costs, working capital adjustments, and other uses.
LTM Adjusted EBITDA. LTM Consolidated Adjusted EBITDA for the twelve-month period ending December 31, 2024 is $385,000,000. In the base case, we assume that Adjusted EBITDA remains constant at $385,000,000 for the LTM period ending December 31, 2025. Sensitivity analysis is provided for growth and decline scenarios. The $385,000,000 figure includes $28,000,000 in permitted EBITDA add-backs, consisting of $12,000,000 in acquisition-related costs, $8,500,000 in non-recurring restructuring charges, $4,500,000 in sponsor management fees payable to Granite Peak under the Management Agreement, and $3,000,000 in integration costs. Reported EBITDA (before add-backs) is approximately $357,000,000.
Capital Expenditures. Capital expenditures are assumed to be $78,000,000 for fiscal 2025, held constant from the LTM period. This figure includes both maintenance capital expenditures (estimated at approximately $52,000,000) and growth capital expenditures (estimated at approximately $26,000,000).
Cash Interest Expense. Estimated annual cash interest expense is calculated as follows:
Term Loan B interest: The average outstanding principal balance during the period the Term Loan B is outstanding (March 28 through December 31, 2025) is approximately $1,394,750,000 (the midpoint of the opening balance of $1,400,000,000 and the year-end balance of $1,389,500,000). The estimated all-in interest rate is approximately 8.45% (consisting of Term SOFR of approximately 4.35%, plus the 0.10% credit spread adjustment for one-month SOFR, plus the 4.00% applicable margin). Full-year interest on the Term Loan B would be approximately $117,856,375; however, for the approximately nine months from March 28 to December 31, 2025, cash interest on the Term Loan B is estimated at approximately $88,392,281 (9/12 of the full-year amount).
Unsecured Notes interest: Interest on the $250,000,000 Unsecured Notes at 7.250% per annum equals $18,125,000 annually. For the full fiscal year, this amount is payable regardless of the Term Loan B closing date. However, we note that the Unsecured Notes interest is payable semi-annually (on May 15 and November 15), and the full $18,125,000 will be paid during fiscal 2025.
Pre-closing interest on Atlas Meridian facilities: For the period from January 1 through approximately March 28, 2025, the Borrower will continue to pay interest on the existing Atlas Meridian Bank term loan (outstanding balance of approximately $879,375,000 at an assumed rate of approximately 9.00%). Estimated pre-closing interest for this three-month period is approximately $19,787,000.
Total estimated cash interest for fiscal 2025: Approximately $117,000,000 (blended estimate encompassing pre-closing interest on the Atlas Meridian facilities, post-closing interest on the Term Loan B, and the full year of Unsecured Notes interest). This is a blended approximation; the actual figure will depend on the precise closing date, the applicable SOFR rate on each interest payment date, and other factors.
Cash Taxes. Cash taxes paid during fiscal 2025 are estimated at approximately $25,000,000, reflecting the Borrower's estimated effective tax rate applied to taxable income for the period. This estimate takes into account Section 163(j) limitations on the deductibility of business interest expense, which may limit the Borrower's ability to deduct the full amount of cash interest paid during the year. We note that a detailed analysis of the Section 163(j) implications was prepared by Sylvia Hartwell of our Tax Group in her memorandum dated March 5, 2025, and we have relied on her estimated cash tax figure for purposes of this modeling.
Working Capital Changes. In the base case, we assume working capital changes are flat (i.e., no net increase or decrease in working capital during the fiscal year). This is a simplifying assumption; in practice, working capital for a diversified industrial company with $2.1 billion in annual revenue can fluctuate significantly from quarter to quarter and year to year, depending on the timing of receivable collections, inventory management, and payable cycles.
B. Base Case — ECF Calculation (Fiscal Year 2025)
Based on the assumptions set forth in Section IV.A above, we present the following illustrative base case ECF calculation for fiscal 2025. We note that this calculation is necessarily simplified and is intended to provide an order-of-magnitude estimate of the ECF sweep obligation (if any) rather than a precise calculation. The actual ECF calculation will be performed based on the final definitions in the executed Credit Agreement and the Borrower's actual audited financial statements for fiscal 2025.
Derivation of Estimated Consolidated Net Income. As a preliminary step, we derive estimated Consolidated Net Income from Adjusted EBITDA:
Revenue (assumed constant): $2,100,000,000
Adjusted EBITDA: $385,000,000 (including $28,000,000 in permitted add-backs, as described in Section IV.A above)
Less: Depreciation and amortization: ($65,000,000) (estimated based on reported EBITDA of $357,000,000 and typical depreciation and amortization rates for a diversified industrial company of Nexford's size; this figure includes approximately $40,000,000 of depreciation on property, plant, and equipment and approximately $25,000,000 of amortization of intangible assets, including customer relationships and trade names recognized in connection with the 2021 leveraged buyout)
Less: Cash interest expense: ($117,000,000) (blended estimate for fiscal 2025, as described in Section IV.A above)
Less: Cash taxes: ($25,000,000) (estimated, as described in Section IV.A above)
Estimated Consolidated Net Income: $178,000,000 ($385,000,000 - $65,000,000 - $117,000,000 - $25,000,000)
We acknowledge that this derivation involves a number of simplifying assumptions, including the treatment of Adjusted EBITDA add-backs, the estimation of depreciation and amortization, and the use of blended interest and tax figures. The actual Consolidated Net Income figure will be determined from the Borrower's audited financial statements and the specific definition of Consolidated Net Income in the Credit Agreement.
Excess Cash Flow Computation (Base Case).
The above illustrative calculation indicates that Nexford would generate approximately $164,500,000 in Excess Cash Flow for fiscal 2025 under the base case assumptions. This substantial ECF generation reflects Nexford's strong cash flow profile: with $385,000,000 in Adjusted EBITDA and relatively moderate capital expenditures of $78,000,000, the company generates significant free cash flow in excess of its debt service obligations and investment requirements.
We note that the above calculation is illustrative and simplified. The actual ECF definition in the Credit Agreement will incorporate more granular components and adjustments, including detailed specifications of which non-cash charges are eligible for add-back, the precise treatment of cash taxes and cash interest expense, and the specific categories of permitted deductions. The key takeaway from this analysis is that Nexford generates substantial Excess Cash Flow, and the applicable sweep percentage (determined by the leverage test) will be the primary determinant of the mandatory prepayment obligation.
C. Leverage Test at December 31, 2025 (Base Case)
The applicable ECF sweep percentage is determined by the First Lien Net Leverage Ratio at December 31, 2025, the last day of the fiscal year. Under the base case assumptions, we calculate the leverage ratio as follows:
Outstanding First Lien Debt at December 31, 2025: $1,389,500,000 (initial principal of $1,400,000,000 less three quarterly amortization payments totaling $10,500,000, and assuming no voluntary prepayments during the year).
Estimated Unrestricted Cash at Year-End (Base Case): Under the base case, we estimate year-end unrestricted cash of approximately $130,000,000. This estimate begins with pro forma cash of $100,000,000 at closing and adds the incremental cash generated during the approximately nine months of operations following the closing, net of cash interest, cash taxes, capital expenditures, and scheduled amortization. The buildup of cash from $100,000,000 to $130,000,000 reflects the Borrower's strong free cash flow generation during the partial year, offset by the various cash outflows described in Section IV.A. We note that this estimate assumes no dividends or other restricted payments are made to Holdings or the Sponsor during fiscal 2025 and no voluntary prepayments beyond scheduled amortization.
First Lien Net Debt: $1,389,500,000 - $130,000,000 = $1,259,500,000.
LTM Adjusted EBITDA: $385,000,000 (assumed constant for the LTM period ending December 31, 2025).
First Lien Net Leverage Ratio: $1,259,500,000 / $385,000,000 = approximately 3.27x.
Result: The base case first lien net leverage ratio of approximately 3.27x is below the 3.50x threshold for the Tier 3 step-down. Accordingly, Tier 3 applies, and the ECF sweep percentage is 0%. No mandatory prepayment would be required for fiscal 2025, regardless of the $164,500,000 in Excess Cash Flow generated during the year.
This result is consistent with expectations, as the pro forma first lien net leverage at closing of approximately 3.38x already falls below the 3.50x threshold, and the combination of modest amortization payments and cash accumulation during the year provides a further cushion. In the base case, Nexford has ample room within the 0% sweep tier and would need to experience a significant deterioration in EBITDA or a meaningful reduction in cash balances (or both) to be pushed into a higher sweep tier.
D. Sensitivity Analysis — Downside Case (EBITDA Decline of 10%)
To assess the impact of an adverse performance scenario, we model a case in which Adjusted EBITDA declines by 10% from the base case of $385,000,000 to $346,500,000. This decline could result from range factors, including macroeconomic headwinds affecting the industrial sector, the loss of one or more significant customers, input cost inflation that cannot be fully passed through to customers, or a slowdown in end-market demand for Nexford's products.
EBITDA and Cash Flow Impact. A 10% decline in Adjusted EBITDA would directly reduce Consolidated Net Income and, consequently, Excess Cash Flow. We estimate Excess Cash Flow in this scenario at approximately $120,000,000, reflecting the lower net income partially offset by the fixed nature of certain deductions (e.g., capital expenditures, which are assumed to remain at $78,000,000, and scheduled amortization, which remains at $10,500,000). Cash interest and cash taxes would also be somewhat lower due to reduced profitability, but the net effect is a reduction in ECF of approximately $44,500,000 relative to the base case.
Cash Balance Impact. Year-end unrestricted cash would also be lower in the downside scenario, reflecting reduced profitability and lower cash generation during the year. We estimate year-end cash of approximately $100,000,000, representing a decrease of $30,000,000 from the base case estimate of $130,000,000.
Leverage Calculation:
Outstanding First Lien Debt at December 31, 2025: $1,389,500,000
Estimated Unrestricted Cash at Year-End: $100,000,000
First Lien Net Debt: $1,389,500,000 - $100,000,000 = $1,289,500,000
LTM Adjusted EBITDA: $346,500,000
First Lien Net Leverage Ratio: $1,289,500,000 / $346,500,000 = approximately 3.72x
Result: The downside first lien net leverage ratio of approximately 3.72x exceeds the 3.50x threshold but is below the 4.25x threshold. Accordingly, Tier 2 applies, and the ECF sweep percentage is 25%.
Estimated Mandatory Prepayment:
Estimated Excess Cash Flow: $120,000,000
ECF Sweep Percentage: 25%
Gross ECF Sweep Obligation: 25% x $120,000,000 = $30,000,000
Less: Voluntary Prepayment Credit (scheduled amortization of $10,500,000, if the definition permits this credit as discussed in Section III.E): ($10,500,000)
Net ECF Sweep Payment: $30,000,000 - $10,500,000 = $19,500,000
We note that the voluntary prepayment credit in this scenario is limited to the $10,500,000 of scheduled amortization actually paid during fiscal 2025, as we have assumed no additional voluntary prepayments in this downside case. If the Borrower were to make additional voluntary prepayments during the year (e.g., $20,000,000 in voluntary prepayments funded from the $100,000,000 of closing cash), the voluntary prepayment credit would increase correspondingly, potentially reducing or eliminating the net ECF sweep payment. However, the use of cash for voluntary prepayments would also reduce year-end cash balances, potentially increasing the leverage ratio and pushing the Borrower into a higher sweep tier. This interplay between voluntary prepayments, cash balances, and leverage underscores the importance of careful cash flow management throughout the year.
E. Sensitivity Analysis — Severe Downside (EBITDA Decline of 20%)
In a more severe downside scenario, we model a case in which Adjusted EBITDA declines by 20% from the base case of $385,000,000 to $308,000,000. This level of decline would represent a significant deterioration in Nexford's business performance, potentially resulting from a recessionary environment, the loss of multiple significant customers, significant operational disruptions, or a combination of adverse factors.
EBITDA and Cash Flow Impact. A 20% decline in Adjusted EBITDA would significantly reduce Consolidated Net Income and Excess Cash Flow. We estimate Excess Cash Flow in this scenario at approximately $85,000,000, reflecting the substantially lower net income offset by the continued deduction of capital expenditures and other fixed items.
Cash Balance Impact. Year-end unrestricted cash would be further reduced in this severe downside scenario due to significantly lower cash generation. We estimate year-end cash of approximately $80,000,000.
Leverage Calculation:
Outstanding First Lien Debt at December 31, 2025: $1,389,500,000
Estimated Unrestricted Cash at Year-End: $80,000,000
First Lien Net Debt: $1,389,500,000 - $80,000,000 = $1,309,500,000
LTM Adjusted EBITDA: $308,000,000
First Lien Net Leverage Ratio: $1,309,500,000 / $308,000,000 = approximately 4.25x
Result: The severe downside first lien net leverage ratio of approximately 4.25x is exactly at the 4.25x threshold. Under the tiered step-down structure, the Tier 1 sweep percentage of 50% applies only if leverage exceeds 4.25x. Since the ratio is equal to 4.25x, Tier 2 applies, and the ECF sweep percentage is 25%.
Estimated Mandatory Prepayment (at 4.25x):
Estimated Excess Cash Flow: $85,000,000
ECF Sweep Percentage: 25%
Gross ECF Sweep Obligation: 25% x $85,000,000 = $21,250,000
This result highlights the importance of the precise drafting of the leverage tier boundaries. The use of "exceeds" (rather than "equal to or exceeds") for the Tier 1 threshold means that a leverage ratio of exactly 4.25x remains in Tier 2 at the 25% sweep rate, rather than triggering the more punitive 50% sweep. We should confirm that this drafting is maintained in the final Credit Agreement.
Illustration of Tier 1 Trigger. If Adjusted EBITDA were to decline slightly further such that the first lien net leverage ratio exceeded 4.25x — for example, if EBITDA declined to approximately $305,000,000 and year-end cash was approximately $78,000,000, resulting in leverage of approximately $1,311,500,000 / $305,000,000 = 4.30x — Tier 1 would apply and the ECF sweep percentage would increase to 50%. In such a scenario, the estimated mandatory prepayment would be significantly higher:
Estimated Excess Cash Flow (at ~$305,000,000 EBITDA): approximately $85,000,000
ECF Sweep Percentage: 50%
Gross ECF Sweep Obligation: 50% x $85,000,000 = $42,500,000
The difference between the 25% and 50% sweep percentages is significant — an additional $21,250,000 of mandatory prepayment at the 50% tier — underscoring the cliff effect at the 4.25x threshold and the importance of managing leverage to remain at or below that level.
F. Upside Case (EBITDA Growth of 5%)
In an upside scenario, we model a case in which Adjusted EBITDA grows by 5% from the base case of $385,000,000 to $404,250,000. This growth could result from organic revenue growth, successful integration of recent bolt-on acquisitions, realization of operational efficiencies, favorable pricing dynamics, or a combination of positive factors.
EBITDA and Cash Flow Impact. A 5% increase in Adjusted EBITDA would increase Consolidated Net Income and Excess Cash Flow. We estimate Excess Cash Flow in this scenario at approximately $180,000,000, reflecting the higher net income with capital expenditures and other deductions held constant.
Cash Balance Impact. Year-end unrestricted cash would be higher in the upside scenario, reflecting improved profitability and cash generation. We estimate year-end cash of approximately $145,000,000.
Leverage Calculation:
Outstanding First Lien Debt at December 31, 2025: $1,389,500,000
Estimated Unrestricted Cash at Year-End: $145,000,000
First Lien Net Debt: $1,389,500,000 - $145,000,000 = $1,244,500,000
LTM Adjusted EBITDA: $404,250,000
First Lien Net Leverage Ratio: $1,244,500,000 / $404,250,000 = approximately 3.08x
Result: The upside first lien net leverage ratio of approximately 3.08x is well below the 3.50x threshold. Accordingly, Tier 3 applies, and the ECF sweep percentage is 0%. No mandatory prepayment would be required for fiscal 2025. In the upside scenario, Nexford comfortably remains within the 0% sweep tier, with approximately 42 basis points of cushion below the 3.50x threshold (compared to approximately 23 basis points in the base case). This confirms that even modest EBITDA growth provides significant deleveraging benefit and reinforces the expectation that no ECF sweep payment will be required in any scenario other than a meaningful performance decline.
G. Summary of Sensitivity Results
The following table summarizes the ECF sweep analysis under each of the scenarios modeled above:
As illustrated by the table, the ECF sweep obligation is not triggered until EBITDA declines by approximately 10% or more from the base case, and the most punitive 50% sweep tier is not reached unless EBITDA declines by in excess of approximately 20%. The Borrower's strong cash flow generation and moderate leverage at closing provide meaningful cushion against the ECF sweep obligation in all but the most adverse scenarios.
V. Key Drafting and Negotiation Issues
Based on our analysis of the ECF sweep mechanics and the illustrative Year 1 modeling, we have identified the following key drafting and negotiation issues for discussion with Claudia Merritt. Each of these issues represents an area where the current draft of the Credit Agreement may be improved from the Borrower's perspective, or where open issues need to be resolved in the next round of negotiations with W&G.
A. Voluntary Prepayment Credit — Scope and Mechanics
As discussed in Section III.E above, the voluntary prepayment credit is one of the most important borrower-favorable provisions in the ECF sweep mechanics. The credit reduces the ECF sweep obligation dollar-for-dollar by the amount of voluntary prepayments made during the applicable fiscal year. We recommend the following positions:
(i) Breadth of Credit. Confirm that the ECF sweep amount is reduced dollar-for-dollar by all voluntary prepayments of the Term Loans made during the applicable fiscal year, regardless of the source of funds used for such prepayments. The credit should encompass optional prepayments made under Section 2.05(a) of the Credit Agreement, prepayments funded from the builder basket, and prepayments made from any other permitted source.
(ii) Scheduled Amortization and Pari Passu Debt. Confirm that the credit also covers (a) scheduled amortization payments actually made during the fiscal year and (b) voluntary prepayments of any incremental pari passu term loans that may be incurred under the incremental facility provisions. The inclusion of pari passu debt prepayments is important to ensure that the Borrower is not penalized for choosing to prepay incremental term loans rather than the original Term Loan B.
(iii) Deemed Voluntary Prepayment for Below-Par Buybacks. We recommend pushing for inclusion of a "deemed voluntary prepayment" credit for debt buybacks conducted below par, with the credit calculated at the face amount (par value) of debt retired rather than the cash purchase price. This is a meaningful borrower-favorable position, as it would allow the Borrower to retire $100 face value of debt for (for example) $97 in cash while receiving $100 of credit against the ECF sweep obligation. We acknowledge that this position may face resistance from W&G and the Administrative Agent, but it has been accepted in a number of recent comparable transactions in the leveraged loan market.
B. Definition of Consolidated Net Income / EBITDA Add-Backs
The EBITDA add-backs permitted under the Credit Agreement directly affect the ECF calculation through their impact on the Consolidated Net Income starting point. Because Excess Cash Flow begins with Consolidated Net Income, and Consolidated Net Income is derived (in substance) from Adjusted EBITDA minus depreciation, interest, and taxes, the scope of permitted EBITDA add-backs flows through to the ECF definition and influences the size of the Excess Cash Flow pool.
Currently, the Borrower's Adjusted EBITDA includes $28,000,000 in permitted add-backs, consisting of: $12,000,000 in acquisition-related costs (principally investment banking, legal, and accounting fees incurred in connection with the original 2021 leveraged buyout and subsequent bolt-on acquisitions); $8,500,000 in non-recurring restructuring charges (relating to a manufacturing facility consolidation completed in 2024); $4,500,000 in sponsor management fees payable to Granite Peak under the Management Agreement; and $3,000,000 in integration costs (relating to the integration of Nexford's 2024 bolt-on acquisition of Whitmore Precision Components).
We recommend the following positions:
(i) Flow-Through to ECF. Confirm that the EBITDA add-backs are incorporated into the Consolidated Net Income definition in a manner that allows them to flow through to the ECF calculation. Specifically, the add-backs should increase Consolidated Net Income (and therefore Excess Cash Flow) only to the extent they represent non-cash charges or one-time items that do not affect the Borrower's recurring cash flow generation. If the add-backs are excluded from the ECF calculation (i.e., if the ECF definition uses a narrower definition of net income that does not reflect the EBITDA add-backs), the Borrower could face a higher ECF sweep obligation than anticipated.
(ii) EBITDA Add-Back Cap. The definition should incorporate a customary cap on EBITDA add-backs, typically set at 25% of Consolidated Adjusted EBITDA (calculated without giving effect to the add-backs). At $385,000,000 of Adjusted EBITDA, a 25% cap would permit up to approximately $96,250,000 in add-backs — well in excess of the current $28,000,000 in actual add-backs. We should confirm that W&G's draft includes a 25% cap (rather than a lower cap or no cap), and that the cap is sufficient to accommodate the Borrower's anticipated add-backs in future periods.
C. Capital Expenditure Deduction
Capital expenditures are a key deduction in the ECF calculation and directly reduce the Excess Cash Flow pool. The scope of this deduction is an important drafting point. We recommend the following positions:
(i) Maintenance and Growth CapEx. Confirm that the definition permits the deduction of all capital expenditures, including both maintenance capital expenditures (expenditures necessary to maintain the existing asset base) and growth capital expenditures (expenditures made to expand capacity, develop new products, or enter new markets). Some credit agreements limit the CapEx deduction to maintenance CapEx only, which would significantly increase the ECF sweep obligation for a growing company like Nexford. We should ensure that the definition is not so limited.
(ii) Exclusion of Debt-Financed CapEx. Confirm that capital expenditures financed with the proceeds of Indebtedness (other than revolving loans) are excluded from the CapEx deduction, to avoid double-counting. Similarly, capital expenditures financed with asset sale reinvestment proceeds or insurance or condemnation proceeds should be excluded from the deduction, as those proceeds are separately accounted for in the mandatory prepayment provisions.
(iii) Current LTM CapEx Level. The Borrower's current LTM capital expenditure level is $78,000,000, which is moderate relative to its $2.1 billion revenue base (representing approximately 3.7% of revenue). If Nexford increases its capital expenditure program in future years (e.g., to fund expansion projects or new manufacturing facilities), the CapEx deduction will correspondingly reduce the ECF pool. The flexibility to deduct growth CapEx is therefore an important long-te

CALDERWOOD & HARKNESS LLP 425 Lexington Avenue New York, New York 10017

MEMORANDUM

MATTER NO.: 1005-00001

BILLING CODE: IBL-NIH-2025-031

Record

Parties

Dates

Amounts