PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue New York, New York 10017
INTERNAL STRATEGY MEMORANDUM
March 4, 2025
TO: Claudia Merritt, Responsible Partner, Banking & Finance
FROM: Marcus Leung, Lead Associate, Banking & Finance
RE: Nexford Industrial Holdings Inc. — $1,400,000,000 Senior Secured Term Loan B — Key Negotiation Points and Borrower Positions
MATTER NO.: 1005-00001
BILLING CODE: IBL-NIH-2025-031
COPIES TO: Ian Blackwood (Billing Partner); Sophie Tremblay (Working Associate)
I. EXECUTIVE SUMMARY AND PURPOSE
The purpose of this memorandum is to identify and prioritize the key negotiation points arising from the first draft credit agreement circulated by Whitfield & Gage LLP ("W&G") on February 24, 2025, on behalf of Crescent Harbor Bank, N.A. ("Crescent Harbor"), as Administrative Agent, and to recommend the positions to be taken by Nexford Industrial Holdings Inc. ("Nexford" or the "Borrower") in the borrower's marked draft to be returned to W&G. The Calderwood & Harkness ("C&H") team returned its marked first draft to W&G on March 3, 2025. This memorandum memorializes the strategic rationale behind each material borrower position in anticipation of W&G's response and the expected counterparty push-back on our revisions.
Transaction Overview. The proposed transaction involves a $1,400,000,000 senior secured Term Loan B (the "Term Loan B" or the "Facility"). The Borrower is Nexford Industrial Holdings Inc., a Delaware corporation and portfolio company of Granite Peak Capital Partners, LP ("Granite Peak" or the "Sponsor"). The Borrower is a direct, wholly-owned subsidiary of Granite Peak NIH Holdings, LLC ("Holdings"). The proceeds of the Term Loan B will be used to (a) refinance the existing $879,375,000 first lien term loan and the $190,000,000 revolving credit facility currently outstanding with Atlas Meridian Bank, N.A. (the "Existing Facilities"), (b) fund an approximately $335,000,000 dividend recapitalization to Holdings (for the ultimate benefit of Granite Peak and its co-investors), (c) pay approximately $38,625,000 in transaction fees and expenses, and (d) place approximately $147,000,000 of unrestricted cash on the Borrower's balance sheet for general corporate purposes and working capital.
Key Economic Terms. The Term Loan B will bear interest at a rate equal to Term SOFR plus 400 basis points per annum, subject to a SOFR floor of 0.75%. Credit spread adjustments of 10 basis points for one-month SOFR and 15 basis points for three-month SOFR will apply. The Facility has a seven-year maturity, with a scheduled maturity date of March 28, 2032. The Borrower will be required to make quarterly amortization payments at a rate of 1.00% per annum of the original principal amount, with all remaining principal due and payable at maturity.
Leverage Profile. On a pro forma basis at closing, first lien net leverage is expected to be approximately 3.38x and total net leverage is expected to be approximately 4.03x. Total net leverage takes into account the Borrower's $250,000,000 aggregate principal amount of 7.250% Senior Unsecured Notes due 2028, issued under an indenture dated November 8, 2021, with Pinnacle Trust Company as trustee (the "Senior Unsecured Notes" or the "Unsecured Notes"). Pro forma cash on the balance sheet at closing is expected to be approximately $100,000,000 (after taking into account the $147,000,000 of cash placed on the balance sheet, net of working capital adjustments and estimated pre-closing cash usage).
Ratings. Nexford has received a B1 corporate family rating from Keystone Ratings Group and a B+ corporate credit rating from Sentinel Credit Analytics. These ratings are consistent with the leveraged loan market positioning for the Facility and support the broad-based institutional syndication strategy.
Transaction Parties and Advisors. Crescent Harbor Bank, N.A. serves as the Administrative Agent, and it is also acting as a lead arranger for the syndication. Ironwood Capital Markets, LLC and Northvane Securities, Inc. have been engaged as joint lead arrangers and bookrunners, having formally joined the deal on March 7, 2025. On the agent's side, W&G is serving as legal counsel, with Margaret Ashby as lead partner and Jonathan Ferris as the working associate. Kellner Brandt & Associates LLP ("KB&A") is serving as counsel to the Sponsor, with Patricia Voss leading that engagement. The governing law of the credit agreement and related documentation is New York.
It should be noted that the negotiation positions set out below have been coordinated with Ryan Ostrowski (Granite Peak, deal team lead) and Patricia Voss (KB&A) where they concern sponsor-sensitive economics, including in particular the restricted payments provisions, the change of control definition, and the equity cure mechanics. We have received preliminary feedback from Mr. Ostrowski approving the direction of travel on all material positions, subject to final review by Granite Peak's investment committee, which we understand is expected to meet in advance of the principals call currently being scheduled for the week of March 10, 2025.
II. INCREMENTAL FACILITY FLEXIBILITY
Incremental facility flexibility is the single most important covenant negotiation point in this credit agreement from the Borrower's perspective. Nexford's growth strategy is fundamentally acquisition-driven, and the Borrower has completed four bolt-on acquisitions since Granite Peak's initial investment in 2021: Clearfield Tool & Die, Inc. (2021), Summit Industrial Fabrication Co. (2022), Ridgepoint Specialty Coatings, LLC (2023), and Lakeshore Precision Engineering, Inc. (2024). The pipeline of potential targets remains robust, and both the Borrower and the Sponsor expect continued tuck-in activity over the life of the Facility. Accordingly, the incremental facility provisions must provide the Borrower with meaningful flexibility to incur additional first lien debt without being forced to seek lender consent or otherwise navigate unnecessarily restrictive conditions.
A. Free-and-Clear Basket
The W&G draft proposes a free-and-clear incremental basket permitting the Borrower to incur additional first lien term loans and/or revolving commitments in an amount equal to the greater of (x) $280,000,000 and (y) 75% of LTM Consolidated EBITDA, in each case without being required to demonstrate pro forma compliance with any leverage-based incurrence test.
Borrower's Position. The Borrower should seek to increase the LTM EBITDA prong from 75% to 100% of LTM Consolidated EBITDA. Based on the Borrower's LTM Adjusted EBITDA as of December 31, 2024 of approximately $385,000,000, this would result in a free-and-clear basket of approximately $385,000,000 at closing (as compared to approximately $288,750,000 at the 75% level). The dollar-fixed amount of $280,000,000 would serve as a floor, representing approximately 73% of current EBITDA, and would provide an absolute minimum level of capacity even if EBITDA were to decline.
Rationale. A 100% LTM EBITDA free-and-clear basket is consistent with market precedent for sponsor-backed Term Loan B transactions at comparable leverage levels. The 100% prong is particularly important here because it provides additional capacity for bolt-on acquisitions without requiring the Borrower to demonstrate pro forma leverage compliance. Given the pace of Nexford's acquisition activity and the typical size range of its targets (which have ranged from approximately $15,000,000 to approximately $95,000,000 in aggregate enterprise value), a free-and-clear basket that grows with the business is commercially essential. We note that the agreed commitment letter and term sheet both contemplate the 100% LTM EBITDA level, and W&G's reduction to 75% in the draft is a departure from the agreed terms.
As the EBITDA base grows through organic growth and acquisitions, the 100% prong will provide incrementally more capacity, which is the intended purpose of the grower component. The $280,000,000 fixed-dollar floor ensures that even in a downside scenario, the Borrower retains meaningful free-and-clear capacity independent of operating performance.
B. Ratio-Based Incremental Capacity
The W&G draft provides for unlimited additional incremental term loans and/or revolving commitments, in each case subject to pro forma compliance with a maximum first lien net leverage ratio of 4.25x.
Borrower's Position. The Borrower should push for a 4.50x first lien net leverage incurrence test for the ratio-based prong. At closing, first lien net leverage is expected to be approximately 3.38x. At a 4.50x incurrence test, the Borrower would have approximately $431,000,000 of ratio-based incremental capacity (assuming approximately $385,000,000 of EBITDA and all other balance sheet items held constant), as compared to approximately $335,000,000 at the 4.25x level proposed by W&G. The additional $96,000,000 of capacity at 4.50x provides the Borrower with meaningfully more room to fund acquisitions, particularly in a scenario where leverage has temporarily increased as a result of a recent acquisition that has not yet fully contributed to trailing EBITDA.
Rationale. The 4.50x ratio is consistent with the springing maintenance covenant level, which is set at 5.00x, and provides a meaningful cushion between the incurrence level and the maintenance level. This is a standard structural feature in sponsor-backed leveraged loan transactions and avoids a situation in which the Borrower's ability to incur incremental debt is constrained at a leverage level that remains well within the maintenance covenant headroom. We would further note that the agreed term sheet specifies a 4.50x incurrence test, and W&G's tightening to 4.25x in the draft is again a departure from the agreed terms.
Additionally, the Borrower should confirm that the free-and-clear basket and the ratio-based basket can be used simultaneously and without any "inside-out" limitation. That is, the Borrower should be entitled to incur incremental debt under the free-and-clear basket without first utilizing available ratio-based capacity, and vice versa. Some credit agreements include provisions that effectively require the borrower to exhaust one basket before accessing the other, or that apply a netting concept — these provisions are not appropriate here and should be resisted if raised by W&G.
C. Incremental Equivalent Debt
The W&G draft is silent on incremental equivalent debt, and this is a gap that must be addressed in the borrower's markup.
Borrower's Position. The credit agreement should include affirmative permission for the Borrower to incur incremental equivalent debt — that is, debt incurred outside of the credit agreement but on terms permitted by the credit agreement — in the form of pari passu first lien secured debt, junior lien secured debt, or unsecured debt. Incremental equivalent debt should be subject to the same ratio tests applicable to ratio-based incremental facilities under the credit agreement and should share capacity with the incremental basket (i.e., any incremental equivalent debt incurred should reduce the available ratio-based capacity on a dollar-for-dollar basis, and vice versa).
The inclusion of incremental equivalent debt provisions is now standard in sponsor-backed leveraged loan transactions and provides the Borrower with valuable flexibility to access the debt capital markets or the private credit market for additional financing without being constrained to the syndicated loan format. This is particularly relevant for junior lien or unsecured financings, which may not be practically administrable through the incremental facility mechanics of the credit agreement (which are designed primarily for pari passu term loans). The Borrower's ability to issue incremental equivalent debt on a second lien or unsecured basis could be critical in connection with a larger acquisition that requires a more complex capital structure.
D. Most Favored Nation Protection
The credit agreement includes a most favored nation ("MFN") clause providing that if any incremental term loans are incurred within the first twelve months after closing at an effective yield that exceeds the applicable margin on the initial Term Loan B by more than 50 basis points, the applicable margin on the initial Term Loan B will be adjusted upward so that the spread differential is reduced to 50 basis points.
Borrower's Position. The Borrower is prepared to accept the 50 basis point MFN threshold and the twelve-month sunset period, both of which are within market norms. However, the Borrower should seek the following carve-outs from the MFN adjustment mechanism:
(i) Incremental term loans incurred in connection with a permitted acquisition where the aggregate consideration for such acquisition exceeds $75,000,000. Acquisition-related incremental debt may require above-market pricing to attract new lenders on an expedited timeline, and subjecting the initial Term Loan B to an automatic spread increase in that context would effectively penalize the Borrower for pursuing its stated growth strategy.
(ii) Incremental term loans that are not fungible with the initial Term Loan B — that is, incremental term loans with a different maturity date, different amortization schedule, or different currency. Non-fungible incremental tranches should not trigger MFN protection because they represent a distinct risk profile and are not directly comparable to the initial tranche.
(iii) Any term loans extended by existing lenders through an extension amendment pursuant to the extension provisions of the credit agreement. Extensions are a mechanism by which the Borrower and consenting lenders agree to extend the maturity of all or a portion of the outstanding term loans, and any yield adjustment in that context is a negotiated, bilateral arrangement that should not trigger the MFN mechanism.
Rationale. The carve-outs described above are consistent with current market practice and reflect the principle that the MFN mechanism should protect initial lenders against being "undercut" by a subsequent fungible tranche, but should not inhibit the Borrower's ability to pursue acquisitions or to manage the maturity profile of its debt. The twelve-month sunset is acceptable and provides an appropriate time-limited protection period for the initial syndication.
III. EBITDA ADD-BACKS AND ADJUSTMENTS
A. Permitted Add-Backs
The definition of "Consolidated EBITDA" (or "Adjusted EBITDA") in the credit agreement is a critical gating mechanic that affects virtually every financial test and basket in the agreement, including the incurrence ratios for incremental debt, the restricted payment ratio test, the excess cash flow calculation, and the builder basket. The current Adjusted EBITDA of approximately $385,000,000 includes $28,000,000 in add-backs to the reported EBITDA of $357,000,000, consisting of the following:
• $12,000,000 in acquisition-related costs (transaction fees, due diligence costs, legal and advisory fees incurred in connection with the Lakeshore Precision Engineering acquisition and other 2024 M&A activity);
• $8,500,000 in non-recurring restructuring charges (primarily related to facility consolidation following the Summit Industrial Fabrication and Ridgepoint Specialty Coatings acquisitions);
• $4,500,000 in sponsor management fees payable to Granite Peak under the management agreement; and
• $3,000,000 in integration costs (systems integration, operational harmonization, and employee transition costs).
The W&G draft permits add-backs for non-recurring, extraordinary, and unusual items, but proposes a 15% cap on total add-backs as a percentage of EBITDA before such add-backs (i.e., EBITDA before any add-backs). Based on the reported EBITDA of $357,000,000, a 15% cap would limit total add-backs to approximately $53,600,000.
Borrower's Position. The Borrower should push for a 25% cap on total add-backs. In the alternative, the Borrower should seek an uncapped carve-out for acquisition-related costs and integration costs, with the 15% cap applying only to other non-recurring, extraordinary, and unusual items.
Rationale. Nexford's acquisition-driven growth model means that acquisition-related and integration costs will recur in connection with each bolt-on transaction. While these costs are "non-recurring" in the definitional sense (they relate to specific, identified transactions), they are a predictable and recurring feature of the Borrower's business strategy. At current EBITDA levels, the 15% cap ($53,600,000) is arithmetically adequate to accommodate the current $28,000,000 of add-backs with approximately $25,600,000 of headroom. However, in a year in which the Borrower completes multiple bolt-on acquisitions, the combined acquisition-related costs, integration expenses, and restructuring charges could readily approach or exceed the 15% threshold, particularly if the acquisitions are of meaningful size. A 25% cap (approximately $89,250,000 based on current reported EBITDA) provides substantially more cushion and reduces the risk that the Borrower's financial covenants and ratio tests are inadvertently tripped by a high level of strategically desirable acquisition activity.
Run-Rate Cost Savings and Synergies. The W&G draft permits the add-back of projected cost savings and synergies expected to be realized within twelve months following the closing of a permitted acquisition or other qualifying event. The Borrower should seek the following modifications:
(i) Extend the realization period from twelve months to twenty-four months. Many of the synergies arising from Nexford's acquisitions — particularly those related to supply chain consolidation, manufacturing process harmonization, and overhead reduction — take longer than twelve months to be fully implemented and realized. A twenty-four-month realization window is consistent with the Borrower's operational experience (the Clearfield Tool & Die integration, for example, achieved full run-rate synergies approximately eighteen months post-closing).
(ii) Remove any requirement that the projected cost savings be "factually supportable" and replace with a standard requiring that the savings be "reasonably identifiable and expected to be realized" within the applicable period. The "factually supportable" standard is vague and could give rise to disputes about the evidentiary basis for projected savings, whereas "reasonably identifiable and expected to be realized" is a more established formulation that provides appropriate flexibility while still imposing a substantive standard.
B. Sponsor Management Fee Add-Back
Granite Peak receives a $4,500,000 annual management fee from Nexford under the management agreement. The W&G draft includes this fee as a permitted add-back to Adjusted EBITDA, but the fee is subject to the overall percentage cap on add-backs described above.
Borrower's Position. The sponsor management fee should be a standing add-back that is excluded from any percentage cap. The management fee is a recurring, identified, contractually fixed fee payable to the Sponsor. It is not "non-recurring" or "extraordinary" in nature — it is a known, ongoing operating expense that is effectively treated as a pass-through to the equity holder. Including it within the percentage cap unnecessarily consumes add-back capacity that should be available for genuinely non-recurring items. This is a point on which KB&A feels strongly, as the Sponsor has flagged this as a baseline requirement across its portfolio of leveraged credits.
IV. RESTRICTED PAYMENTS
The restricted payments covenant governs the Borrower's ability to make dividends, distributions, equity repurchases, and other payments to Holdings, the Sponsor, and other equityholders. This is a highly sensitive area for the Sponsor and has been the subject of extensive discussion with Ryan Ostrowski and Patricia Voss.
A. General Basket
The W&G draft proposes a $20,000,000 annual general basket for restricted payments (including dividends, distributions, and equity repurchases), usable irrespective of the Borrower's leverage level or financial condition.
Borrower's Position. The general basket should be $25,000,000 per annum, consistent with the agreed term sheet. The $20,000,000 figure in the W&G draft is a departure from the term sheet, and we expect this will be corrected without significant resistance once it is flagged. This basket provides a base level of distribution capacity that the Borrower can access without satisfying a ratio test, and is typically used for routine distributions, management equity repurchases below the dedicated cap, and other ordinary-course payments.
B. Builder Basket
The W&G draft proposes a builder basket commencing with a $35,000,000 starter amount, plus 50% of cumulative Consolidated Net Income commencing from the first fiscal quarter of 2025.
Borrower's Position. The starter amount should be $50,000,000, consistent with the agreed term sheet. This is a clear departure by W&G from the commitment letter and term sheet, both of which specify a $50,000,000 starter amount. The difference of $15,000,000 is material and should be firmly corrected. The 50% accumulation rate on cumulative Consolidated Net Income is standard and acceptable.
With respect to the commencement date for the 50% CNI accumulation, the Borrower's position is that the accumulation should begin from the first full fiscal quarter after the closing date — that is, Q2 2025, ending June 30, 2025. Given the expected closing date of March 28, 2025, Q1 2025 will be a partial quarter and should not be included in the accumulation period, as it would capture only three days of post-closing operating results and would create unnecessary complexity in the calculation.
In addition, the builder basket should be credited with (i) the net cash proceeds of qualified equity issuances by Holdings (i.e., equity issuances that are not "disqualified stock" or otherwise constituting redeemable equity), and (ii) cash capital contributions received by the Borrower from Holdings (to the extent not otherwise applied to cure a covenant default or satisfy another basket). These credits are standard in sponsor-backed credit agreements and reflect the principle that cash equity infusions into the credit group should expand the Borrower's capacity to make distributions.
C. Ratio-Based Restricted Payments
The W&G draft permits unlimited restricted payments subject to pro forma compliance with a maximum total net leverage ratio of 4.00x.
Borrower's Position. The Borrower should seek a total net leverage test of 3.75x for unlimited restricted payments. While this may appear on its surface to be a more restrictive test (lower leverage threshold), the Sponsor's view — and we concur — is that 3.75x is the appropriate level given the pro forma closing total net leverage of 4.03x. Setting the unlimited distribution threshold at 3.75x effectively requires the Borrower to achieve approximately 75 basis points of deleveraging (from 4.03x to 3.75x) before unlimited distributions become available. This creates a meaningful incentive structure that aligns the interests of the Borrower and the lenders: the Borrower must generate sufficient cash flow to reduce leverage before accessing uncapped distribution capacity.
By contrast, a 4.00x threshold would permit unlimited distributions almost immediately upon closing (the Borrower would need only to reduce leverage by 3 basis points), which provides neither a meaningful governance framework nor a credible deleveraging incentive. The 3.75x threshold is the level agreed in the term sheet, and W&G's increase to 4.00x — while ostensibly borrower-favorable — is not aligned with the Sponsor's stated preferences.
The ratio test should be measured on a pro forma basis after giving effect to the proposed restricted payment (i.e., the restricted payment itself reduces cash on the balance sheet, which increases net leverage for testing purposes). This is the standard mechanic and should be confirmed in the credit agreement.
D. Customary Permitted Payments
The Borrower should confirm that the restricted payments covenant includes carve-outs for the following customary permitted payments, each of which is distinct from the general basket, the builder basket, and the ratio-based test described above:
(i) Tax distributions. Payments by the Borrower to Holdings and its equityholders in an amount sufficient to permit Holdings and its direct and indirect equityholders to pay federal, state, and local income taxes attributable to the income of the Borrower and its subsidiaries. This carve-out is essential given the flow-through tax structure at the Holdings level.
(ii) Sponsor management fees. Payments to Granite Peak under the management agreement, in an amount not to exceed $4,500,000 per year (with annual increases indexed to CPI), plus reasonable out-of-pocket expenses. This carve-out should permit the ongoing payment of the management fee without consuming any of the restricted payment baskets.
(iii) Holdings overhead. Payments to Holdings to fund its overhead costs, general and administrative expenses, and corporate-level obligations, in an amount not to exceed $2,500,000 per year. Holdings is a shell holding company with limited operations of its own, and this basket covers its audit fees, filing fees, board-related expenses, and other necessary operating costs.
(iv) Management equity repurchases. Repurchases of equity interests from current and former employees, officers, directors, and consultants (and their estates, heirs, and permitted transferees), in an amount not to exceed $10,000,000 per year, with unused amounts carrying forward to subsequent years, subject to a maximum of $20,000,000 in any single year (including carried-forward amounts). This basket is critical for Nexford's management equity incentive program and the Sponsor's ability to recycle equity interests upon employee departures.
(v) Insurance premiums. Payments of insurance premiums on behalf of Holdings, including directors' and officers' liability insurance, to the extent not otherwise paid by Holdings from its own resources.
V. FINANCIAL COVENANT FRAMEWORK
A. Springing Maintenance Covenant
The parties have agreed to a springing financial maintenance covenant consisting of a maximum first lien net leverage ratio of 5.00x (5.00 to 1.00), tested quarterly only when aggregate outstanding revolving loans exceed 40% of total revolving commitments at the end of the applicable fiscal quarter.
Importantly, no revolving credit facility is being established as part of this transaction. The credit agreement will provide only for the Term Loan B. Accordingly, the springing maintenance covenant will have no practical effect at closing and will only become operative if and when a revolving facility is added in the future through the incremental facility provisions. This is an agreed structural feature and should not require significant negotiation.
Borrower's Position. The Borrower's position is to confirm that the mechanics of the springing covenant are properly drafted as follows:
Testing Date. The covenant should be tested as of the last day of each fiscal quarter (i.e., March 31, June 30, September 30, and December 31 of each year), based on the trailing four-quarter period ending on such date. The relevant measurement of outstanding revolving loans should also be taken as of the last day of the fiscal quarter — not as a daily average or peak outstanding balance during the quarter.
Exclusions from "Revolving Loans" for Testing Purposes. For purposes of determining whether the 40% utilization threshold has been exceeded, "revolving loans" should exclude (a) undrawn letters of credit (whether standby or commercial), which are contingent obligations and do not represent actual funded revolving usage, and (b) revolving loans that have been outstanding for fewer than thirty (30) consecutive days at the end of the fiscal quarter. This "cash clean-up" provision prevents a short-term or seasonal borrowing from inadvertently triggering the maintenance covenant and is a standard feature in springing covenant constructs.
Equity Cure Right. The Borrower should seek an equity cure right that permits Granite Peak (or its affiliates) to contribute cash equity to the Borrower (directly or through Holdings) in an amount sufficient to bring the first lien net leverage ratio into compliance with the 5.00x maintenance threshold. The contributed cash equity should be deemed to be added to Consolidated EBITDA for the applicable test period solely for purposes of calculating compliance with the maintenance covenant. The equity cure right should be subject to the following limitations: (a) no more than two cures may be exercised in any four consecutive fiscal quarters, (b) no more than five cures may be exercised during the life of the Facility, and (c) the cure amount must be limited to the minimum amount necessary to achieve compliance with the maintenance covenant (i.e., no "over-curing" that would inflate EBITDA for purposes of other baskets or tests). The cure contribution must be made in cash within ten business days following the date on which the applicable compliance certificate is required to be delivered.
The equity cure right is an important sponsor protection and has been specifically requested by Granite Peak. KB&A has confirmed that the limitations described above (two-in-four, five-in-life, minimum cure amount) are consistent with Granite Peak's standard portfolio terms and are acceptable to the Sponsor.
B. Leverage Calculation Mechanics
The following mechanics should be confirmed in the definition of "Consolidated First Lien Net Leverage Ratio" and related provisions:
Netting of Cash. Net leverage should be calculated by deducting unrestricted cash and cash equivalents on the Borrower's consolidated balance sheet from the numerator (i.e., total first lien debt minus unrestricted cash and cash equivalents). There should be no cap on the amount of cash that can be netted. At closing, pro forma cash on the balance sheet is expected to be approximately $100,000,000, which contributes directly to the favorable 3.38x closing leverage figure. Imposing a cap on nettable cash would artificially inflate the reported leverage ratio and reduce the Borrower's capacity under ratio-based tests.
Exclusions from Consolidated First Lien Debt. The definition of "Consolidated First Lien Debt" should include only debt that is secured by a first-priority lien on the collateral securing the Term Loan B. It should expressly exclude (a) any second lien or subordinated debt (including, for the avoidance of doubt, the Senior Unsecured Notes), (b) capital lease obligations and finance lease obligations (which are addressed in a separate basket), (c) undrawn letters of credit (which represent contingent obligations only), and (d) surety bonds and performance bonds. These exclusions are standard and should not be controversial.
Pro Forma Adjustments. For purposes of all leverage calculations, pro forma adjustments should be made to give effect to (a) acquisitions and dispositions completed during the trailing four-quarter measurement period (and, where applicable, during the period between the end of the measurement period and the date of determination), as if such acquisitions and dispositions had occurred on the first day of the measurement period, and (b) the incurrence or repayment of debt in connection with such transactions. Where an acquired entity has been owned for fewer than four full fiscal quarters, its financial results should be annualized based on the partial period included in the Borrower's consolidated results.
VI. NEGATIVE COVENANT FLEXIBILITY — INDEBTEDNESS
A. Capital Leases and Purchase Money Debt
The W&G draft proposes a cap of $35,000,000 on indebtedness in respect of capital leases (now "finance leases" under ASC 842) and purchase money obligations incurred to finance the acquisition of fixed or capital assets.
Borrower's Position. The Borrower should seek to increase this cap to $50,000,000. Nexford's manufacturing operations span fourteen production and distribution facilities across the United States and Canada, and the business requires significant and ongoing equipment leasing and financing. Current capital lease obligations are approximately $22,000,000 and are growing as the Borrower expands its manufacturing capacity and integrates acquired businesses. The $35,000,000 cap provides only approximately $13,000,000 of headroom, which is insufficient given the anticipated pace of capital investment and equipment replacement. A $50,000,000 cap, consistent with the term sheet, provides more appropriate flexibility for a manufacturing business of this scale.
The basket should also expressly include sale-leaseback transactions, which are a common and efficient financing technique for manufacturing equipment. Sale-leaseback transactions permit the Borrower to monetize existing owned equipment while retaining use of the asset, and should not be excluded from the capital lease basket or subject to separate, more restrictive limitations.
B. General Debt Basket
The W&G draft proposes a general debt basket of $25,000,000 for indebtedness not otherwise permitted by a specific basket in the covenant.
Borrower's Position. The general debt basket should be increased to $35,000,000, consistent with the agreed term sheet. The general basket provides the Borrower with flexibility to incur miscellaneous indebtedness that does not fit neatly within one of the enumerated baskets (e.g., small equipment financing arrangements, vendor take-back notes, and other ordinary-course credit facilities). The $10,000,000 differential between the W&G draft and the term sheet amount is a departure that should be corrected.
C. Intercompany Debt
The indebtedness covenant should include the following framework for intercompany obligations:
Among Loan Parties. Intercompany indebtedness among Loan Parties (i.e., from one Loan Party to another Loan Party, or between the Borrower and any Guarantor) should be permitted on an unlimited basis. These obligations do not represent a leakage of value outside the credit group and do not impair the lenders' recovery prospects.
From Loan Parties to Non-Loan Parties. Indebtedness owed by Loan Parties to non-Loan Parties (i.e., loans or advances from a Loan Party to a foreign subsidiary or other non-guarantor subsidiary) should be permitted up to $30,000,000 in aggregate principal amount. Such indebtedness should be subordinated to the obligations under the credit agreement on customary terms (including a standstill on enforcement remedies during any payment blockage period) and should be evidenced by intercompany notes that are pledged to the Collateral Agent as part of the security package. This structure ensures that the lenders have visibility into and security over downstream cash flows to non-guarantor entities.
From Non-Loan Parties to Loan Parties. Indebtedness owed by non-Loan Parties to Loan Parties (i.e., loans or advances from a foreign subsidiary to the Borrower or a Guarantor) should be permitted on an unlimited basis. From the Loan Parties' perspective, such indebtedness represents a receivable (an asset) that enhances the credit group's position. From the lenders' perspective, this category of intercompany indebtedness represents an investment by the Loan Parties and is more appropriately addressed under the investments covenant.
D. Acquired Debt
Indebtedness that is existing at the time of a permitted acquisition — that is, debt that is already on the balance sheet of the target entity at the time it is acquired by the Borrower or a subsidiary — should be permitted to remain outstanding after the acquisition. The Borrower should not be required to refinance or repay acquired debt as a condition to the closing of a permitted acquisition, provided that (a) such indebtedness was not incurred in contemplation of the acquisition (i.e., it was bona fide pre-existing debt), and (b) the Borrower is in pro forma compliance with the applicable incurrence ratio after giving effect to the acquisition and the assumption of such debt.
There should be no dollar cap on acquired debt, as the pro forma leverage test provides a self-regulating limit. Imposing a separate dollar cap on acquired debt would be duplicative and would unnecessarily constrain the Borrower's ability to pursue larger acquisitions where the target carries existing financing.
VII. NEGATIVE COVENANT FLEXIBILITY — LIENS
The negative covenant on liens operates in tandem with the indebtedness covenant to govern the security that the Borrower and its subsidiaries may grant to third parties. The following positions should be advanced:
Matching Lien Baskets. Liens securing any category of permitted indebtedness should be automatically permitted as a corresponding lien basket. That is, each debt basket in the indebtedness covenant should have a matching lien basket that permits the granting of liens to secure such debt. This avoids the administrative complexity and potential gaps that arise when lien baskets and debt baskets are drafted independently and do not align.
Judgment Liens. The W&G draft includes a permitted lien basket for judgment liens of up to $15,000,000. We believe this threshold is adequate for the time being, though it should be monitored in connection with the judgment default threshold discussion (see Section XIII.B below).
UCC Financing Statements Under Operating Leases. Liens arising from the filing of UCC financing statements in connection with operating leases (or "right-of-use" assets under ASC 842 that are classified as operating leases) should be expressly excluded from the lien covenant as a permitted lien. It is common practice for lessors to file UCC-1 financing statements as a protective measure, even in the context of a true lease that does not create a security interest under the UCC. These filings should not be treated as violations of the negative pledge covenant.
General Lien Basket. The W&G draft proposes a general lien basket of $20,000,000. The Borrower's position is that the general lien basket should be $35,000,000, matching the general debt basket. There is no principled reason for the general lien basket to be smaller than the general debt basket, as liens securing permitted general basket debt should be automatically available. A $35,000,000 general lien basket is consistent with the term sheet.
VIII. NEGATIVE COVENANT FLEXIBILITY — INVESTMENTS
A. General Investment Basket
The W&G draft proposes a general investment basket of $30,000,000.
Borrower's Position. The general investment basket should be increased to $50,000,000. This basket covers a broad range of ordinary-course investments, including joint ventures, minority equity investments, strategic partnerships, and other investments that do not constitute "permitted acquisitions" (which are subject to separate conditions). Given the size and scope of Nexford's business, a $30,000,000 general basket is too restrictive and would constrain the Borrower's ability to make routine investments in the ordinary course without seeking lender consent.
In addition, the Borrower should have the ability to make investments using builder basket capacity. That is, amounts available under the builder basket (as described in Section IV.B above) should be usable not only for restricted payments but also for investments, on an interchangeable basis. This is a standard feature that provides the Borrower with maximum flexibility in deploying accumulated capacity.
B. Investments in Non-Guarantor Subsidiaries (including Foreign Subsidiaries)
The W&G draft limits investments in non-guarantor subsidiaries — which principally consists of intercompany loans and capital contributions to Nexford Canada Holdings ULC and its subsidiary, Nexford Canada Manufacturing, Inc. — to $25,000,000 in the aggregate.
Borrower's Position. The Borrower should seek to increase this basket to $40,000,000. The Canadian operations represent a meaningful and growing part of Nexford's overall business, contributing approximately 12% of consolidated revenues and requiring ongoing working capital support and periodic capital investment for equipment and facility maintenance. A $25,000,000 cap would be constraining if the Borrower determines that additional investment in the Canadian platform is warranted — for example, in connection with an expansion of manufacturing capacity at Nexford Canada Manufacturing's facility or the acquisition of a Canadian bolt-on target.
Additionally, investments that constitute intercompany debt from a Loan Party to a non-Loan Party should be permitted to the extent such intercompany debt is subordinated to the obligations under the credit agreement and evidenced by an intercompany note pledged to the Collateral Agent in accordance with the security documents. Such subordinated and pledged intercompany loans should not count against the $40,000,000 basket, or in the alternative, should be subject to a separate, uncapped basket, as the security package provides the lenders with adequate protection.
C. Permitted Acquisition Conditions
The credit agreement should permit the Borrower to make acquisitions of businesses and assets without any individual dollar cap, subject to the following conditions:
(i) No Event of Default. No Event of Default shall exist at the time of or immediately after giving pro forma effect to such acquisition.
(ii) Pro Forma Leverage Compliance. After giving pro forma effect to such acquisition (including any debt incurred or assumed in connection therewith), the Borrower shall be in compliance with a maximum first lien net leverage ratio of 4.50x. The Borrower's position is that the acquisition incurrence test should be set at the same level as the ratio-based incremental facility test (4.50x) for internal consistency.
(iii) Line of Business Limitation. The target must be engaged in a business that is the same as, or similar or complementary to, the business of the Borrower and its subsidiaries (including any reasonable extensions or expansions thereof). This is a standard limitation that provides the lenders with assurance that the Borrower will not materially diversify into unrelated industries.
(iv) Guarantee and Security Requirements. If the target is a domestic entity (or its assets are located in the United States), the target entity or its assets must become subject to the guarantee and security package within a specified period after the closing of the acquisition. The Borrower should seek ninety (90) days for this post-acquisition collateral delivery requirement. The W&G draft specifies sixty (60) days, which is unrealistically tight for certain types of acquisitions, particularly those involving complex corporate structures, significant real property, or intellectual property portfolios.
The W&G draft requires pro forma compliance at 4.00x first lien net leverage for permitted acquisitions. The Borrower's position is that this test should be set at 4.50x, consistent with the incremental facility incurrence test. Using the same ratio for both acquisitions and incremental debt ensures internal consistency throughout the credit agreement and avoids a situation in which the Borrower has incremental borrowing capacity (at 4.50x) but is unable to deploy that capacity to fund an acquisition (which requires compliance at 4.00x). This disconnect would effectively render the incremental facility headroom illusory in an acquisition context and should be eliminated.
IX. COLLATERAL PACKAGE — EXCLUDED ASSETS AND LIMITATIONS
A. Excluded Assets
The credit agreement and the related security agreement should exclude the following categories of assets from the pledged collateral. These exclusions are consistent with market practice for sponsor-backed Term Loan B transactions and reflect a commercially reasonable assessment of the costs and burdens of perfection relative to the incremental value to the lenders:
• Motor vehicles with an individual book value below $250,000. The cost of obtaining certificates of title and noting the lien on each vehicle registration is disproportionate to the collateral value for lower-value vehicles. The Borrower's vehicle fleet consists primarily of delivery trucks and maintenance vehicles at the manufacturing facilities, the vast majority of which fall below this threshold.
• Letter of credit rights with face amounts under $1,000,000. These are typically associated with small vendor arrangements and do not justify the administrative burden of notifying the issuing bank and obtaining consent.
• Commercial tort claims with amounts in controversy below $2,500,000. This is a standard de minimis threshold that avoids the burden of identifying and documenting each pending or potential tort claim in the security agreement.
• Leases, licenses, contracts, and permits to the extent that a grant of a security interest therein would violate a valid and enforceable restriction on assignment, result in a termination of the agreement, or constitute a default thereunder. This exclusion is subject to the anti-assignment override provisions of Section 9-406 and Section 9-408 of the Uniform Commercial Code, which render certain contractual restrictions on assignment ineffective as against a secured party. The security agreement should include appropriate savings language to ensure that any contractual restriction that is overridden by the UCC does not give rise to an exclusion.
• Assets where the cost or burden of pledging is excessive relative to the benefit afforded to the Secured Parties, as determined by the Administrative Agent and the Borrower in good faith. This is a customary catch-all exclusion that provides practical flexibility for unforeseen circumstances (e.g., assets located in jurisdictions with burdensome filing or registration requirements, or assets subject to complex regulatory restrictions).
• Intent-to-use trademark applications prior to the filing of a statement of use with the United States Patent and Trademark Office. Under the Lanham Act, an intent-to-use application may be invalidated if the applicant grants a security interest in the mark prior to the filing of a statement of use. This exclusion preserves the validity of the Borrower's pending trademark applications.
• Margin stock. The Borrower represents that it does not currently own any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. Notwithstanding, the exclusion should be included for avoidance of doubt, as a pledge of margin stock would require compliance with Regulation U's margin lending limitations.
• Equity interests in immaterial subsidiaries, defined as subsidiaries with total assets of less than $5,000,000 individually and $15,000,000 in the aggregate. These are typically dormant or de minimis entities that do not warrant the cost of obtaining legal opinions, secretary's certificates, and other deliverables required in connection with an equity pledge.
B. Foreign Subsidiary Equity Pledge Limitation
Nexford International Holdings, Inc. is a controlled foreign corporation ("CFC") holding company for purposes of the Internal Revenue Code. Its principal subsidiary is Nexford Canada Holdings ULC, which in turn owns Nexford Canada Manufacturing, Inc. Pursuant to the standard IRC Section 956 considerations applicable to CFC holdcos, the pledge of equity in Nexford Canada Holdings ULC should be limited to 65% of the outstanding voting equity and 100% of the outstanding non-voting equity of such entity.
This limitation is a well-established market convention designed to avoid the adverse U.S. federal income tax consequences that would arise if a U.S. borrower were treated as holding a pledge of more than two-thirds of the voting stock of a CFC. While recent tax law changes under the Tax Cuts and Jobs Act of 2017 have arguably reduced the practical significance of the Section 956 issue for many borrowers, the 65% limitation remains the prevailing market practice, and neither the Borrower nor the Agent has proposed deviating from this convention.
The Borrower should confirm that no direct pledge of assets of Nexford Canada Holdings ULC or Nexford Canada Manufacturing, Inc. is required under the credit agreement or any related security document. These entities are "excluded foreign subsidiaries" that are not Guarantors and whose assets should not be subject to the Collateral Agent's lien. The only collateral connection to the Canadian operations is the limited equity pledge in Nexford Canada Holdings ULC as described above.
C. Real Property Collateral
The credit agreement requires the Borrower to deliver mortgages, deeds of trust, or similar security instruments on owned real property with an aggregate fair market value in excess of $10,000,000 per property. Based on the current real property portfolio, the following four properties are subject to the mortgage requirement:
The total appraised value of the four mortgaged properties is approximately $193,000,000. Appraisals have been conducted by Greystone Valuation Services (Daniel Pritchard, MAI, lead appraiser), and Phase I environmental site assessments have been completed by Clearwater Environmental Sciences (Dr. Nathan Foley, project manager).
Borrower's Position. Mortgages should be treated as post-closing deliverables, with a delivery deadline of sixty (60) days following the closing date, with a further thirty (30)-day extension available in the event of good faith delays related to title or survey issues. The W&G draft specifies a fixed deadline of April 30, 2025, which is approximately thirty-three days from the expected closing date of March 28, 2025. This timeline is unrealistically tight given the number of properties, the involvement of multiple counties and jurisdictions, and the administrative requirements associated with ordering and reviewing title commitments, surveys, and endorsements. A sixty-day period (with a thirty-day extension for documented delays) is a more reasonable and market-standard timeline.
Flood Zone Determinations. The Borrower is required to obtain standard flood hazard determinations for each mortgaged property. If any property is located in a FEMA-designated special flood hazard area, flood insurance must be obtained in compliance with the National Flood Insurance Act of 1968, as amended. Based on the Phase I ESAs and the appraisals, none of the four properties is currently located in a designated flood zone. However, this determination should be formally verified through a third-party flood zone certification at the time of mortgage delivery, as FEMA flood maps are subject to periodic revision.
Title Insurance. Lender's title insurance policies are to be issued by Landmark Title Assurance Company for each mortgaged property. The policies should be in ALTA loan policy form (2006, as amended) with standard endorsements (including zoning, survey, access, and contiguity endorsements where applicable). Title commitments should be ordered promptly following closing to facilitate timely delivery of the mortgages and title policies within the sixty-day post-closing period.
D. Deposit and Securities Account Control
The security package requires the delivery of deposit account control agreements ("DACAs") covering the Borrower's material bank accounts. The relevant accounts include (a) accounts maintained at Crescent Harbor Bank, N.A. (which, as the Administrative Agent, has "self-control" over these accounts by operation of UCC Section 9-104(a)(1)), and (b) the Borrower's operating accounts at Redstone National Bank (account numbers ending in -4471, -4472, and -6633).
Borrower's Position. The deposit account control agreements should be in "springing" or "notice-only" form during non-default periods. Under this structure, the DACA acknowledges the Collateral Agent's security interest in the applicable deposit account but does not give the Collateral Agent dominion and control over the account during ordinary-course operations. Instead, the Borrower retains full operational control over the account (including the right to direct withdrawals, transfers, and payments) unless and until the Collateral Agent delivers a "notice of exclusive control" to the depository bank. The notice of exclusive control may only be delivered upon the occurrence and continuance of an Event of Default.
This springing control structure is critical for the Borrower's day-to-day treasury operations. If the DACAs were in "full control" form from the outset, the Collateral Agent would have the legal right to instruct the depository bank to freeze or redirect funds at any time, which would create unacceptable operational risk for the Borrower even in the absence of any default or other triggering event. The springing control mechanic has become the prevailing market standard in sponsor-backed Term Loan B transactions and should not face significant resistance from W&G.
Securities account control agreements should follow the same springing structure, with the Collateral Agent's exclusive control rights activating only upon the delivery of a notice of exclusive control following an Event of Default.
X. ASSET DISPOSITION COVENANT
The credit agreement requires mandatory prepayment of the Term Loan B from 100% of net cash proceeds of asset sales, subject to the Borrower's reinvestment rights as described below.
Reinvestment Rights. The Borrower should have three hundred and sixty-five (365) days from receipt of net cash proceeds from an asset sale to reinvest such proceeds in assets useful in the Borrower's business (including by way of capital expenditures or permitted acquisitions). If the Borrower has entered into a binding commitment to reinvest the proceeds within the initial 365-day period, the reinvestment period should be automatically extended to five hundred and forty-five (545) days from the date of receipt. This two-tier reinvestment structure is consistent with the agreed term sheet and provides the Borrower with adequate time to identify and execute reinvestment opportunities, which is particularly important for capital-intensive manufacturing businesses where equipment procurement and facility construction can involve extended lead times.
Annual De Minimis Basket. Aggregate net cash proceeds from asset sales in any fiscal year that do not exceed $25,000,000 should not be subject to the mandatory prepayment obligation. The W&G draft proposes a de minimis basket of only $15,000,000, which is a clear departure from the agreed term sheet figure of $25,000,000. This departure should be flagged and corrected. The $25,000,000 threshold accommodates the ordinary-course disposition of non-core or underperforming equipment and assets without triggering mandatory prepayment obligations that would be administratively burdensome and commercially counterproductive.
Mandatory Prepayment Exclusions. The following dispositions should be expressly excluded from the mandatory prepayment trigger:
(i) Sales of inventory in the ordinary course of business. These are the Borrower's day-to-day revenue-generating transactions and are obviously not intended to be captured by the asset sale prepayment provision.
(ii) Dispositions of obsolete, worn-out, or surplus equipment that is no longer used or useful in the Borrower's business.
(iii) Intercompany sales and transfers among Loan Parties, which do not result in any leakage of value from the credit group.
(iv) Casualty events and condemnation events involving net proceeds below $10,000,000, which are addressed by a separate insurance/condemnation mandatory prepayment provision with its own threshold.
XI. EXCESS CASH FLOW SWEEP
The credit agreement includes a mandatory prepayment from Excess Cash Flow ("ECF"), determined annually based on the following step-down schedule:
Borrower's Positions on ECF Calculation. The definition of Excess Cash Flow and the calculation mechanics are critical to determining the actual dollar amount of any mandatory prepayment obligation. The Borrower should confirm that the following deductions are included in the ECF calculation:
(i) Cash taxes paid during the applicable fiscal year.
(ii) Cash interest paid during the applicable fiscal year, net of any amortized original issue discount ("OID"). To the extent OID is amortized as non-cash interest expense, it should not reduce the ECF deduction for cash interest actually paid.
(iii) Scheduled amortization and mandatory prepayments actually made during the applicable fiscal year. At the current amortization rate of 1.00% per annum, scheduled amortization payments total $14,000,000 annually ($3,500,000 per quarter on an original principal amount of $1,400,000,000).
(iv) Capital expenditures funded from internally generated cash flow during the applicable fiscal year, but only to the extent such capital expenditures were not funded from the proceeds of asset sales, insurance or condemnation proceeds, or equity issuances. This ensures that capital expenditures funded from identified external sources are not double-counted as deductions.
(v) Increases in working capital (and corresponding credits for decreases in working capital) during the applicable fiscal year. Changes in working capital are a significant variable in the ECF calculation for a manufacturing business like Nexford, which has meaningful inventory and receivables balances that can fluctuate substantially from period to period.
(vi) Cash restructuring charges and integration costs incurred during the applicable fiscal year in connection with permitted acquisitions and other approved restructuring activities.
(vii) Acquisition consideration paid during the applicable fiscal year in connection with permitted acquisitions, to the extent funded from internally generated cash flow (and not from the proceeds of incremental debt, equity issuances, or asset sales).
Voluntary Prepayment Credit. Voluntary prepayments of the Term Loan B made during the applicable fiscal year should reduce the ECF payment obligation on a dollar-for-dollar basis. This credit is essential to incentivize voluntary prepayments — absent the credit, a borrower that makes voluntary prepayments during the year would effectively be penalized by having to make a duplicative ECF sweep payment at year-end.
Pro Forma Leverage at Closing. It is worth noting for the client's benefit that at the pro forma closing first lien net leverage of 3.38x, the 0% ECF sweep tier would apply (as leverage is less than or equal to 3.50x). This means that no Excess Cash Flow sweep payment would be required in the first year following closing, absent a leverage increase resulting from incremental debt incurrence, reduced EBITDA, or a decline in the cash balance. This is a favorable outcome that should be communicated to Michelle Kaplan and David Engstrom.
De Minimis Threshold. The Borrower should seek a de minimis threshold of $10,000,000 for the ECF sweep. If the calculated ECF prepayment amount for any fiscal year is less than $10,000,000, no prepayment should be required. This avoids the administrative burden of processing small mandatory prepayments that would have negligible deleveraging impact and would not meaningfully benefit the lender group. The W&G draft does not include a de minimis threshold, and this should be added in the borrower's markup.
XII. CHANGE OF CONTROL PROVISION
The credit agreement includes a change of control prepayment event that permits the Administrative Agent, at the direction of the Required Lenders, to declare all outstanding obligations immediately due and payable upon the oc