MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Philip Hartmann, Partner, Banking & Finance; Lisa Morrow, Lead Associate, Banking & Finance
FROM: Marcus Leung, Working Associate, Banking & Finance
DATE: March 27, 2026
RE: Mandatory Prepayment and Excess Cash Flow Sweep Analysis — $200,000,000 Senior Secured Term Loan Facility; Solara Digital Acquisition Holdings LLC (Borrower)
MATTER NO.: 1041-00002
CLIENT NO.: CL-081273
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I. Executive Summary
This memorandum analyzes the mandatory prepayment provisions contained in the draft term sheet (the "Draft Term Sheet") received from Brindoval National Bank, N.A. ("Brindoval" or the "Administrative Agent") on March 21, 2026, in connection with the proposed $200,000,000 Senior Secured Term Loan Facility (the "Facility") to be provided to Solara Digital Acquisition Holdings LLC (the "Borrower") to finance, in part, the acquisition (the "Acquisition") of Meridian Cloud Solutions Inc. ("Meridian" or the "Target"). The Borrower is a newly formed wholly owned subsidiary of Solara Digital Infrastructure Fund IV LP ("Fund IV"), which is managed by the Solara Digital team and which is contributing approximately $130,000,000 of equity to fund the Acquisition.
The Draft Term Sheet contemplates three categories of mandatory prepayment events: (1) an Excess Cash Flow ("ECF") sweep, (2) an asset sale proceeds sweep, and (3) a debt issuance proceeds sweep. Each of these mechanisms operates to require the Borrower to apply specified percentages of cash flows or transaction proceeds to the prepayment of outstanding term loan obligations, thereby reducing the principal balance of the Facility on an accelerated basis relative to the scheduled amortization profile.
This memorandum provides a detailed walkthrough of each mandatory prepayment mechanism as proposed in the Draft Term Sheet, identifies borrower-favorable positions that we recommend advancing in the first markup of the term sheet (which is due to Brindoval's counsel, Broadwick & Thayer LLP, by close of business on March 28, 2026), and benchmarks the proposed terms against current market practice for sponsor-backed SaaS acquisition financings. In preparing this analysis, I have reviewed the Draft Term Sheet, publicly available term sheet summaries from comparable transactions completed during Q3 2025 through Q1 2026 (sourced from Refinitiv LPC and Severin Systems), and our firm's internal precedent database.
The key recommendations set forth in this memorandum are as follows:
• Negotiate netting of voluntary prepayments against ECF sweep obligations. The Draft Term Sheet does not expressly provide for such netting, which is a significant departure from market practice. This is a "must-have" item for the markup.
• Clarify the treatment of capitalized software development costs in the ECF calculation. Given Meridian's business model as a cloud-native SaaS platform, capitalized software development costs represent a material annual expenditure (estimated at $6–8 million annually) and must be treated as a deduction in the ECF computation to avoid overstating available cash flow.
• Expand the asset sale reinvestment exception and annual basket. While the reinvestment period is within market norms, the annual basket of $2,500,000 is at the lower end of the range for a business of Meridian's scale. We recommend an increase to $5,000,000.
• Narrow the debt issuance sweep to exclude all categories of permitted debt. The effectiveness of this provision depends entirely on the breadth of the "permitted debt" definition, which must be carefully negotiated to encompass all categories of indebtedness the Borrower may need to incur in the ordinary course or in connection with the growth strategy for the Target.
Each of these points, along with additional recommendations, is discussed in detail below.
II. Transaction Context
To frame the mandatory prepayment analysis, the following summarizes the key terms and participants of the proposed transaction.
Borrower. Solara Digital Acquisition Holdings LLC, a newly formed Delaware limited liability company and a wholly owned subsidiary of Solara Digital Infrastructure Fund IV LP ("Fund IV"). Fund IV is a $1.8 billion private equity fund focused on enterprise software and digital infrastructure investments, managed by the Solara Digital team based in New York.
Target. Meridian Cloud Solutions Inc., a Delaware corporation. Meridian operates a cloud-native SaaS platform that provides portfolio management, client reporting, and compliance monitoring solutions to mid-market asset managers. Meridian was founded in 2015 and is headquartered in Denver, Colorado, with additional offices in Austin, Texas, and London, United Kingdom.
Enterprise Value / Purchase Price. $315,000,000.
Sources and Uses.
Equity Contribution. Fund IV is contributing $130,000,000 of equity, representing approximately 41.3% of enterprise value. This equity contribution level is within the range expected by Brindoval for a transaction of this nature, and it satisfies the minimum equity contribution requirement discussed during the initial term sheet negotiations.
Administrative Agent / Lead Arranger / Sole Bookrunner. Brindoval National Bank, N.A.
Lender's Counsel. Broadwick & Thayer LLP, represented by Catherine Hartwell (partner) and James Okoro (senior associate).
Key Financial Metrics of Meridian.
Closing Leverage Ratios.
• Total Debt / LTM Adjusted EBITDA: $200,000,000 ÷ $18,700,000 ≈ 10.70x
• Total Debt / ARR: $200,000,000 ÷ $62,400,000 ≈ 3.21x
These leverage levels are elevated on an EBITDA basis, which is characteristic of sponsor-backed SaaS acquisitions where the lending thesis is premised on recurring revenue growth, high gross margins, and improving EBITDA margins as the business scales. The 3.21x Debt/ARR multiple is within the range typically observed in SaaS acquisition financings (generally 2.5x–4.0x ARR for businesses with Meridian's growth and retention profile). However, the high EBITDA-based leverage ratio has important implications for the ECF sweep analysis, as discussed in Section III.D below.
Key Facility Terms.
First ECF Sweep Calculation. The Draft Term Sheet provides that the first ECF sweep calculation will be performed with respect to the fiscal year ending December 31, 2026. As discussed below, this raises the question of whether a partial-year ECF calculation is appropriate given the targeted June 30, 2026 closing date.
Auditor. Meridian's independent auditor is Whitfield & Sable LLP, with Raymond Bautista serving as the lead engagement partner. The firm issued unqualified opinions on Meridian's financial statements for fiscal years 2024 and 2025, and we understand that the engagement letter contemplates continued service through the post-acquisition period.
III. Excess Cash Flow Sweep — Detailed Analysis
A. Overview of ECF Sweep Mechanics
The ECF sweep is the most significant of the three mandatory prepayment mechanisms from a practical standpoint, as it will recur annually and directly impact the Borrower's ability to retain operating cash flow for reinvestment in the business. Under the Draft Term Sheet, the Borrower is required to make mandatory prepayments in an amount equal to a specified percentage of Excess Cash Flow for each fiscal year, commencing with the fiscal year ending December 31, 2026.
The ECF sweep percentages are subject to step-downs based on the Total Net Leverage Ratio ("TNL") as of the last day of the applicable fiscal year, as follows:
The leverage ratio is tested as of the last day of the applicable fiscal year, which means the step-down determination is made on a backward-looking basis using year-end financial data. The mandatory prepayment is due within ten (10) business days after the delivery of the Borrower's audited annual financial statements for the applicable fiscal year. The Draft Term Sheet requires delivery of audited annual financial statements within 120 days of fiscal year-end, which means that for fiscal year 2026, audited financials would be due by April 30, 2027, and the ECF mandatory prepayment would be due by approximately mid-May 2027 (depending on the exact delivery date and the calendar of business days).
This structure is a standard "waterfall" ECF sweep that is common in leveraged acquisition financings. The policy rationale from the lender's perspective is straightforward: when the Borrower's leverage is high, a greater share of excess operating cash flow should be directed toward debt reduction; as leverage decreases, the Borrower is rewarded with reduced sweep obligations, and ultimately, at the lowest leverage threshold, the sweep is eliminated entirely. However, as discussed in Section III.D below, the practical implications of these particular step-down thresholds for a high-leverage SaaS acquisition merit careful attention.
B. Definition of Excess Cash Flow
The Draft Term Sheet does not include a fully drafted definition of Excess Cash Flow; rather, it references a "customary" ECF definition to be set forth in the definitive credit agreement. Based on our experience and the precedent in Brindoval's prior credit agreements (including the Brindoval-led $175M term loan for Obsidian Data Corp. closed in October 2025, which we reviewed in our firm's precedent database), the ECF definition will likely be structured as follows:
Excess Cash Flow = Consolidated Net Income plus depreciation, amortization, and other non-cash charges deducted in arriving at Consolidated Net Income minus capital expenditures actually made in cash (excluding capitalized expenditures financed with the proceeds of indebtedness) minus scheduled amortization payments actually made on the term loan and any other funded indebtedness minus the aggregate amount of cash payments made in respect of working capital changes (i.e., increases in current assets minus increases in current liabilities) minus cash taxes actually paid minus certain other permitted deductions (as negotiated)
The precise formulation of this definition will be a critical negotiation point in the definitive credit agreement. The following are the key definitional issues that we should address in our first markup of the term sheet and flag for further negotiation in the credit agreement:
1. Consolidated Net Income Starting Point. Consolidated Net Income typically serves as the starting point for the ECF calculation. It is essential that the definition of Consolidated Net Income exclude the following items, which would otherwise distort the ECF computation:
(a) extraordinary or non-recurring gains and losses;
(b) gains and losses from asset dispositions outside the ordinary course of business (which are separately addressed by the asset sale sweep);
(c) acquisition-related expenses, including transaction fees, advisory fees, and legal costs incurred in connection with the Acquisition or any permitted acquisitions;
(d) non-cash stock-based compensation expense;
(e) non-cash impairment charges, including goodwill and intangible asset impairment;
(f) unrealized gains and losses on hedging instruments and foreign currency translation adjustments;
(g) the income or loss of any person that is not a subsidiary, except to the extent of cash dividends or distributions actually received by the Borrower or a Guarantor; and
(h) any non-cash purchase accounting adjustments arising from the application of ASC 805 (Business Combinations) or any successor standard.
We should seek confirmation in the term sheet that these exclusions will be reflected in the definitive credit agreement. Given that the Acquisition will give rise to significant purchase price allocation adjustments (including substantial goodwill and intangible asset recognition), item (h) above is particularly important.
2. Capital Expenditure Deduction. The treatment of capital expenditures in the ECF calculation is one of the most important issues for a SaaS business like Meridian. Capital expenditures serve as a deduction from ECF, meaning that a broader definition of deductible capital expenditures results in a lower ECF sweep amount.
The key question is whether the capital expenditure deduction is limited to "maintenance" capital expenditures or includes all capital expenditures (including growth capital expenditures). From the Borrower's perspective, the deduction should encompass all capital expenditures, as growth capex represents cash that has been invested in the business and is not available for debt service.
Of particular significance for Meridian is the treatment of capitalized software development costs. Under ASC 350-40 (Internal-Use Software) and ASC 985-20 (Costs of Software to Be Sold, Leased, or Marketed), Meridian capitalizes a substantial portion of its software development expenditures. Based on our review of Meridian's financial statements and discussions with management, capitalized software development costs are estimated at $6–8 million annually, representing a significant portion of Meridian's total capital expenditure profile. For context, Meridian's total capital expenditures (including capitalized software costs) were approximately $9.2 million in FY 2025, of which approximately $7.1 million consisted of capitalized software development costs and approximately $2.1 million consisted of property, equipment, and other tangible capital expenditures.
If capitalized software development costs are not treated as deductible capital expenditures in the ECF calculation, the ECF sweep amount will be materially overstated. This is because the ECF definition adds back amortization of capitalized software costs (as a non-cash charge) to Consolidated Net Income but would not then deduct the cash cost of new software development. The net effect would be that the Borrower is "charged" for the amortization add-back without receiving credit for the ongoing cash investment in software development.
Recommendation: We must ensure that the ECF definition either (a) includes capitalized software development costs within the definition of "capital expenditures" for purposes of the ECF deduction, or (b) includes a separate, express deduction for capitalized software development costs. This is a priority item for the term sheet markup, and we should include a parenthetical or footnote in the term sheet specifying that "capital expenditures" for ECF purposes includes capitalized software development costs.
3. Working Capital Adjustments. The working capital component of the ECF definition is designed to account for changes in the Borrower's operating working capital during the fiscal year. In a typical manufacturing or distribution business, working capital adjustments primarily relate to changes in accounts receivable, inventory, and accounts payable. For a SaaS business like Meridian, however, the single most significant working capital item is deferred revenue.
Deferred revenue represents cash received from customers for subscription services that have not yet been delivered or recognized as revenue under ASC 606. As Meridian grows its subscription base and books multi-year or annual prepaid contracts, deferred revenue will increase. An increase in deferred revenue represents cash that has been collected but not yet earned — it is a real cash inflow to the business. However, under the standard ECF working capital adjustment, an increase in a current liability (such as deferred revenue) would typically be added to ECF (because it represents a source of cash that was not reflected in Consolidated Net Income). If this treatment is applied mechanically to deferred revenue, it could artificially inflate ECF by treating prepaid subscription bookings as available cash flow for debt service, even though that cash is effectively committed to future service delivery obligations.
Recommendation: We should negotiate for one of the following treatments:
(a) Exclude changes in deferred revenue from the working capital adjustment entirely, on the theory that deferred revenue is not "true" working capital in the same sense as accounts receivable or accounts payable; or
(b) Include deferred revenue in the working capital adjustment but with a cap on the amount by which increases in deferred revenue can be added to ECF (e.g., cap the add-back at the lesser of the actual increase and a specified dollar amount or percentage of revenue).
Option (a) is the more aggressive borrower position and may face resistance from Brindoval; option (b) represents a reasonable middle ground. We should discuss the preferred approach with Philip and Lisa before finalizing the markup.
4. Cash Restructuring Charges and Transaction Costs. The first fiscal year following the closing of the Acquisition (FY 2026) will include significant one-time cash expenditures related to transaction costs, integration expenses, severance payments, and systems migration costs. Based on the financial model prepared by Velthorn Stanton Advisory LLC, one-time integration and transaction costs for FY 2026 are estimated at approximately $4.5–5.5 million. These are real cash outflows that reduce the Borrower's available cash and should be deducted in the ECF calculation.
Recommendation: Include an express deduction in the ECF definition for cash restructuring charges, integration costs, and transaction expenses paid during the applicable fiscal year, at least for the first 24 months following the closing date. This is consistent with the treatment of such costs in the Adjusted EBITDA definition for covenant compliance purposes.
5. Permitted Acquisition Consideration. The Borrower's business plan contemplates potential tuck-in acquisitions to expand Meridian's product suite and customer base. Cash consideration paid for acquisitions that constitute "permitted acquisitions" under the credit agreement should reduce ECF, as such payments represent cash deployed for business purposes that is not available for debt service.
Recommendation: Include an express deduction in the ECF definition for cash consideration (including earnout payments) paid in connection with permitted acquisitions during the applicable fiscal year.
C. Netting of Voluntary Prepayments
This is the single most important issue we have identified in the mandatory prepayment provisions of the Draft Term Sheet.
The Draft Term Sheet does not explicitly provide for netting of voluntary prepayments made during the fiscal year against the ECF sweep obligation. This means that if the Borrower were to make, for example, a $10 million voluntary prepayment of the term loan during FY 2027, and the ECF sweep for FY 2027 were calculated at $8 million, the Borrower would be required to pay the full $8 million ECF sweep in addition to the $10 million voluntary prepayment already made — resulting in a total of $18 million in prepayments during or with respect to that fiscal year.
This result is economically irrational from the Borrower's perspective, as the voluntary prepayment has already reduced the outstanding principal balance and achieved the debt reduction that the ECF sweep is designed to accomplish. The absence of voluntary prepayment netting creates a perverse incentive for the Borrower to defer voluntary prepayments until after the ECF sweep has been calculated and paid, which is contrary to the lenders' interests and inconsistent with the purpose of the mandatory prepayment regime.
Market standard in sponsor-backed deals is to permit voluntary prepayments to net against ECF sweep obligations on a dollar-for-dollar basis. In our review of twelve comparable sponsor-backed SaaS term loans closed between Q3 2025 and Q1 2026, all twelve included express voluntary prepayment netting provisions. This is a well-established market term, and its omission from the Draft Term Sheet may be an oversight by Brindoval's documentation team or a deliberate negotiating position intended to be conceded during markup negotiations.
Recommendation: We should insert express language in the term sheet markup providing that voluntary prepayments of the term loan made during the applicable fiscal year (including any prepayment premium paid in connection therewith — specifically, the 1.0% soft call premium applicable during the first twelve months following closing) shall be credited on a dollar-for-dollar basis against the ECF mandatory prepayment obligation for such fiscal year. If the aggregate voluntary prepayments exceed the calculated ECF sweep amount, no ECF payment should be required for that fiscal year, and any excess should be carried forward as a credit against subsequent fiscal year ECF sweep obligations (though the carry-forward feature is a "nice-to-have" rather than a "must-have").
This is categorized as a "must-have" in our negotiation strategy. We should not agree to proceed to definitive documentation without this netting right.
D. Step-Down Analysis and Practical Implications
A clear-eyed assessment of the ECF sweep step-down thresholds reveals that the 50% sweep rate will apply for the foreseeable future given the Borrower's opening leverage profile. This has significant implications for our negotiation strategy.
Opening Leverage. At closing, the Borrower's Total Net Leverage Ratio will be approximately 10.70x (calculated as $200,000,000 of total debt divided by $18,700,000 of LTM Adjusted EBITDA). This is well above the 4.50x first step-down threshold.
Path to First Step-Down (4.50x). To achieve the first step-down from 50% to 25%, the Borrower would need to reach a Total Net Leverage Ratio of 4.50x or below. Assuming no voluntary prepayments and only scheduled amortization of $2,000,000 per year, the outstanding principal balance after one year of amortization would be approximately $198,000,000. To achieve 4.50x leverage with $198 million of debt, the Borrower would need Adjusted EBITDA of approximately $44,000,000. This would represent approximately 135% growth from the $18,700,000 base — a level that, while not impossible for a high-growth SaaS business, is highly unlikely within the first year post-closing and improbable within the first several years.
Realistic Scenario Analysis. Based on Meridian's current growth trajectory (27% ARR growth, improving EBITDA margins), a more realistic EBITDA growth path is as follows:
These projections assume no voluntary prepayments (which would accelerate deleveraging) and no ECF sweep prepayments being applied (which would also reduce outstanding principal). In practice, ECF sweep payments will reduce the outstanding balance, creating a virtuous cycle of deleveraging. However, even accounting for this dynamic, the Borrower is unlikely to reach the 4.50x first step-down threshold until approximately FY 2029 at the earliest, and likely FY 2030 or later under moderate growth assumptions.
Practical Implication. The 50% ECF sweep rate will apply for at least the first three to four fiscal years of the Facility. This means that a substantial portion of the Borrower's excess cash flow will be directed toward debt reduction during the period when the Borrower may most need operating flexibility to invest in growth, fund tuck-in acquisitions, and execute on the value creation plan that underpins Fund IV's investment thesis.
Recommendations:
(a) Net debt denominator. Negotiate for a Total Net Leverage Ratio definition that subtracts unrestricted cash and cash equivalents (up to a specified cap, such as $15,000,000 or $20,000,000) from total debt in the numerator. This is commonly referred to as a "net leverage" test and is standard in most sponsor-backed term loan facilities. If Meridian maintains a healthy cash balance (which is typical for SaaS businesses with strong collections), the net leverage ratio will be lower than the gross leverage ratio, potentially accelerating step-down eligibility. The Draft Term Sheet references "Total Net Leverage Ratio," suggesting that net debt treatment may already be contemplated, but we should confirm this in the markup and ensure that the netting is not subject to unduly restrictive conditions.
(b) Higher first step-down threshold. Consider proposing a higher initial step-down threshold — for example, 5.50x for the step-down from 50% to 25%, and 4.50x for the step-down from 25% to 0%. This would provide earlier relief from the 50% sweep rate while maintaining meaningful deleveraging incentives. We recognize that Brindoval may resist this proposal, but given the high opening leverage and the growth-oriented nature of the business, we believe a reasonable case can be made.
(c) Alternative: ARR-based step-downs. As an alternative or supplement to EBITDA-based leverage step-downs, consider proposing step-downs tied to a Total Debt / ARR ratio. Given that the Debt/ARR ratio (3.21x at closing) is more reflective of the lending thesis in a SaaS acquisition financing, ARR-based step-downs may more accurately capture the Borrower's deleveraging progress. For example: 50% ECF sweep if Debt/ARR > 2.50x; 25% if Debt/ARR ≤ 2.50x but > 2.00x; 0% if Debt/ARR ≤ 2.00x. This is a more aggressive negotiating position and may be better suited for the definitive credit agreement negotiation rather than the term sheet markup, but we should raise the concept early.
E. Timing and Calculation Mechanics
Annual Calculation Basis. The ECF sweep is calculated on an annual basis, tied to the Borrower's audited annual financial statements. There is no semi-annual or quarterly ECF sweep mechanism in the Draft Term Sheet, which is consistent with market practice for term loan facilities of this nature.
First ECF Calculation — Partial Year Issue. The first ECF sweep calculation is scheduled for the fiscal year ending December 31, 2026. Because the targeted closing date is June 30, 2026, the first fiscal year will include only approximately six months of operations under the Facility. This raises an important question: should the ECF sweep apply to a full twelve-month fiscal year (which would include six months of pre-closing operations), or should it apply only to the period from the closing date through December 31, 2026?
Applying the ECF sweep to a full twelve months of operations would be inappropriate for several reasons. First, the Borrower did not have the benefit of the Facility proceeds for the first six months of the fiscal year, and the mandatory prepayment obligation should correspond to the period during which the Facility was outstanding. Second, the pre-closing period may include transaction-related cash flows (such as receipt of the equity contribution and term loan proceeds, payment of the acquisition purchase price, and payment of transaction costs) that would distort the ECF calculation. Third, the capital expenditure and amortization deductions in the ECF formula should be calibrated to the post-closing period to avoid under-counting deductions.
Recommendation: Negotiate a provision specifying that the first ECF sweep calculation applies only to the period from the closing date through December 31, 2026, with the following pro rata adjustments:
(a) Scheduled amortization deduction is pro-rated for the partial year (i.e., $1,000,000 for six months of amortization rather than $2,000,000 for a full year);
(b) Capital expenditure deductions are based on actual capital expenditures made during the post-closing period;
(c) Working capital changes are measured from the closing date balance sheet through the December 31, 2026 balance sheet; and
(d) The de minimis ECF threshold (if successfully negotiated) is pro-rated for the partial year.
Payment Timing. Under the Draft Term Sheet, the ECF mandatory prepayment is due within ten (10) business days after delivery of the audited annual financial statements. Audited financial statements are due within 120 days of fiscal year-end. For FY 2026, this means:
• Fiscal year-end: December 31, 2026
• Audited financials due: April 30, 2027
• ECF payment due: approximately May 14–16, 2027 (10 business days after April 30, 2027, depending on calendar)
The ten-business-day payment window after delivery of audited financials is tighter than what we typically see in sponsor-backed deals. Many comparable facilities provide for a fifteen-business-day or twenty-business-day payment window, which allows additional time for the Borrower's finance team to calculate the ECF amount, prepare the compliance certificate, and arrange for the wire transfer. We should consider requesting an extension to fifteen (15) business days in the markup, though this is a lower-priority item.
Auditor Information. Meridian's independent auditor, Whitfield & Sable LLP, has issued unqualified opinions on Meridian's financial statements for fiscal years 2024 and 2025. Raymond Bautista serves as the lead engagement partner. We do not anticipate any issues with the timeliness or quality of the audit that would affect the ECF calculation timeline, though the post-acquisition transition to consolidated reporting (if applicable) should be coordinated with the auditors.
F. Market Comparison — ECF Sweep in Comparable SaaS Transactions
To benchmark the Draft Term Sheet's ECF sweep provisions, we reviewed twelve sponsor-backed SaaS acquisition term loans that closed between Q3 2025 and Q1 2026, sourced from Refinitiv LPC, Severin Systems, and our firm's internal precedent database. The following summarizes our findings:
ECF Sweep Percentages. The majority of comparable deals (ten of twelve) utilize a three-tier 50%/25%/0% ECF sweep structure, consistent with the Draft Term Sheet. Two deals utilized a two-tier structure (50%/0%), which is less common but provides a more dramatic incentive for deleveraging. No deals in our sample utilized a sweep rate higher than 50%.
Step-Down Leverage Thresholds. Step-down thresholds varied across the sample as follows:
Brindoval's proposed thresholds of 4.50x and 3.50x are at the median of the market range but are on the tighter end relative to the Borrower's opening leverage profile. Several deals with comparable opening leverage (above 9.0x) featured more generous first step-down thresholds in the range of 5.00x–5.50x, reflecting the longer deleveraging horizon inherent in high-leverage SaaS acquisitions.
De Minimis ECF Threshold. Seven of the twelve comparable deals included a de minimis ECF threshold below which no sweep is required. The threshold amounts ranged from $1,000,000 to $3,500,000, with a median of $2,000,000. The Brindoval Draft Term Sheet does not include a de minimis threshold, which means that even a trivially small amount of ECF would trigger a mandatory prepayment obligation. The administrative burden and cost of processing a small mandatory prepayment (which requires notice to the lenders, preparation of a compliance certificate, and wire transfer) is disproportionate when the ECF amount is de minimis.
Recommendation: Propose a de minimis ECF threshold of $2,000,000, which represents approximately 10.7% of LTM Adjusted EBITDA. This is consistent with the market median and would exempt the Borrower from the ECF sweep obligation in fiscal years where ECF is minimal.
Voluntary Prepayment Netting. All twelve comparable deals reviewed include express voluntary prepayment netting provisions, confirming that the absence of such a provision in the Draft Term Sheet is a departure from prevailing market practice.
Capitalized Software Development Costs. Of the twelve comparable deals, nine expressly included capitalized software development costs within the definition of "capital expenditures" for ECF purposes. The remaining three did not expressly address the issue in their publicly available term sheet summaries, but we believe that such treatment was likely addressed in the definitive credit agreements.
IV. Asset Sale Mandatory Prepayment — Detailed Analysis
A. Overview
The Draft Term Sheet provides that 100% of net cash proceeds from asset sales (other than asset sales generating net cash proceeds at or below $2,500,000 in any fiscal year) must be used to mandatorily prepay the term loan, subject to reinvestment rights.
Specifically, the Draft Term Sheet provides:
• Sweep Percentage: 100% of net cash proceeds from asset sales.
• Annual Basket: Asset sales generating net cash proceeds at or below $2,500,000 in the aggregate in any fiscal year are exempt from the mandatory prepayment requirement.
• Reinvestment Rights: Net cash proceeds may be reinvested in assets useful in the business within 365 days of receipt. If the Borrower has entered into a binding commitment to reinvest within the initial 365-day period, the reinvestment period is extended by an additional 180 days, for a total of 545 days from receipt of proceeds.
The asset sale mandatory prepayment is a standard feature of leveraged term loan facilities. Its purpose is to ensure that the economic value of the collateral base is preserved by requiring that proceeds from the disposition of material assets are applied to reduce outstanding debt rather than distributed to equity holders or deployed for purposes not contemplated by the credit agreement.
B. Key Issues and Recommendations
We have identified the following key issues with respect to the asset sale mandatory prepayment provisions:
1. Annual Basket Size. The $2,500,000 annual basket is relatively small for a business of Meridian's size and scale. Meridian's LTM ARR is $62,400,000, and its total assets (based on the FY 2025 balance sheet) are approximately $85,000,000 (inclusive of goodwill and intangible assets that will be significantly restated upon application of acquisition purchase price accounting). In the ordinary course of business, Meridian may need to dispose of obsolete server equipment, decommission end-of-life hardware, license or sell non-core intellectual property, or dispose of leasehold improvements in connection with office consolidations. A $2,500,000 basket provides very limited headroom for these routine dispositions.
Recommendation: Propose an increase in the annual basket from $2,500,000 to $5,000,000. This represents approximately 8.0% of LTM ARR and approximately 26.7% of LTM Adjusted EBITDA, and it would provide meaningful flexibility for routine asset dispositions without materially impacting the lenders' collateral protection. As noted in Section IV.C below, the market range for annual baskets in comparable deals is $2,000,000 to $7,500,000, and $5,000,000 is at the midpoint of this range.
2. Reinvestment Period. The Draft Term Sheet's reinvestment period of 365 days, with a 180-day extension upon entry into a binding commitment, is consistent with the prevailing market standard. We have no objection to this provision, and it does not require modification in the first markup. The total 545-day reinvestment window provides adequate time for the Borrower to identify and execute replacement asset acquisitions or capital investment programs.
3. Net Cash Proceeds Definition. The term "net cash proceeds" is not defined in the Draft Term Sheet but will need to be carefully defined in the definitive credit agreement. It is essential that "net cash proceeds" be defined to deduct the following items from gross proceeds:
(a) reasonable and customary fees, commissions, costs, and expenses incurred in connection with such sale or disposition (including legal fees, investment banking fees, brokerage commissions, and title and transfer fees);
(b) taxes paid or reasonably estimated to be payable in connection with such sale or disposition (including income taxes, capital gains taxes, transfer taxes, and withholding taxes), net of any available tax credits or deductions;
(c) amounts required to be applied to repay any indebtedness secured by a lien on the asset sold (other than the term loan itself), including any prepayment premiums or breakage costs; and
(d) appropriate reserves for any indemnification obligations, purchase price adjustments, or escrow holdbacks in connection with such sale.
Recommendation: Include a parenthetical in the term sheet markup referencing the key deductions from net cash proceeds, or include a notation that the definition will be "customary for facilities of this type." We should flag this for detailed drafting in the credit agreement.
4. Casualty and Condemnation Events. The Draft Term Sheet does not clearly specify whether insurance proceeds received in connection with casualty events (such as fire, flood, or other property damage) or condemnation awards received in connection with governmental takings or eminent domain proceedings are subject to the asset sale mandatory prepayment provisions. In many credit agreements, casualty and condemnation proceeds are either (a) swept under the same asset sale mandatory prepayment provisions, (b) subject to a separate mandatory prepayment regime with its own basket and reinvestment terms, or (c) excluded from mandatory prepayment altogether up to a specified threshold.
Recommendation: Propose a separate basket for casualty and condemnation proceeds of $1,000,000 per event and $2,500,000 in the aggregate per fiscal year, with a reinvestment right of 365 days (plus a 180-day extension for binding commitments) for restoration or replacement of the damaged or condemned property. This provides the Borrower with flexibility to restore its operations without being forced to apply insurance or condemnation proceeds to debt repayment.
5. Excluded Asset Sales. The Draft Term Sheet does not specify any categories of asset sales that are excluded from the mandatory prepayment requirement (other than the annual basket). To provide operational flexibility and avoid triggering mandatory prepayments in connection with routine business transactions, we should negotiate carve-outs for the following categories of dispositions:
(a) Sales of inventory in the ordinary course of business. While Meridian is primarily a SaaS business and does not carry significant physical inventory, it may from time to time sell or license software modules, data sets, or other items that could be characterized as inventory.
(b) Dispositions of obsolete or worn-out equipment. As a technology company, Meridian regularly cycles through hardware, servers, networking equipment, and other technology assets that reach end-of-life. Dispositions of such assets should not trigger mandatory prepayments.
(c) Sales or transfers between the Borrower and Guarantors (or among Guarantors). Intercompany transactions that do not result in value leaving the credit group should not trigger mandatory prepayments.
(d) Dispositions constituting permitted investments. Certain dispositions may be made in connection with joint ventures, strategic partnerships, or other transactions that qualify as "permitted investments" under the credit agreement. These should be excluded from the asset sale sweep.
(e) Sale-leaseback transactions (to the extent permitted under the credit agreement) up to a specified aggregate amount.
(f) Dispositions of cash equivalents and short-term investments in the ordinary course of cash management.
Recommendation: Include a notation in the term sheet markup that the definitive credit agreement will include customary carve-outs for the categories described above, and include specific reference to at least items (a) through (d) in the term sheet itself.
6. Leverage-Based Step-Downs. Some recent SaaS term loans include leverage-based step-downs for asset sale sweeps, mirroring the structure of the ECF sweep. Under such a structure, the percentage of net cash proceeds required to be applied to mandatory prepayment decreases as the Borrower deleverages. For example:
The Draft Term Sheet proposes a flat 100% sweep with no leverage-based step-downs. While this is not unusual (approximately half of comparable deals do not include step-downs for asset sale sweeps), it is an area where we can seek additional flexibility.
Recommendation: Propose leverage-based step-downs for the asset sale sweep, consistent with the ECF sweep leverage thresholds. This provides a coherent, integrated mandatory prepayment framework and rewards the Borrower for deleveraging across all mandatory prepayment channels.
C. Market Comparison
The following summarizes market data from comparable transactions:
The Brindoval Draft Term Sheet's annual basket of $2,500,000 is at the lower end of the market range, and the absence of leverage-based step-downs is a point of differentiation from approximately half of comparable deals. The reinvestment period is fully consistent with market practice.
V. Debt Issuance Mandatory Prepayment — Detailed Analysis
A. Overview
The Draft Term Sheet provides that 100% of net cash proceeds from debt issuances, other than debt constituting "permitted debt" under the credit agreement, must be used to mandatorily prepay the term loan. This provision is designed to prevent the Borrower from incurring additional leverage without using the proceeds to reduce the outstanding term loan balance, except where the additional indebtedness falls within categories that the lenders have pre-approved as acceptable (i.e., "permitted debt").
The debt issuance sweep is typically the most straightforward of the three mandatory prepayment mechanisms, as it is triggered by discrete, identifiable events (the issuance of new debt) rather than by the annual calculation of a formula-based metric (as in the ECF sweep). However, the practical significance of this provision depends almost entirely on the breadth and specificity of the "permitted debt" definition, which will be negotiated in the definitive credit agreement.
B. Key Issues and Recommendations
1. Scope of "Permitted Debt" Exclusion. The effectiveness of the debt issuance mandatory prepayment provision is inversely related to the breadth of the "permitted debt" definition. From the Borrower's perspective, the "permitted debt" definition must be sufficiently comprehensive to exclude all categories of indebtedness that the Borrower may need to incur in the ordinary course of business or in connection with the execution of its growth strategy, without triggering a mandatory prepayment. At a minimum, the "permitted debt" definition should encompass the following categories:
(a) Revolving credit facility borrowings. The Draft Term Sheet does not contemplate a revolving credit facility as part of the initial financing, but the Borrower may seek to establish a revolving facility in the future for working capital and general corporate purposes. Borrowings under any revolving credit facility should be excluded from the debt issuance sweep.
(b) Capital lease obligations. Meridian utilizes capital leases for certain equipment, data center capacity, and office space. Capital lease obligations should be excluded from the debt issuance sweep, subject to a customary aggregate cap (e.g., $5,000,000 outstanding at any time).
(c) Purchase money indebtedness. Indebtedness incurred to finance the acquisition of specific assets (e.g., servers, networking equipment, or other capital equipment) should be excluded, subject to a customary aggregate cap.
(d) Intercompany debt. Loans and advances between the Borrower and its subsidiaries, or among subsidiaries, should be excluded from the debt issuance sweep, provided that such intercompany debt is subordinated to the term loan obligations on customary terms.
(e) Debt incurred in connection with permitted acquisitions. If the Borrower undertakes a permitted acquisition and incurs acquisition financing (whether in the form of seller notes, earnout obligations, or third-party acquisition debt), such indebtedness should be excluded from the sweep, subject to compliance with applicable incurrence-based leverage tests.
(f) Incremental term loan facilities. The Draft Term Sheet contemplates the possibility of incremental term loan facilities (commonly referred to as "accordion" facilities). Proceeds of incremental term loans should not trigger a mandatory prepayment of the existing term loan, as the incremental facility is designed to increase total borrowings, not to refinance existing debt. Any incremental facility will be subject to its own terms (including pricing, amortization, and mandatory prepayment provisions).
(g) Debt incurred under general or ratio-based permitted debt baskets. Sponsor-backed credit agreements typically include both fixed-dollar general debt baskets (e.g., $10,000,000 of indebtedness for any purpose) and ratio-based debt baskets (e.g., additional indebtedness so long as the Borrower's pro forma Total Net Leverage Ratio does not exceed a specified level). Indebtedness incurred under these baskets should be excluded from the debt issuance sweep.
(h) Letters of credit, bank guarantees, and surety bonds issued in the ordinary course of business.
(i) Hedging obligations incurred in the ordinary course of business and not for speculative purposes (e.g., interest rate swaps, currency hedges).
(j) Indebtedness arising from cash management services (including overdraft facilities, corporate credit cards, and netting arrangements).
Recommendation: The term sheet markup should include a notation that the "permitted debt" definition will be "customary for sponsor-backed term loan facilities of this type" and will include, at a minimum, the categories listed above. The detailed negotiation of the permitted debt definition will occur during the credit agreement drafting process, but establishing the framework at the term sheet stage is important to set expectations and avoid re-litigation of these issues later.
2. Refinancing Debt. Proceeds from debt issued to refinance, repay, or replace the term loan itself should be expressly excluded from the mandatory prepayment requirement. This is a mechanical point — if the Borrower refinances the term loan with new debt, the proceeds of the new debt will be used to pay off the existing term loan in full, and there would be no economic logic in requiring a "mandatory prepayment" of the same obligation that is being refinanced. While this is generally understood, it should be stated expressly to avoid any ambiguity.
Recommendation: Include a clarifying provision in the term sheet markup that proceeds from refinancing indebtedness (i.e., indebtedness incurred to refinance, repay, or replace the term loan) are excluded from the mandatory prepayment requirement.
3. Timing of Prepayment. The Draft Term Sheet does not specify the time period within which the Borrower must apply net cash proceeds from debt issuances to mandatory prepayment. The customary standard is within three (3) to five (5) business days after receipt of net cash proceeds.
Recommendation: Propose a five (5) business day period after receipt of net cash proceeds, which provides adequate time for the Borrower to process the mandatory prepayment while ensuring prompt application of proceeds.
C. Market Comparison
A 100% sweep of net cash proceeds from non-permitted debt issuances is the universal standard in sponsor-backed leveraged term loan facilities. All twelve comparable deals in our sample include this provision, and there is no meaningful variation in the sweep percentage.
The critical negotiation point, as noted above, is the breadth of the "permitted debt" definition. This is a heavily negotiated provision in virtually every leveraged credit agreement, and the scope of the permitted debt baskets will be a significant focus of the definitive documentation negotiations. We anticipate that Brindoval's initial draft of the credit agreement will include a relatively restrictive permitted debt definition, and we should be prepared to propose a comprehensive counter-draft that reflects the Borrower's operational and strategic requirements.
VI. Interaction Between Mandatory Prepayment Provisions
The three mandatory prepayment mechanisms — ECF sweep, asset sale sweep, and debt issuance sweep — do not operate in isolation. They interact with one another and with voluntary prepayments in ways that can produce economically inefficient results if the interaction provisions are not carefully drafted.
The central concern is "double-counting" — the risk that the Borrower is required to pay down debt through one mandatory prepayment mechanism (such as an asset sale sweep) and then faces an ECF sweep that does not account for the reduced cash balance resulting from the prior mandatory prepayment. For example, consider the following scenario:
• During FY 2027, the Borrower completes an asset sale generating $5,000,000 in net cash proceeds, all of which is applied to mandatory prepayment of the term loan under the asset sale sweep.
• At the end of FY 2027, the Borrower's Excess Cash Flow is calculated at $6,000,000 (before netting). The 50% sweep rate applies, resulting in a calculated ECF sweep of $3,000,000.
• Without netting, the Borrower would be required to pay the full $3,000,000 ECF sweep, on top of the $5,000,000 asset sale mandatory prepayment already made — a total of $8,000,000 in mandatory prepayments for the fiscal year.
• With netting, the $5,000,000 asset sale mandatory prepayment would reduce the ECF sweep obligation dollar-for-dollar, resulting in $0 due under the ECF sweep (since the $5,000,000 credit exceeds the $3,000,000 ECF obligation).
The same logic applies to debt issuance mandatory prepayments and voluntary prepayments. All prepayments — whether mandatory (from asset sales or debt issuances) or voluntary — represent cash that has been applied to reduce the outstanding principal balance and should therefore be credited against the ECF sweep obligation.
Recommendation: We should negotiate explicit language in the term sheet (and subsequently in the credit agreement) providing that:
(a) All voluntary prepayments of the term loan made during the applicable fiscal year are credited dollar-for-dollar against the ECF sweep obligation for such fiscal year;
(b) All mandatory prepayments from asset sales made during the applicable fiscal year are credited dollar-for-dollar against the ECF sweep obligation for such fiscal year;
(c) All mandatory prepayments from debt issuances made during the applicable fiscal year are credited dollar-for-dollar against the ECF sweep obligation for such fiscal year; and
(d) If the aggregate of credits under (a), (b), and (c) exceeds the calculated ECF sweep obligation, no ECF payment is required for such fiscal year, and the Borrower should ideally be permitted to carry forward the excess credit to subsequent fiscal years (though this is a "nice-to-have" that may face resistance from Brindoval).
This integrated netting framework is essential to ensure that the mandatory prepayment regime operates fairly and does not impose duplicative obligations on the Borrower.
VII. Application of Mandatory Prepayments
An important but often under-negotiated aspect of mandatory prepayment provisions is the order in which mandatory prepayments are applied to the remaining amortization schedule and the final maturity balloon payment. The application order has meaningful implications for the Borrower's near-term cash flow profile and overall financial flexibility.
There are three principal approaches to application of mandatory prepayments:
Direct Order of Maturity (Borrower-Favorable). Under this approach, mandatory prepayments are applied first to the nearest upcoming scheduled amortization installments, then to subsequently scheduled installments in chronological order, and finally to the balloon payment at maturity. The effect is to reduce or eliminate near-term amortization obligations, freeing up cash flow for operations and investment. This is the most borrower-favorable approach because it provides immediate cash flow relief.
Inverse Order of Maturity (Lender-Favorable). Under this approach, mandatory prepayments are applied first to the final maturity balloon payment, then to the most distant scheduled amortization installments, working backward. The effect is to reduce the balloon payment while maintaining near-term amortization obligations. This is the most lender-favorable approach because it preserves the cash flow discipline imposed by scheduled amortization (which serves as an ongoing deleveraging mechanism) while reducing the lenders' exposure at maturity.
Pro Rata Application (Market Standard). Under this approach, mandatory prepayments are applied ratably across all remaining scheduled amortization installments and the balloon payment. This is increasingly the prevailing standard in sponsor-backed deals, as it represents a balanced compromise between the borrower's desire for near-term cash flow flexibility and the lenders' interest in maintaining the amortization discipline.
The Draft Term Sheet does not specify the application order for mandatory prepayments. This is a gap that should be addressed in the markup.
Recommendation: We should propose pro rata application across all remaining scheduled amortization installments and the balloon payment. This is the approach most commonly used in recent sponsor-backed SaaS term loans and represents a reasonable middle ground. As an alternative (if Brindoval resists pro rata application), we should propose direct order of maturity, which provides the most cash flow flexibility for the Borrower. At a minimum, we should resist inverse order of maturity, which would provide no near-term relief despite significant cash being applied to debt reduction.
We should also confirm whether the Borrower has the right to elect the application order for voluntary prepayments (as opposed to mandatory prepayments). Typically, voluntary prepayments are applied at the Borrower's election, either in direct order of maturity, inverse order of maturity, or pro rata. This flexibility is a standard borrower-favorable term that should be included in the credit agreement.
VIII. Summary of Recommendations for First Markup
Based on the analysis set forth in this memorandum, the following is a prioritized list of specific markup recommendations for the first turn of the Draft Term Sheet, organized by subject matter:
Excess Cash Flow Sweep:
1. ECF — Voluntary prepayment netting (Must-Have): Add an express provision allowing voluntary prepayments of the term loan made during the applicable fiscal year (including any prepayment premium paid in connection therewith) to be credited on a dollar-for-dollar basis against the ECF sweep obligation for such fiscal year. This is a universal market standard that is absent from the Draft Term Sheet.
2. ECF — Mandatory prepayment netting (Must-Have): Add a provision providing that mandatory prepayments from asset sales and debt issuances made during the applicable fiscal year are credited on a dollar-for-dollar basis against the ECF sweep obligation for such fiscal year, to avoid double-counting.