Graham, Christine,
Thank you for circulating the initial draft Credit Agreement dated March 20, 2024 (the "Draft"), among Cloudium Technologies plc (as Borrower), Meridian Atlantic Bank, N.A. (as Administrative Agent), Ironclad Capital Markets LLC (as Co-Arranger), and the lenders party thereto, prepared by Winthrop & Hale LLP on behalf of the Administrative Agent.
As you know, Calderwood & Harkness LLP represents Solara Digital Infrastructure Fund VI LP ("Fund VI" or the "Sponsor") in connection with the financing of the acquisition of Cloudium Technologies plc. We have now completed our review of the Draft and are writing to transmit our comments. Attached to this email please find (1) a marked-up version of the Draft reflecting our comments in tracked changes (Attachment 1) and (2) a summary comparison chart identifying the principal deviations between the Draft and the terms set forth in the Debt Commitment Letter dated January 22, 2024 (the "Commitment Letter") and the draft term sheet dated November 28, 2023 (the "Term Sheet") (Attachment 2).
This letter summarizes the principal areas of comment. Our overarching concern is that in a number of respects the Draft departs from, or does not fully implement, the economic and structural terms agreed in the Commitment Letter and the Term Sheet. We believe the Commitment Letter should serve as the baseline for the definitive documentation, and many of our comments are aimed at restoring that alignment. We have organized our comments thematically below.
**A. Definitions / EBITDA Adjustments**
The definition of "Consolidated EBITDA" in the Draft requires meaningful expansion to reflect the adjustments contemplated by the Commitment Letter and the Sponsor's financial model for the transaction. In particular, we request the following add-backs be included:
- *Run-rate cost synergies.* The Sponsor's financial model contemplates approximately $110,000,000 in projected run-rate cost synergies. We request that the EBITDA definition permit add-backs for reasonably identifiable and factually supportable run-rate cost savings, operating expense reductions, and synergies, subject to a customary cap (we propose 25% of pro forma Consolidated EBITDA) and an 18-month realization period. This adjustment is critical to the economics of the opening leverage profile. - *Transaction costs and fees.* Costs and expenses incurred in connection with the Transactions (estimated at approximately $185,000,000) should be added back without limitation for the fiscal periods in which they are incurred. - *Non-recurring restructuring and integration charges.* Customary add-backs for non-recurring charges, business optimization expenses, restructuring charges, and integration costs should be included, subject to a reasonable cap.
By way of context, the closing-date Term Loan B of $3,740,000,000 against LTM Consolidated EBITDA of approximately $405,000,000 requires pro forma adjusted EBITDA—inclusive of synergies and add-backs—to be within the opening Total Net Leverage covenant of ≤ 6.50:1.00. On our estimates, pro forma adjusted EBITDA of approximately $515,000,000 yields approximately 6.91x net leverage after deducting projected closing-date unrestricted cash of approximately $180,000,000, which means the EBITDA adjustments need to be carefully calibrated to provide adequate operating headroom from day one. We would welcome a discussion on how best to align the EBITDA definition with the flex provisions in Annex II of the Commitment Letter.
**B. Financial Covenants**
We note that the Term Loan B ($3,740,000,000; SOFR + 325 bps; 7-year maturity to July 9, 2031) is intended to be covenant-lite, with no maintenance financial covenant applicable to the term loan tranche, consistent with the Commitment Letter. The Draft appears consistent in this respect, and we appreciate that.
With respect to the Revolving Credit Facility ($500,000,000; SOFR + 275 bps; 5-year maturity to July 9, 2029), we have the following comments:
- *Springing covenant trigger.* We agree to a springing First Lien Net Leverage financial covenant tested at ≤ 5.00:1.00, triggered at 40% utilization of the Revolver ($200,000,000 drawn). However, the Draft as written would trigger the springing covenant based on letters of credit outstanding, regardless of whether they have been drawn. We request that customary cash-collateralized letters of credit and undrawn letters of credit be excluded from the utilization calculation for purposes of determining whether the springing covenant testing threshold has been met. This is consistent with prevailing market practice. - *Total Net Leverage step-downs.* The Commitment Letter contemplates a step-down from ≤ 6.50:1.00 to 5.00:1.00 over three years. We request that the step-down schedule be implemented on a borrower-friendly basis with incremental steps providing adequate cushion: 6.50x for Year 1, 6.00x for Year 2, 5.50x for Year 2.5, and 5.00x for Year 3 and thereafter. The Draft does not currently specify the interim steps, and we believe the schedule proposed above is reasonable in light of the projected deleveraging trajectory.
**C. Restricted Payments / Distributions**
The restricted payments covenant in the Draft is, in our view, more restrictive than what was contemplated by the Commitment Letter and more restrictive than market for a transaction of this size and profile. We request the following modifications:
- A builder basket based on cumulative retained Excess Cash Flow (commencing from the first full fiscal quarter after the closing date), plus a general free-and-clear basket. - Specific carve-outs for: - (i) management fees and monitoring fees payable to Solara Digital Infrastructure LP (and its affiliates) in accordance with the management services agreement to be entered into at closing; - (ii) tax distributions to Fund VI and Co-Invest VI-A LP (the $425,000,000 co-invest vehicle) in amounts necessary for the partners thereof to satisfy their respective tax obligations; - (iii) payments required under the rollover agreements with Jonathan Hargrove (Cloudium's CEO) and Pinnacle Growth Ventures LLC; - (iv) payments in connection with the representations and warranties insurance policy issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487; $680,000,000 aggregate limit), including premium payments, deductible payments, and related costs; and - (v) payments to fund, or make distributions in connection with, the indemnification escrow mechanics administered by Cobalt Trust Company.
**D. Permitted Acquisitions**
The Draft imposes a fixed dollar cap on permitted acquisitions that is, in our assessment, overly restrictive and inconsistent with the Sponsor's demonstrated add-on acquisition strategy. Fund VI's investment thesis for Cloudium is centered on the enterprise software, cloud infrastructure, data analytics, and SaaS platform verticals, and the Sponsor has completed 14 platform investments across Funds IV through VI—many of which have involved significant add-on acquisition activity.
We request that the permitted acquisitions basket be restructured to permit acquisitions subject to pro forma compliance with financial covenants (tested on a pro forma basis after giving effect to the acquisition and any related incurrence of indebtedness), rather than a fixed dollar cap. This approach aligns the Borrower's ability to execute on value-accretive acquisitions with the credit profile of the enterprise at the time of the acquisition, which we believe is the appropriate risk framework for all parties.
**E. Mandatory Prepayments / Excess Cash Flow Sweep**
We request that the excess cash flow sweep percentages be subject to step-downs tied to Total Net Leverage, as follows:
- 75% when Total Net Leverage is greater than 5.00:1.00; - 50% when Total Net Leverage is between 4.00:1.00 and 5.00:1.00; - 25% when Total Net Leverage is between 3.00:1.00 and 4.00:1.00; and - 0% when Total Net Leverage is less than 3.00:1.00.
In addition, we request that excess cash flow be calculated net of (a) voluntary prepayments of the Term Loans made during the applicable period, (b) the aggregate consideration paid for permitted acquisitions consummated during such period (to the extent funded with internally generated cash flow), (c) capital expenditures made during such period in excess of maintenance capital expenditures, and (d) cash contributions to the indemnity escrow or amounts paid in respect of R&W insurance claims during such period.
**F. Collateral and Guarantee Matters**
We understand that the Guarantee and Collateral Agreement will include pledges of equity interests held in Cloudium's principal subsidiaries, including Cloudium Technologies UK Ltd. (Company No. 11287456), Cloudium Technologies India Pvt. Ltd., and Cloudium Solutions GmbH. We have the following comments:
- We request the standard 65% limitation on the pledge of equity interests in first-tier foreign subsidiaries (Cloudium UK, Cloudium India, and Cloudium Germany) for tax efficiency purposes, consistent with the Commitment Letter. - We request that any perfection requirements in non-U.S. jurisdictions (including share charge registration in England and Wales, filings in India, and notarization and registration of the German share pledge) be handled on a post-closing basis with a 60- to 90-day period from the closing date, rather than as a condition precedent to initial funding. We are happy to agree to customary post-closing deliverables language. - We note that coordination will be needed with the Intercreditor Agreement among Meridian Atlantic Bank, N.A. (as First Lien Agent), Fund VI, and other secured parties. We have not yet received a draft of the Intercreditor Agreement and would appreciate Winthrop & Hale circulating one at the earliest opportunity.
**G. Change of Control**
The "Change of Control" definition in the Draft requires tailoring to reflect the Sponsor's ownership structure and the economics of the deal. Specifically, we request that the definition exclude from the scope of a "change of control":
- (i) any direct or indirect transfer of equity interests among Solara-affiliated entities, including Fund VI, Co-Invest VI-A LP, Solara Fund VI GP LLC, and Solara Digital GP LLC; - (ii) any initial public offering of the Borrower or any direct or indirect parent entity of the Borrower (so long as the Sponsor retains a specified minimum percentage of voting power, which we propose at 35%); and - (iii) any transfer of equity interests that is expressly permitted under the rollover agreements with Jonathan Hargrove and Pinnacle Growth Ventures LLC.
This issue is particularly sensitive given the "change of control" triggers that have already been carefully navigated in certain of Cloudium's key commercial contracts, including the Aegis Federal Solutions Inc. Master SaaS Agreement (approximately $84,000,000 in ARR) and the Helix Data Systems GmbH Technology License Agreement, as well as the payoff of the existing credit agreement with Atlas Commercial Lending Corp. ($820,000,000 outstanding). We want to ensure that the definition in the Credit Agreement does not inadvertently create issues with respect to intra-Sponsor transfers or the eventual IPO path.
**H. Reporting and Information Covenants**
We request that the reporting deadlines in the Draft be aligned with Cloudium's historical fiscal year end of September 30 and that the Credit Agreement provide reasonable grace periods for the first post-closing fiscal year (given the anticipated mid-year closing). We also note that Cloudium's independent auditor is Harwell & Dobson LLP (engagement partner Martin Chisholm), and we request that the Credit Agreement not require any change of auditor as a condition or covenant. Harwell & Dobson is a nationally recognized firm and has served as Cloudium's auditor since the company's formation.
**I. Events of Default**
We have the following comments on the Events of Default provisions:
- Customary cure rights and notice periods should apply across all Events of Default that are capable of cure. We have marked specific provisions in the redline where cure periods are either missing or shorter than market. - The cross-default threshold should be set at $50,000,000 (the Draft currently uses $25,000,000, which we believe is too low relative to the size of this enterprise). - The judgment default threshold should similarly be set at $50,000,000. - The change of control Event of Default should incorporate the tailored definition discussed in Section G above.
**J. Conditions Precedent to Closing / Funding**
This is among the most significant areas of comment. We wish to emphasize that the conditions to initial funding on the closing date must be limited to "SunGard-certain" conditions consistent with the Commitment Letter. Only the conditions set forth in Annex I to the Commitment Letter should apply at closing. The Draft currently includes a number of additional conditions precedent that go beyond the Commitment Letter and that we have deleted in the redline.
In particular, the representations and warranties that must be true and correct as a condition to closing-date funding should be limited to (a) "Specified Representations" (organization and existence, authorization, enforceability, no conflicts with the Credit Documents, solvency, use of proceeds, Federal Reserve margin regulations, OFAC/sanctions, and anti-corruption/anti-money laundering) and (b) "Specified Acquisition Agreement Representations" (as defined in the Merger Agreement dated January 22, 2024, to the extent the accuracy thereof is a condition to the Sponsor's obligation to close the Acquisition). The Draft currently requires all representations to be true at closing, which is inconsistent with the certain-funds construct. We have also confirmed that the Solvency Certificate will be delivered by the Chief Financial Officer of the surviving entity at closing, and the form of Solvency Certificate attached to the Draft is acceptable subject to the minor revisions reflected in the redline.
**Additional Procedural and Technical Comments**
In addition to the foregoing substantive comments, we note that the redline includes a number of technical corrections where definitional cross-references are incomplete or internally inconsistent. A detailed schedule of these technical comments is included in the tracked-changes markup.
We would appreciate Winthrop & Hale circulating a revised draft incorporating these comments by April 5, 2024, in order to maintain the documentation timeline. As you know, the outside date for closing under the Merger Agreement is June 30, 2024. We are pleased to report that the regulatory workstream is progressing well—the HSR waiting period expired on March 11, 2024, and CMA Phase 1 clearance is expected in early April. We are mindful, however, that the ticking fee on undrawn Term Loan B commitments (0.25% per annum) commences on April 22, 2024 (90 days post-signing of the Commitment Letter), and the commitment fee on the Revolver (0.375% per annum on undrawn commitments) is already running. These economics create a shared incentive to finalize the Credit Agreement documentation as promptly as practicable.
**Attachments:**
1. Marked-up Credit Agreement (tracked changes reflecting Calderwood & Harkness LLP's borrower-side comments) 2. Summary comparison chart — Debt Commitment Letter terms vs. Draft Credit Agreement terms (highlighting deviations)
We would welcome the opportunity to schedule a call with Graham, Samuel, and Christine to walk through the principal comments at your convenience. We would suggest a call during the week of March 25 to prioritize resolution of the key commercial terms—in particular, the EBITDA add-backs, permitted acquisitions basket, restricted payments framework, and closing conditions. Please let us know what times work on your end and we will coordinate accordingly.
Thank you for your attention to the foregoing. We look forward to working with you to finalize the documentation on a timeline that works for all parties.
Best regards,
Tiffany Rosenthal Calderwood & Harkness LLP 599 Lexington Avenue New York, NY 10022 Direct: (212) 558-7124 Email: trosenthal@calderwoodharkness.com Matter No. 1041-00003