MEMORANDUM
PRIVILEGED AND CONFIDENTIAL / ATTORNEY WORK PRODUCT
TO: Harrison Wexford, Responsible Partner, Mergers & Acquisitions
FROM: Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions
DATE: December 15, 2023
RE: Review and Commentary — Debt Commitment Letter for Acquisition of Cloudium Technologies plc by Solara Digital Infrastructure Fund VI LP
MATTER NO.: 1041-00003
CLIENT: Solara Digital Infrastructure LP
I. Executive Summary
The purpose of this memorandum is to present our analysis of the initial Debt Commitment Letter (the "DCL") dated December 15, 2023, from Meridian Atlantic Bank, N.A. (in its capacity as lead arranger, bookrunner, and administrative agent) and Ironclad Capital Markets LLC (in its capacity as co-arranger and joint bookrunner) to Solara Digital Infrastructure Fund VI LP ("Fund VI" or the "Sponsor") in connection with the proposed acquisition of Cloudium Technologies plc ("Cloudium" or the "Company") for an aggregate equity value of approximately $6,800,000,000 (the "Transaction").
The DCL commits to provide $4,240,000,000 in aggregate committed financing, consisting of two facilities: (i) a $3,740,000,000 senior secured Term Loan B facility (the "Term Loan B") and (ii) a $500,000,000 senior secured Revolving Credit Facility (the "Revolver" and, together with the Term Loan B, the "Facilities"). The Facilities, when combined with equity contributions from Fund VI and rollover equity from certain management and pre-existing shareholders, are intended to fund the entirety of the merger consideration, the repayment of Cloudium's existing indebtedness, and transaction expenses.
Overall Assessment. The DCL is broadly market-standard for a sponsor-led take-private transaction of this magnitude (the implied enterprise value of approximately $6,800,000,000, representing approximately 16.8x EV/LTM EBITDA, places this squarely within the upper range of recent large-cap software LBOs). The commitment is structured on a "certain funds" basis, which is appropriate and expected for a leveraged acquisition of a public company target. Nevertheless, several provisions in the DCL warrant negotiation before the DCL is executed concurrently with the signing of the Agreement and Plan of Merger (the "Merger Agreement") among Fund VI, Stratos Merger Sub Inc. ("Merger Sub"), and Cloudium, which is targeted for January 22, 2024.
Key Areas of Focus. Our review has identified the following principal areas requiring attention:
1. Conditions Precedent and SunGard Conditionality. The conditions to funding under the DCL must be carefully calibrated to be no more burdensome than the conditions to the Sponsor's obligation to close under the Merger Agreement. We have identified three specific conditionality gaps that must be resolved.
2. Flex Provisions. The DCL contains pricing flex, structure flex, and covenant (or "market") flex provisions that, while customary in nature, contain certain parameters and standards that should be tightened to protect Fund VI's interests.
3. Material Adverse Change / Market-Out Language. We must confirm that the DCL contains no "market-out" or "market MAC" provision and that the sole MAC condition is tied exclusively to the definition of "Company Material Adverse Effect" as set forth in the Merger Agreement.
4. Certain Funds Certainty and Limited Conditionality Framework. A holistic assessment of the DCL's compliance with "certain funds" principles, including identification of excess conditions and subjective standards that could provide the lenders with unintended avenues to decline funding.
5. Documentation Principles and Borrower-Favorable Covenants. The DCL establishes the framework for the definitive Credit Agreement, and we must ensure that the documentation principles preserve maximum flexibility for the Borrower (Cloudium, as the post-closing surviving entity) and the Sponsor.
Each of these areas is discussed in detail in the sections that follow. A summary of our specific recommendations and action items is set forth in Section XI.
II. Transaction Overview and Financing Context
A. Transaction Structure
The Transaction will be effected through a reverse triangular merger under the Delaware General Corporation Law (the "DGCL"). Stratos Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of Fund VI that was incorporated on January 8, 2024, will merge with and into Cloudium, with Cloudium surviving the merger as a wholly owned subsidiary of Fund VI (the "Surviving Corporation"). This structure was selected to preserve Cloudium's existing contractual relationships, licenses, and regulatory approvals, which would otherwise require novation or re-consent in a forward merger structure. The reverse triangular merger also avoids triggering the change-of-control provisions in certain of Cloudium's material customer contracts that would be implicated by a forward merger or asset acquisition.
The per-share merger consideration is approximately $36.92 per share in cash, based on 184,200,000 shares of Cloudium common stock outstanding as of the date hereof. The per-share price represents a premium of approximately 28% to Cloudium's unaffected closing share price of $28.84 on October 27, 2023, the last trading day prior to press reports regarding Solara's potential interest in an acquisition.
Certain shareholders have agreed to rollover elections in lieu of receiving the cash merger consideration. Specifically, Jonathan Hargrove, Cloudium's Chief Executive Officer and founder, who holds approximately 4.2% of the outstanding shares (approximately 7,736,400 shares), has agreed to roll over 50% of his equity stake (approximately 3,868,200 shares, representing rollover equity of approximately $142,814,544). Pinnacle Growth Ventures LLC ("Pinnacle"), a growth equity fund that holds approximately 11.6% of the outstanding shares (approximately 21,367,200 shares), has agreed to roll over 60% of its stake (approximately 12,820,320 shares, representing rollover equity of approximately $473,241,408). The aggregate rollover equity is approximately $616,055,952. The terms of the rollover arrangements, including governance rights and liquidity provisions, are being documented separately and will be addressed in a future memorandum.
B. Sources and Uses
The total funding requirement for the Transaction, inclusive of all components, is $7,188,944,048, as set forth in the following table:
Uses of Funds
The existing Cloudium indebtedness to be repaid at closing consists of (i) a $620,000,000 outstanding balance under a term loan facility and (ii) $200,000,000 drawn under a revolving credit facility, in each case under the Existing Credit Agreement dated March 15, 2021, among Cloudium, as borrower, Atlas Commercial Lending Corp., as administrative agent, and the lenders party thereto (the "Existing Credit Agreement"). Payoff letters and lien releases from Atlas Commercial Lending Corp. will be required at or prior to closing.
Sources of Funds
Note regarding the Equity Commitment Letter. The Equity Commitment Letter in the amount of $2,832,888,096, pursuant to which Fund VI will commit to fund its equity contribution at closing, and the Limited Guarantee from Solara Fund VI GP LLC (the "Fund VI GP") in the amount of $246,000,000 (covering the $221,000,000 reverse termination fee payable under the Merger Agreement, plus $25,000,000 in estimated enforcement costs) are being negotiated in parallel with the DCL. These instruments are under separate review and will be addressed in a forthcoming memorandum, which we expect to circulate on or about January 14, 2024.
Note regarding co-investment. A portion of the equity contribution will be funded through Solara Digital Co-Invest VI-A LP (the "Co-Invest Vehicle"), a co-investment vehicle organized for the benefit of certain limited partners of Fund VI and select co-investors. The Co-Invest Vehicle is expected to contribute $425,000,000, which constitutes a subset of (and not an addition to) the $2,832,888,096 aggregate equity contribution. The co-investment arrangements do not affect the total sources calculation.
C. Closing Date Leverage Analysis
An analysis of closing-date leverage is essential both for assessing the credit risk profile of the Facilities and for confirming compliance with the financial covenants under the Credit Agreement commencing with the first full fiscal quarter following closing. The relevant calculations are as follows:
Gross Total Leverage:
$3,740,000,000 (Term Loan B) ÷ $405,000,000 (LTM EBITDA, FYE September 30, 2023) = approximately 9.24x
Net Total Leverage (net of projected closing-date cash):
($3,740,000,000 − $180,000,000 projected closing-date cash) ÷ $405,000,000 = approximately 8.79x
Pro Forma Adjusted Net Leverage (including run-rate synergies):
($3,740,000,000 − $180,000,000) ÷ ($405,000,000 + $110,000,000 run-rate synergies) = approximately 6.91x
The opening Total Net Leverage financial covenant under the DCL term sheet is set at 6.50:1.00, tested beginning with the first full fiscal quarter following the closing date. The pro forma adjusted net leverage of 6.91x exceeds this covenant level by approximately 41 basis points. However, the covenant is not tested as of the closing date itself; rather, the first test date will be the first full fiscal quarter-end after closing. Assuming a closing date of July 9, 2024, the first test date would be the fiscal quarter ending September 30, 2024, by which time management projects EBITDA growth and initial synergy realization sufficient to bring leverage within the covenant threshold. In addition, the Credit Agreement will contain customary equity cure rights (discussed in Section III.C below) that provide a backstop.
Assessment. The closing-date leverage is at the higher end of market for enterprise software leveraged buyouts. However, the leverage level is within the acceptable range given Cloudium's attractive credit characteristics, including: (i) a highly recurring revenue base, with annual recurring revenue ("ARR") of $1,740,000,000 as of December 31, 2023; (ii) a gross retention rate in excess of 95%; (iii) high gross margins (approximately 72% on a GAAP basis, approximately 78% on a non-GAAP adjusted basis); and (iv) significant potential for margin expansion through the realization of the identified $110,000,000 in run-rate synergies. These characteristics are consistent with the premium multiples at which enterprise SaaS businesses have been acquired in recent sponsor-led transactions and support the arrangers' willingness to underwrite the Facilities at the proposed leverage levels.
III. Summary of Committed Facilities
A. Term Loan B Facility
The principal terms of the Term Loan B, as set forth in the DCL and the attached term sheet, are summarized below:
The amortization schedule at 1.00% per annum is typical for a broadly syndicated Term Loan B and ensures that the vast majority of the principal is repaid at maturity. Mandatory prepayment provisions are consistent with current market practice; we note that the excess cash flow sweep step-downs (from 50% to 25% at a Total Net Leverage ratio of 4.50:1.00, and from 25% to 0% at a Total Net Leverage ratio of 3.50:1.00) should be confirmed in the definitive Credit Agreement and are subject to further negotiation.
The ticking fee of 0.25% per annum commencing 90 days after signing is a meaningful cost if closing is delayed. On the full $3,740,000,000 commitment, the ticking fee would accrue at a rate of approximately $9,350,000 per annum (or approximately $25,616 per day). We should be mindful of this cost in assessing the timeline for regulatory approvals and any potential delays.
B. Revolving Credit Facility
The principal terms of the Revolver are as follows:
The Revolver provides important day-one liquidity for the post-closing business. The springing financial covenant is tested only upon significant utilization (exceeding 40% of commitments), which provides operational flexibility while still affording the revolving lenders covenant protection in circumstances where the revolver is materially drawn. The 5-year maturity is standard for a revolving facility in a leveraged acquisition; the 2-year gap between the Revolver maturity (2029) and the Term Loan B maturity (2031) is typical and should not present refinancing concerns under normal circumstances.
C. Financial Covenants (Term Loan B and Revolver)
The DCL term sheet contemplates the following financial covenant framework:
Total Net Leverage Covenant:
The Total Net Leverage covenant is tested quarterly, beginning with the first full fiscal quarter ending after the closing date. As noted in Section II.C above, pro forma adjusted net leverage at closing (including run-rate synergies) is approximately 6.91x, which exceeds the Year 1 covenant level of 6.50:1.00. The first test date is not the closing date itself, and management's projections indicate compliance by the first test date. Nonetheless, this is a tight cushion and warrants monitoring.
Revolver Springing Covenant (First Lien Net Leverage). The springing covenant on the Revolver is set at a First Lien Net Leverage ratio of ≤ 5.00:1.00, tested only when revolver utilization exceeds 40% of commitments (i.e., more than $200,000,000 outstanding). Because the Revolver is not expected to be drawn at closing, this covenant is unlikely to be tested in the near term.
EBITDA Definition. The definition of "Consolidated EBITDA" is a critical component of the financial covenant framework and will be negotiated in the definitive Credit Agreement. The DCL term sheet references "Consolidated EBITDA" with "customary add-backs," including:
• Restructuring charges and business optimization expenses;
• Transaction costs and expenses related to the Transaction;
• Pro forma cost savings and synergies, capped at amounts permitted under SEC Regulation S-X (or such other cap as may be agreed);
• Run-rate adjustments for acquisitions and dispositions;
• Non-cash stock-based compensation expense;
• Losses on asset sales outside the ordinary course; and
• Other non-recurring charges and expenses to be agreed.
The breadth and specificity of the EBITDA add-back provisions will be a significant area of negotiation in the definitive Credit Agreement. We will address these provisions in detail in a subsequent memorandum focused on the Credit Agreement documentation.
Equity Cure Rights. The DCL provides for customary equity cure rights, permitting Fund VI to make cash equity contributions to the Borrower that will be deemed added to Consolidated EBITDA for purposes of the leverage ratio calculation. The equity cure is subject to the following limitations: (i) no more than two cures may be exercised in any fiscal year; (ii) no more than five cures may be exercised over the life of the Facilities; and (iii) cures may not be exercised in consecutive fiscal quarters. These parameters are within market range and provide an important safety valve in the event that actual EBITDA falls short of projections in any given quarter.
IV. Conditions Precedent to Funding — SunGard Conditionality Analysis
A. Overview of SunGard / Certain Funds Framework
In any leveraged acquisition in which the buyer's obligation to close is supported by committed debt financing, the alignment between the conditions to funding under the debt commitment letter and the conditions to the buyer's obligation to close under the merger agreement is of paramount importance. This alignment is commonly referred to as "SunGard conditionality," a reference to the 2005 leveraged buyout of SunGard Data Systems, Inc., which is widely regarded as having established the modern market standard for limited conditionality in acquisition debt commitment letters.
The core principle of SunGard conditionality is straightforward: the conditions to the lenders' obligation to fund under the DCL should be limited in scope and should be no more restrictive than the conditions to the buyer's obligation to close under the Merger Agreement. The purpose of this principle is to eliminate the risk of a "conditionality gap" — that is, a scenario in which the buyer is required to consummate the acquisition under the Merger Agreement (because all conditions to closing have been satisfied) but the lenders are not required to fund under the DCL (because one or more additional or more restrictive conditions have not been satisfied). A conditionality gap of this nature would expose the buyer to catastrophic financial consequences: the buyer would be in breach of its obligation to close, potentially triggering the reverse termination fee and specific performance remedies, while simultaneously being unable to fund the acquisition due to the unavailability of committed financing.
In the context of the present Transaction, a financing failure would expose Fund VI to the reverse termination fee of $374,000,000 (representing 5.5% of the approximately $6,800,000,000 deal value), payable to Cloudium under the Merger Agreement. In addition, such a failure could trigger Fund VI GP's obligations under the Limited Guarantee (up to $246,000,000), cause significant reputational harm to Solara in the sponsor community, and potentially give rise to litigation by Cloudium and its shareholders.
Accordingly, our review of the DCL conditions precedent is conducted with a singular focus: ensuring that there is no scenario in which Fund VI is obligated to close under the Merger Agreement but the lenders are not obligated to fund under the DCL.
B. Analysis of Specific Conditions in the DCL
We have reviewed each condition precedent to funding set forth in the DCL and provide our analysis and commentary below.
1. Execution and Effectiveness of the Merger Agreement.
The DCL requires that the Merger Agreement shall have been executed and delivered by all parties thereto in substantially the form of the draft dated December 1, 2023 (the initial draft circulated by our firm to Ridgeway Phelps & Sato LLP, counsel to Cloudium), with only such modifications as are not materially adverse to the interests of the lenders (or as have been consented to by the lead arrangers, such consent not to be unreasonably withheld).
Commentary. This condition is acceptable and market-standard. However, as currently drafted, the "not materially adverse to the interests of the lenders" standard is not qualified by the phrase "in their capacity as lenders of the Facilities." This omission, while seemingly minor, could theoretically permit the lenders to object to modifications to the Merger Agreement that are commercially significant to Fund VI but have no bearing on the credit risk of the Facilities. For example, modifications to the governance provisions, indemnification caps, or non-compete covenants in the Merger Agreement could be characterized as "materially adverse to the interests of the lenders" in some expansive reading, even though such provisions do not affect the credit profile of the debt financing. We recommend negotiating for the inclusion of the qualifying language "in their capacity as lenders of the Facilities" to cabin the scope of this condition and prevent frivolous objections to commercially necessary changes.
2. Consummation of the Merger.
The DCL requires that the merger shall be consummated substantially concurrently with the initial funding of the Term Loan B, in accordance with the terms of the Merger Agreement, without any waiver or amendment of any condition to closing under the Merger Agreement that would be materially adverse to the interests of the lenders.
Commentary. This condition is standard and reflects the customary interlocking closing mechanic in leveraged acquisitions: the merger closes and the debt funds simultaneously, ensuring that the proceeds of the Term Loan B are available to pay the merger consideration and retire existing indebtedness. The "no waiver or amendment" proviso is subject to the same qualification discussed above (i.e., should be limited to waivers or amendments that are materially adverse to the lenders "in their capacity as lenders"). We should apply the same redline here for consistency.
3. Accuracy of Specified Representations.
The DCL requires that "all representations and warranties" in the Credit Agreement shall be true and correct in all material respects (or, where qualified by materiality, in all respects) as of the closing date, and that the "Specified Merger Agreement Representations" (i.e., those representations in the Merger Agreement that are conditions to closing in favor of Fund VI) shall be true and correct to the extent required under the Merger Agreement.
Commentary. This is the most critical issue identified in our review. Under SunGard conditionality principles, the representation bring-down condition in the DCL should be limited to a narrow set of "Specified Representations" — not "all representations and warranties" in the Credit Agreement. The Specified Representations are a defined subset of representations that are specifically relevant to the lenders' ability to enforce their rights and the validity of the credit documents. They typically include only the following:
• Corporate existence and good standing of the Borrower;
• Power and authority to enter into the Credit Agreement and related loan documents;
• Enforceability of the Credit Agreement and related loan documents;
• No conflicts with organizational documents;
• Compliance with Federal Reserve margin regulations (Regulations T, U, and X);
• Non-status as an "investment company" under the Investment Company Act of 1940;
• Solvency (after giving effect to the Transaction and the incurrence of the Facilities);
• Compliance with the USA PATRIOT Act, beneficial ownership requirements, and anti-money laundering laws; and
• Use of proceeds consistent with the terms of the Credit Agreement.
By contrast, the full set of representations in a typical credit agreement includes numerous additional representations regarding financial statements, absence of litigation, environmental compliance, labor matters, tax compliance, ERISA matters, accuracy of information, and the like. These broader representations are appropriately conditions to ongoing draws under the Revolver during the life of the facility, but they should not be conditions to the initial funding at closing. The reason is clear: if "all representations" must be true at closing, the lenders could refuse to fund based on a technical inaccuracy in a representation (for example, an immaterial tax dispute or a minor environmental matter) even though the corresponding condition to closing under the Merger Agreement has been satisfied.
We must narrow this condition to reference only "Specified Representations" (to be defined by enumeration in the DCL) and "Specified Merger Agreement Representations." We recommend preparing revised language that explicitly enumerates the Specified Representations and transmitting it to Graham Whitaker at Meridian Atlantic and Christine Novak at Winthrop & Hale LLP (lenders' counsel) as a priority item.
4. Solvency.
The DCL requires delivery of a solvency certificate by the Chief Financial Officer of the Surviving Corporation (i.e., Sienna Whitfield, the current CFO of Cloudium) on the closing date, in the form attached to the DCL as Exhibit A, certifying that the Surviving Corporation and its subsidiaries, on a consolidated basis, are solvent after giving effect to the merger, the incurrence of the debt financing, and the repayment of existing indebtedness.
Commentary. This condition is standard and appropriate. The solvency certificate will require the CFO to certify that: (i) the fair value of the assets of the Surviving Corporation and its subsidiaries exceeds their debts and liabilities (including contingent liabilities); (ii) the Surviving Corporation and its subsidiaries will be able to pay their debts as they become due; and (iii) the Surviving Corporation and its subsidiaries will not have unreasonably small capital with which to conduct their business. We should prepare the form of solvency certificate and circulate it for review well in advance of signing, as the form must be agreed upon and attached to the DCL as an exhibit prior to execution. This item is included in our work plan.
5. Absence of Company Material Adverse Effect.
The DCL requires that no "Company Material Adverse Effect" (as defined in the Merger Agreement) shall have occurred since the date of the Merger Agreement and be continuing as of the closing date.
Commentary. This condition is acceptable, as it links the MAC standard in the DCL directly to the definition of "material adverse effect" in the Merger Agreement. The MAE definition in the Merger Agreement is currently under active negotiation with Ridgeway Phelps & Sato LLP (a separate annotated redline analysis of the MAE definition was circulated to the deal team on December 12, 2023). The MAE definition, as currently drafted, includes customary carveouts for (a) pandemics, epidemics, and public health emergencies; (b) changes in general economic, financial, or market conditions; (c) changes in applicable law or regulation; (d) acts of war, terrorism, or natural disasters; (e) changes affecting the enterprise software industry generally; and (f) changes resulting from the announcement of the Transaction itself.
It is critical that the MAE condition in the DCL automatically incorporates the final negotiated MAE definition from the Merger Agreement, including all carveouts. If the MAE definition is modified during the course of Merger Agreement negotiations (for example, if additional carveouts are added or existing carveouts are narrowed), those modifications must flow through to the DCL condition without the need for a separate amendment. We recommend adding an express provision to the DCL confirming this automatic linkage, stating, for example: "For purposes of this commitment, 'Company Material Adverse Effect' shall at all times have the meaning assigned to such term in the Merger Agreement, as in effect from time to time (including any amendments thereto made in accordance with the terms hereof)."
6. Delivery of Financial Statements.
The DCL requires delivery of the following financial information as a condition to funding:
(a) Audited consolidated financial statements of Cloudium for the three most recently completed fiscal years — fiscal years ending September 30, 2021, September 30, 2022, and September 30, 2023. Cloudium's independent auditor is Harwell & Dobson LLP (engagement partner: Martin Chisholm).
(b) Unaudited interim consolidated financial statements of Cloudium for each completed fiscal quarter ending at least 45 days before the closing date (and each completed fiscal year ending at least 90 days before the closing date, if audited financial statements for such year have not been previously delivered).
Commentary. The financial statement delivery condition is standard but presents a potential timing trap that warrants careful attention. Cloudium's fiscal year ends on September 30. Assuming a closing date of July 9, 2024 (within the contemplated closing window), the most recent fiscal quarter ending at least 45 days before closing would be the quarter ending March 31, 2024 (45 days from March 31 is May 15, 2024, well before the July 9 closing). This should not present difficulties.
However, if closing is delayed beyond June 30, 2024 — the scheduled outside date in the Merger Agreement — the analysis becomes more complicated. If the Merger Agreement outside date is extended (whether by mutual consent or pursuant to any automatic extension mechanism for regulatory approvals), Cloudium may need to deliver additional interim financial statements to satisfy the 45-day freshness requirement. For example, if closing is delayed to October 2024, the lenders would require delivery of the quarterly financial statements for the quarter ending June 30, 2024 (at a minimum) and potentially audited financial statements for the fiscal year ending September 30, 2024, if closing occurs more than 90 days after that fiscal year-end.
We should take two steps to mitigate this risk: (i) confirm with Cloudium and its advisors that Cloudium has the ability to produce interim financial statements on the required timeline, particularly during any period of delayed closing; and (ii) ensure that the financing cooperation covenant in the Merger Agreement (Section 6.14, discussed in Section X.A below) expressly obliges Cloudium to deliver financial statements satisfying the requirements of the DCL, on a timeline that ensures the marketing period can commence and the financial statement condition can be satisfied without becoming the long pole in the closing timeline.
7. Delivery of Customary Closing Documents.
The DCL requires delivery of customary closing documents, including:
• Legal opinions from counsel to the Borrower and the Guarantors (including an opinion from Calderwood & Harkness LLP addressed to Meridian Atlantic Bank, N.A., as administrative agent, and the lenders party to the Credit Agreement);
• Officer's certificates of the Borrower and each Guarantor;
• Secretary's certificates (attaching certified copies of organizational documents, board resolutions, and incumbency certificates);
• Good-standing certificates for the Borrower and each Guarantor from their respective jurisdictions of organization;
• Evidence of insurance (certificates of insurance naming the administrative agent as additional insured and loss payee, as applicable);
• Perfection certificates; and
• Copies of organizational documents (certificates of incorporation, bylaws, operating agreements) of the Borrower and each Guarantor.
Commentary. These requirements are standard. The legal opinion from our firm to Meridian Atlantic is within the scope of our engagement and is reflected in our closing checklist. We should begin preparation of the opinion framework promptly after the definitive Credit Agreement terms are substantially agreed, as the opinion will need to address enforceability, no-conflicts, and other customary matters. We anticipate coordinating with Winthrop & Hale on the form and scope of the opinion.
8. Collateral and Security.
The DCL requires that first-priority security interests in the collateral shall have been perfected to the extent required on the closing date. However, the closing-date perfection requirements are limited to: (i) delivery of stock certificates (or equivalent equity interest certificates) for the Borrower's direct subsidiaries, together with undated stock powers endorsed in blank; and (ii) filing of UCC-1 financing statements in the appropriate filing offices. All other perfection actions (including foreign collateral filings, mortgage recordings, intellectual property filings, and control agreements for deposit accounts and securities accounts) are subject to post-closing perfection periods.
Commentary. This approach is acceptable and consistent with market practice for leveraged acquisitions, where full perfection at closing is impractical given the complexity of the target's asset base and the involvement of multiple jurisdictions. The critical item is the length of the post-closing perfection period for foreign subsidiaries. Cloudium has three foreign subsidiaries that are the subject of 65% equity pledges: Cloudium Technologies UK Ltd. (England and Wales), Cloudium Technologies India Pvt. Ltd. (India), and Cloudium Solutions GmbH (Germany). We recommend that the post-closing perfection period for foreign collateral be set at no less than 90 days from closing, which is the market standard and should provide adequate time to complete share charge registrations, notarizations, and other foreign-law perfection requirements.
9. KYC / Beneficial Ownership.
The DCL requires delivery of all documentation and information required under applicable "know your customer" and anti-money laundering regulations (including the USA PATRIOT Act, the Bank Secrecy Act, and the Customer Due Diligence Rule under FinCEN regulations) at least three (3) business days prior to the closing date.
Commentary. This condition is standard and non-controversial. However, KYC collection for multi-entity sponsor structures can be time-consuming, and we should initiate this process promptly. The key entities for KYC purposes include:
• Solara Digital Infrastructure Fund VI LP (Fund VI) — EIN: 87-4523190
• Solara Fund VI GP LLC (Fund VI GP)
• Solara Digital Co-Invest VI-A LP (Co-Invest Vehicle)
• Cloudium Technologies plc (the Company/Borrower) — EIN (US taxpayer): 83-2196754
• Each domestic subsidiary Guarantor of Cloudium
We recommend that the Finance & Corporate department coordinate with the Solara compliance team to begin gathering certified organizational documents, beneficial ownership certifications, government-issued identification for control persons, and other required KYC materials.
C. Missing / Excess Conditions — Recommended Revisions
In addition to the issues identified with respect to specific conditions above, our review has identified the following excess or problematic conditions that must be addressed:
Excess "No Event of Default" Condition. The DCL contains a condition requiring the "absence of any event of default under the Credit Agreement" as a condition to initial funding at closing. This is an excess condition that is not tied to any closing condition under the Merger Agreement and is inconsistent with SunGard conditionality principles. Under the certain-funds framework, the lenders should not be able to refuse to fund at closing based on the existence of an event of default (or default) under the Credit Agreement, because the Credit Agreement will not yet have been in effect for any meaningful period and any "default" at closing would almost certainly arise from the very conditions that are separately addressed by the other conditions precedent. To the extent an event of default could exist on the closing date, it would be attributable to a breach of a representation or a failure to satisfy a condition that is already independently addressed by the representation bring-down condition or another specific condition precedent.
Recommendation. This condition should be deleted entirely, or, at a minimum, limited to events of default arising solely from the borrower's failure to satisfy conditions that are themselves already conditions precedent to funding (i.e., it should add nothing to the existing conditionality framework). We will prepare proposed language for transmission to lenders' counsel.
Subjective "Satisfactory" CIM Standard. The DCL conditions the obligation to fund on receipt of a "satisfactory" confidential information memorandum (the "CIM") by the lead arrangers. The use of the word "satisfactory" injects an element of subjective discretion that is inconsistent with the certain-funds framework. The CIM is a marketing document prepared in connection with the syndication of the Term Loan B, and its preparation is a cooperative effort between the arrangers, the sponsor, and the target. A "satisfactory" standard could theoretically allow the arrangers to refuse to fund by deeming the CIM unsatisfactory, even if the CIM meets all customary requirements and contains all information reasonably necessary for syndication.
Recommendation. "Satisfactory" should be replaced with "customary" or deleted in its entirety. The DCL should require only that a CIM be prepared and delivered, with the content and format consistent with customary practice for broadly syndicated leveraged acquisition financings.
SunGard Compliance Chart. We recommend preparing a comprehensive SunGard compliance chart that maps each condition precedent in the DCL against the corresponding closing condition in the Merger Agreement, identifies any conditionality gaps, and proposes revisions where necessary. This chart should be completed and presented to Harrison Wexford for review in advance of the final negotiation session with the lender group, which is currently scheduled for January 15, 2024, at Calderwood & Harkness's New York office.
V. Flex Provisions
The DCL contains several categories of flex provisions that permit the lead arrangers to modify the economic and structural terms of the Facilities in connection with syndication. These provisions are set forth primarily in the confidential Fee Letter (the "Fee Letter"), which is a separate side letter executed concurrently with the DCL and shared only with Fund VI (and not with Cloudium or its advisors). Our analysis of each category of flex is set forth below.
A. Pricing Flex
The Fee Letter grants the lead arrangers the following pricing flex:
• Term Loan B Spread: The interest rate margin may be increased by up to 50 basis points, from SOFR + 325 bps to a maximum of SOFR + 375 bps.
• Term Loan B OID: The original issue discount may be decreased by up to 100 basis points, from 99.0 (100 bps discount) to a minimum of 98.0 (200 bps OID).
• Aggregate Yield Cap: The total increase in yield resulting from the exercise of pricing flex (taking into account both spread increases and OID decreases, with OID amortized to the first call date for purposes of yield equivalence) shall not exceed 75 basis points in the aggregate.
• Revolver Spread: The interest rate margin on the Revolver may be increased by up to 25 basis points, from SOFR + 275 bps to a maximum of SOFR + 300 bps.
Commentary. The pricing flex parameters are within the market range for a transaction of this size and leverage profile, though on the more lender-favorable end of the spectrum. The 75 bps aggregate yield cap provides a hard ceiling on the total economic cost of flex, which is an important protection for Fund VI. However, we note the following:
First, the aggregate cost of full pricing flex is significant. If the arrangers exercise the full 75 bps of yield flex on the $3,740,000,000 Term Loan B, the incremental annual interest expense would be approximately $28,050,000. While this additional expense does not directly affect the Total Net Leverage ratio calculation (which is based on EBITDA, not debt service coverage), it reduces free cash flow and may affect the excess cash flow sweep calculation, the equity cure economics, and the overall return profile for Fund VI.
Second, we recommend pushing for a tighter aggregate yield cap of 50 basis points, consistent with the more borrower-favorable end of market practice for large-cap software LBOs. A 50 bps cap would limit the incremental annual interest expense to approximately $18,700,000, a reduction of approximately $9,350,000 per year relative to the current 75 bps cap.
Third, we should confirm with Osprey Bancroft & Co. (Damien Harlow, lead M&A advisor) that the financial model provided to Fund VI's investment committee incorporates the full flex scenario (75 bps, or our proposed 50 bps cap) to ensure that the returns analysis remains within the parameters approved by the investment committee.
B. Structure Flex
The Fee Letter grants the lead arrangers the following structure flex:
• Reallocation to Notes / Bridge: The lead arrangers may reallocate up to $500,000,000 of the Term Loan B commitment from an institutional term loan tranche to a bridge loan tranche and/or a senior secured notes tranche, provided that the total committed amount of the Facilities remains unchanged at $4,240,000,000.
• Second Lien Tranche: The lead arrangers may establish a second-lien tranche of up to $250,000,000, with a corresponding reduction in the Term Loan B commitment, subject to intercreditor terms acceptable to Fund VI (acting reasonably).
Commentary. Structure flex of this nature is standard for a broadly syndicated leveraged acquisition financing of this magnitude. The arrangers may determine that syndication of the full $3,740,000,000 Term Loan B as a single tranche is more effectively accomplished by offering investors a choice of instruments (institutional term loans, senior secured notes, or second-lien paper), each with pricing and structural features calibrated to different investor constituencies (CLOs, credit funds, insurance companies, etc.).
However, we flag two concerns:
First, any reallocation to a notes tranche could trigger additional documentation and regulatory requirements, including the need for an indenture qualified under the Trust Indenture Act of 1939 (to the extent the notes are offered to more than a limited number of qualified institutional buyers) and potential SEC registration requirements. These additional steps could introduce delay and should not be permitted to extend the marketing period or add closing conditions beyond those already set forth in the DCL. We recommend including a provision in the DCL expressly stating that any exercise of structure flex shall not (a) extend the marketing period, (b) add conditions to funding beyond those already specified in the DCL, or (c) delay the closing date.
Second, the establishment of a second-lien tranche would require the negotiation of an intercreditor agreement between the first-lien and second-lien lenders. Intercreditor agreements are complex instruments and their negotiation can be time-consuming. The DCL provides that intercreditor terms must be "acceptable to Fund VI," which provides some protection, but we should seek to attach a form of intercreditor agreement (or intercreditor term sheet) to the DCL to minimize the potential for disputes that could delay closing.
C. Covenant Flex
The Fee Letter provides that the lead arrangers shall have the right to propose modifications to the negative covenants set forth in the DCL term sheet to facilitate syndication, provided that such modifications are "no less favorable to the Borrower than the most restrictive covenant package in any comparable broadly syndicated term loan B transaction closed in the preceding six months."
Commentary. Covenant flex — sometimes referred to as "market flex" — is a customary feature of leveraged acquisition commitment letters and reflects the practical reality that the arrangers may need to adjust covenant levels, basket sizes, or permission structures to meet investor demand during syndication. However, the standard set forth in the current DCL — the "most restrictive" covenant package in comparable transactions — is problematic.
The "most restrictive" standard, by definition, benchmarks to the least borrower-friendly credit agreement in the relevant universe of comparables. This could result in significant tightening of baskets and permissions, potentially impairing the operational and financial flexibility that Fund VI expects to preserve for the post-closing business. For example, a single outlier transaction with unusually tight restricted payment baskets or investment baskets could set the benchmark for the covenant flex, even if such terms are not representative of the broader market.
Recommendation. We recommend replacing "most restrictive" with "consistent with the median" or "consistent with the prevailing market standard" for comparable broadly syndicated term loan B transactions. In addition, we recommend requiring that any exercise of covenant flex be subject to Fund VI's prior written consent (not to be unreasonably withheld or delayed), rather than being within the lead arrangers' unilateral discretion. This approach is increasingly common in sponsor-led transactions and would ensure that Fund VI retains control over the covenant architecture of the definitive Credit Agreement.
D. Marketing Period
The DCL requires that the lead arrangers shall have been afforded a "marketing period" of fifteen (15) consecutive business days following the later of (i) the date on which the lead arrangers receive the "Required Information" (consisting of the audited and unaudited financial statements described in Section IV.B.6, a confidential information memorandum in form and substance customary for broadly syndicated term loan B transactions, and a customary bank book/lender presentation) and (ii) the date that is five (5) business days after the date on which all conditions to closing under the Merger Agreement (other than those conditions that by their terms are to be satisfied at the closing) have been satisfied or waived.
The marketing period is subject to the following blackout provisions: the marketing period shall not include any day during the period from December 20 through January 3 (inclusive) of any year, and the marketing period shall be tolled during any period constituting a "major market disruption" (as reasonably determined by the lead arrangers).
Commentary. The 15-business-day marketing period is the current market standard for large-cap leveraged acquisition financings and is consistent with recent precedent. The key practical concern is ensuring that the marketing period can commence and be completed well in advance of the anticipated closing date, so that the marketing period does not become the gating item on the transaction timeline.
Working backward from the anticipated closing date of July 9, 2024, the 15-business-day marketing period would need to begin no later than approximately June 14, 2024 (accounting for weekends and any potential holidays). This provides a substantial cushion, as we expect the Required Information to be delivered and the Merger Agreement conditions to be satisfied well in advance of that date. If signing occurs on January 22, 2024, and given the holiday blackout through January 3, 2024, the first available date for commencement of the marketing period would be in late January or early February 2024 (depending on when the Required Information is received and the Merger Agreement conditions are satisfied). This timeline is well within the anticipated closing window.
The critical dependency is Cloudium's timely delivery of the Required Information. The financing cooperation covenant in the Merger Agreement (Section 6.14) must require Cloudium to deliver the Required Information on a timeline that permits the marketing period to commence promptly. This includes making management (Jonathan Hargrove, CEO, and Sienna Whitfield, CFO) and representatives available for lender meetings and due diligence calls. Any delay by Cloudium in delivering the Required Information would push back the commencement of the marketing period and could, in a worst-case scenario, push closing beyond the outside date. We will coordinate with Ridgeway Phelps & Sato (Catherine Answorth, partner leading the financing cooperation covenant negotiations) to ensure that the covenant is sufficiently robust.
We also note that the ticking fee of 0.25% per annum on the undrawn $3,740,000,000 Term Loan B commitment commences on April 22, 2024 (90 days after the anticipated signing date of January 22, 2024) and will accrue daily until closing. At the applicable rate, this represents a cost of approximately $25,616 per day ($9,350,000 per annum), which provides an economic incentive for all parties to move toward closing expeditiously.
VI. Material Adverse Change / Market-Out Language
A. Absence of Market-Out
A "market-out" or "market MAC" provision, if included in a debt commitment letter, would permit the lenders to terminate their commitments based on changes in general financial market conditions (such as a broad-based disruption in the leveraged loan or high-yield bond markets) that are unrelated to the credit quality of the specific borrower. Market-out provisions are inconsistent with the "certain funds" framework and are not acceptable in a leveraged acquisition DCL.
We have carefully reviewed the DCL and confirm that the current draft does not contain an express market-out or market MAC provision. This is correct and consistent with the expectations for a certain-funds commitment of this type.
Commentary. While the absence of an express market-out is confirmed, we must also verify that no "backdoor" market-out is embedded in other provisions of the DCL. In particular, we should confirm that:
• The flex provisions (both pricing and structure flex) are not conditioned on market receptivity. That is, the arrangers' obligation to fund should not be conditional on their ability to syndicate the Facilities. The arrangers bear the syndication risk.
• The "major market disruption" tolling provision in the marketing period clause (Section V.D) does not function as a de facto market-out. The tolling provision should only toll the running of the marketing period; it should not relieve the arrangers of their commitment to fund if the marketing period has been completed (or if the conditions to funding are otherwise satisfied).
• The syndication provisions do not contain any language that could be read to condition funding on the successful completion of syndication.
We have not identified any such backdoor provisions in our initial review, but we will continue to monitor this issue as the DCL is revised during the course of negotiations.
B. Lender Material Adverse Change
The DCL does not condition funding on the absence of any material adverse change in the financial condition of the lead arrangers themselves (Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC). There is no "lender MAC" provision.
Commentary. This is appropriate. The commitment to fund is a binding contractual obligation of Meridian Atlantic and Ironclad, and the lead arrangers' obligation to fund should be independent of their own financial condition. If a lender were to experience financial distress between signing and closing, the commitment should remain fully enforceable. We should confirm that the DCL contains an express statement that the commitments are binding and irrevocable (subject only to the satisfaction or waiver of the conditions precedent) and that neither the financial condition of the arrangers nor any change in the availability of syndication markets shall excuse the arrangers from their funding obligations.
C. Company MAC
The sole MAC condition in the DCL is the "Company Material Adverse Effect" condition discussed in Section IV.B.5 above — namely, that no Company Material Adverse Effect (as defined in the Merger Agreement) shall have occurred since the date of the Merger Agreement and be continuing as of the closing date.
Commentary. This is satisfactory, provided that the linkage to the Merger Agreement MAE definition is maintained throughout the DCL and any amendments or supplements thereto, and that the MAE definition incorporates the customary carveouts for pandemics, war, changes in law, general economic conditions, and industry-wide developments, as discussed in Section IV.B.5 above.
VII. Certain Funds / Limited Conditionality — Key Concerns
Based on our comprehensive review of the DCL against the "certain funds" framework, we provide the following summary assessment.
The DCL substantially complies with SunGard / certain-funds principles. The commitment is structured as a binding, irrevocable obligation to fund, subject to limited and specifically enumerated conditions precedent. The sole MAC condition is linked to the Merger Agreement MAE definition. There is no market-out, no lender MAC, and no condition tied to the successful completion of syndication.
However, the DCL contains three specific deviations from the certain-funds framework that require remediation before the DCL is executed:
1. Overbroad Representation Bring-Down Condition. As discussed in Section IV.B.3, the representation bring-down condition references "all representations and warranties" in the Credit Agreement, rather than limiting the bring-down to the narrow set of "Specified Representations." This must be narrowed to enumerate only those representations that are directly relevant to the lenders' ability to enforce the credit documents and that are customarily included in the "Specified Representations" category.
2. Excess "No Event of Default" Condition. As discussed in Section IV.C, the DCL includes a condition requiring the absence of any event of default under the Credit Agreement, which is an excess condition with no corresponding analog in the Merger Agreement closing conditions. This condition should be deleted or limited to defaults arising solely from the borrower's failure to satisfy conditions that are already independently enumerated as conditions precedent to funding.
3. Subjective "Satisfactory" CIM Standard. As discussed in Section IV.C, the DCL conditions funding on receipt by the lead arrangers of a "satisfactory" confidential information memorandum. The word "satisfactory" injects subjective discretion that is inconsistent with the certain-funds framework. This should be replaced with "customary" or deleted, so that the condition requires only the delivery of a CIM that is customary in form and substance for comparable leveraged acquisition financings.
Recommendation. These three items should be fully resolved before the Merger Agreement is signed on or about January 22, 2024. Any residual conditionality gap at the time of signing would expose Fund VI to the risk that the lenders could refuse to fund even though all Merger Agreement closing conditions have been satisfied, thereby triggering the reverse termination fee of $374,000,000 and potentially engaging the Limited Guarantee from Fund VI GP.
Interaction with the Limited Guarantee. It bears emphasis that the Limited Guarantee from Solara Fund VI GP LLC caps the general partner's maximum exposure at $246,000,000, consisting of $221,000,000 (the termination fee amount under the Merger Agreement) plus $25,000,000 (estimated enforcement costs). The reverse termination fee of $374,000,000 would be a direct obligation of Fund VI, with the Limited Guarantee providing credit support up to its $246,000,000 cap. A financing failure — particularly one attributable to a conditionality gap that could have been eliminated through proper negotiation of the DCL — would result in substantial economic loss and reputational damage to Solara. This underscores the imperative to close all conditionality gaps before signing.
VIII. Documentation Principles and Definitive Credit Agreement
The DCL provides that the definitive Credit Agreement (the "Credit Agreement") shall be prepared by Winthrop & Hale LLP (Christine Novak, lead partner) in its capacity as counsel to the lead arrangers and administrative agent. The Credit Agreement is to be based on a "Solara-precedent" credit agreement — specifically, a credit agreement from a prior Solara Fund IV or Fund V leveraged acquisition — with such modifications as are customary for the current market and as may be agreed upon by the parties.
Commentary. The use of a Solara-precedent credit agreement is favorable to the Sponsor, as it anchors the documentation baseline in an instrument that was previously negotiated by Solara's counsel (in prior transactions, Calderwood & Harkness) and that reflects borrower-favorable terms. We should provide Winthrop & Hale with the most borrower-favorable Solara precedent available, which we believe to be the credit agreement dated August 7, 2022, in connection with Solara Fund V's acquisition of Meridia Data Solutions Inc. (the "Meridia Precedent"). The Meridia Precedent was negotiated by Harrison Wexford and contains several borrower-favorable provisions that should serve as the baseline for the Cloudium documentation.
We expect the timeline for the Credit Agreement to be as follows: Winthrop & Hale will circulate an initial draft in Q1 2024 (likely February or March), based on the Solara precedent and the DCL term sheet; we will negotiate the Credit Agreement during the period between signing and closing; and the Credit Agreement will be executed and delivered at or immediately prior to closing.
The following are key borrower-favorable provisions that we should seek to include in the definitive Credit Agreement:
Unlimited "Available Amount" Basket. The Credit Agreement should include a builder basket (the "Available Amount") that accumulates based on cumulative retained Excess Cash Flow, equity contributions, and other specified credits. The Available Amount should be available to fund restricted payments, investments, and prepayment of junior debt, without dollar cap (subject to compliance with financial covenants at the time of use).
Broad "Permitted Acquisition" Basket. The Credit Agreement should permit the Borrower and its subsidiaries to consummate acquisitions without a leverage test, or with a leverage test set at the closing-date leverage level (i.e., a "leverage-neutral" test). This provides maximum flexibility for bolt-on acquisitions, which are expected to be a significant component of the post-closing value creation strategy.
Restricted Payments Flexibility. The Credit Agreement should permit restricted payments (including dividends to Fund VI, management fees payable to Solara under the management services agreement, and distributions to fund the Sponsor's tax obligations) subject to leverage-based conditions. In particular, the Borrower should be permitted to make restricted payments in an unlimited amount so long as pro forma Total Net Leverage is at or below a specified threshold (e.g., 4.50:1.00, or such other level as may be agreed).
EBITDA Add-Backs. The definition of "Consolidated EBITDA" should include robust add-back provisions for run-rate cost savings and synergies, capped at an amount to be agreed but consistent with the $110,000,000 in synergies assumed in the pro forma leverage calculation (Section II.C). We should push for a cap equal to the greater of (i) a fixed dollar amount and (ii) a percentage of Consolidated EBITDA (e.g., 25%), with a 24-month realization period for projected synergies.