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$150M first-lien term loan · sample memo · real grade
59 / 100
The memo is clear and its core leverage, coverage and FCF math reconciles to the case. It is held back by a mild, arbitrary downside that ignores the FY2022 margin collapse and the covenant step-down, and by a structure section that never tests whether the terms protect the first-lien lender.
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Recommendation: We recommend approving the $150M first-lien term loan to Northfield Packaging. The company has grown EBITDA every year since FY2022, margins have recovered to 15.0%, and pro forma leverage of 4.5x is in line with comparable packaging deals.
Northfield Packaging makes rigid plastic containers for food and household-products customers from four plants in Ohio, Indiana and Wisconsin. The company is owned by a private equity sponsor. Revenue grew from $395M in FY2022 to $468M in FY2025, and EBITDA grew from $47M to $70M over the same period. The proceeds will refinance the existing $120M term loan and fund a $30M line expansion at the Indiana plant, which management expects to support further growth.
Rigid plastic packaging for food and household products is a stable end market because demand for groceries and cleaning products holds up in most economic conditions. Northfield's customers are large consumer brands that value reliable supply and tend to stay with incumbent suppliers, which supports volumes. The company's four plants are located close to its main customers, which keeps freight costs down and makes it harder for competitors to win business on price alone.
There are several risks to consider. Resin is about 45% of cost of goods sold, and resin prices can be volatile. Customer concentration is also a risk, as the top three customers are 38% of revenue. The packaging industry is competitive, and a recession could reduce volumes. There is also execution risk on the Indiana expansion. Overall we think these risks are manageable given the company's track record.
Pro forma total debt is $315M, made up of the new $150M first-lien term loan and the existing $165M second-lien notes. On FY2025 EBITDA of $70M, total leverage is 4.5x. First-lien leverage is about 2.1x, which gives the first-lien lender a significant cushion beneath the second-lien notes.
Interest on the first-lien loan is 9.75% (4.0% SOFR plus 575 bps), or about $14.6M a year. Interest on the second-lien notes at 8.5% is about $14.0M. Total cash interest is about $28.7M, so interest coverage is 2.4x.
Free cash flow after interest, capex of $21M, cash taxes of $6M and a $3M working capital investment is about $11M a year. That is enough to cover the 1% amortization ($1.5M) comfortably, and the remainder can be used to pay down debt or fund growth.
In a downside scenario, we assume EBITDA falls 10% to $63M. Leverage would rise to 5.0x, which is still below the 5.25x maximum leverage covenant. Interest coverage would fall to about 2.2x, which is still adequate. We therefore believe the company can withstand a moderate downturn.
The loan is a $150M first-lien term loan with a five-year tenor maturing in 2031. Pricing is SOFR + 575 bps with a 1.0% SOFR floor and a 98.5 OID. Amortization is 1% per year. The financial covenants are a maximum total net leverage ratio of 5.25x, stepping down to 4.75x after 24 months, and a minimum fixed charge coverage ratio of 1.15x. The company can make unlimited restricted payments when total leverage is below 4.0x, and there is a $25M incremental facility. These terms are typical for a sponsor-backed deal of this size.
Northfield is a growing business with improving margins and reasonable leverage. The resin pass-through mechanism protects margins over time, and the first-lien position gives strong protection. Based on the above analysis, we recommend approval of the facility as proposed.
“Leverage would rise to 5.0x, which is still below the 5.25x maximum leverage covenant.”
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