Lugano Diamonds & Jewelry - DIP Terms

DIP Terms

Borrower(s) / Guarantor(s)

• Lugano Diamonds & Jewelry Inc., Lugano Buyer, Inc., Lugano Holding, Inc., K.L.D. Jewelry, LLC, and Lugano Prive, LLC, as Borrowers

Agent / Lender(s)

• Compass Group Diversified Holdings LLC, or an affiliate thereof, as DIP Lender (also Prepetition Lender)

DIP Commitments

• $12 million senior secured, superpriority, priming delayed draw term loan facility comprised of:
  • Up to $12 million in new money loans
    • Up to $1.5 million available on an interim basis in weekly draws
    • The remaining balance available upon entry of the final order
  • $2.2 million roll-up of prepetition obligations held by the DIP lender, available on a cashless, dollar-for-dollar basis upon entry of the interim order
    • The roll-up is provided as an inducement for the new money financing and not as adequate protection.
    • The roll-up amount does not reduce the interim borrowing availability but does reduce the final DIP commitment on a dollar-for-dollar basis.

Cash Collateral

• The debtors are authorized to use cash collateral, defined as all cash, amounts in deposit accounts, and proceeds from accounts receivable or other prepetition collateral, in accordance with the approved budget.
• The debtors anticipate that Bank of America, which has a potential right of setoff, will consent to the use of its cash collateral.

Interest Rate

• 8.0% per annum, payable in kind monthly
• Default Rate Increase: 4.0%

Fees

• The DIP facility does not include any commitment, origination, or exit fees.
• The debtors are required to pay the reasonable and documented fees and expenses of the DIP lender’s and prepetition lender’s professionals.

Maturity

• The earliest to occur of:
  • May 31, 2026
  • 30 days after the filing of the DIP motion, if the final order has not been entered
  • The consummation of a sale of all or substantially all of the debtors’ assets
  • 10 days after the effective date of a chapter 11 plan acceptable to the DIP lender
  • The conversion or dismissal of the chapter 11 cases
  • Acceleration of the loans following an event of default

Carve Out

• The carve-out includes all statutory fees payable to the Clerk of the Court and the U.S. Trustee, and up to $10,000 for a chapter 7 trustee.
• Post Carve-Out Trigger Notice Cap:
  • $100,000 for allowed fees and expenses of debtor professionals
  • $25,000 for allowed fees and expenses of committee professionals

Use of Proceeds

• Fund working capital and general corporate purposes
• Pay the costs of administering the chapter 11 cases, including professional fees and funding the carve-out
• Fund the sale process
• The use of proceeds is limited and may not be used to investigate or prosecute claims against the DIP lender or prepetition lender, except that a committee may use up to $25,000 to investigate, but not litigate, a potential challenge.

Repayment

• The debtors may voluntarily prepay the loans in whole or in part in minimum increments of $100,000.
• Mandatory prepayments are required from the net proceeds of certain asset sales, insurance proceeds, and proceeds from unpermitted debt or equity issuances.

Challenge Period and Stipulations

• The deadline to challenge the validity, priority, or extent of the prepetition liens and claims is 75 days from the entry of the interim order.
• If a chapter 7 or chapter 11 trustee is appointed, the challenge period is extended by 30 days for the trustee.
• Upon entry of the final order, the debtors will release the DIP lender and prepetition lender from any and all claims arising prior to the petition date, excluding certain "Retained Actions" against Compass Group Diversified Holdings LLC and its affiliates in their capacities as shareholders, officers, or directors.

Securities and Priorities

• The DIP obligations are granted superpriority administrative expense claims against each of the debtors, subject only to the carve-out.
• The DIP lender is granted perfected liens on all of the debtors’ prepetition and postpetition assets (the "DIP Collateral"), subject to the carve-out, with the following priorities:
  • Senior priming liens on all prepetition collateral
  • First-priority liens on all unencumbered assets, including, upon entry of the final order, avoidance action proceeds
  • Junior liens on assets subject to valid, perfected, and unavoidable prepetition third-party liens
• The DIP collateral excludes any "Retained Actions," which are claims against Compass Group Diversified Holdings LLC and its affiliates in their capacities as shareholders, officers, directors, or managers of the debtors.

Adequate Protection

Prepetition Secured Parties

• Allowed superpriority administrative expense claims, junior to the DIP superpriority claims and the carve-out.
• Replacement liens on all DIP collateral, junior to the DIP liens and the carve-out.
• Upon entry of the final order, supplemental liens on all of the debtors' assets, including avoidance action proceeds, junior to the DIP liens and the carve-out.
• Payment of reasonable and documented professional fees and expenses.
• Financial reporting and access to books and records.
• All intercompany liens are subordinated to the adequate protection liens.

Waivers

• Subject to entry of the final order:
  • Section 506(c): The debtors waive their right to surcharge the DIP or prepetition collateral.
  • Section 552(b): The “equities of the case” exception shall not apply.
  • The equitable doctrine of “marshaling” shall not apply with respect to the DIP or prepetition collateral.

Permitted Variance

• During any testing period, and excluding certain professional and DIP-related fees, variances from the approved budget may not reflect:
  • Total receipts of less than 75% of projected receipts, or
  • Total payments of more than 110% of projected payments.
• A breach of the variance covenant does not constitute an event of default so long as the debtors’ ending cash balance is within $200,000 of the projected ending cash for the period.

Milestones

• Entry of the interim DIP order no later than three business days after the petition date.
• Filing of retention motions for the CRO, financial advisor, and sales agent within 10 days after the petition date.
• Filing of a sale procedures motion within 10 days after the petition date.
• Entry of the final DIP order within 30 days after the petition date.

Events of Default

• The DIP agreement includes events of default customary for facilities of this nature, including failure to comply with milestones, conversion or dismissal of the cases, and the appointment of a trustee.
• Upon an event of default, the DIP lender must provide five calendar days' written notice before exercising remedies, during which time parties in interest may seek an expedited hearing.