Contract analysis

I. Executive Summary and Purpose The purpose of this memorandum is to analyze and benchmark the proposed incurrence-based covenant package for the Indenture (the "Indenture") governing Verimark Hospitality Group Inc.'s ("VHG" or the "Issuer") proposed issuance of $500,000,000 in aggregate principal amount of 8.250% Senior Notes due 2031 (the "Notes"). This memorandum is intended to support the deal team's preparation

II. Issuer Financial Profile and Pro Forma Capitalization An understanding of VHG's current financial profile and its anticipated post-offering capitalization is essential to evaluating the appropriateness of the proposed covenant package. The incurrence covenants in the Indenture are fundamentally ratio-based, and the degree of headroom that VHG will have above the proposed thresholds directly informs both the negot

III. Fixed Charge Coverage Ratio — Incurrence Test The FCCR incurrence test is the central covenant governing VHG's ability to incur additional Indebtedness and make Restricted Payments under the Indenture. As an incurrence-based (rather than maintenance-based) covenant, the FCCR is tested only at the time VHG proposes to take a specified action — not on an ongoing periodic basis. This distinction is significant beca

IV. Limitation on Restricted Payments The Limitation on Restricted Payments covenant restricts VHG's ability to distribute value to equity holders or make certain investments, ensuring that cash generated by the business is available to service the Notes. This is a critical covenant from the noteholder perspective, as it is the primary mechanism preventing equity value extraction at the expense of creditors. A. Propo

V. Limitation on Indebtedness The Limitation on Indebtedness covenant controls VHG's ability to incur additional debt, ensuring that the capital structure does not become excessively leveraged to the detriment of the noteholders. The covenant operates through two parallel mechanisms: (1) a ratio-based incurrence test (the FCCR test discussed in Section III), and (2) a series of specific baskets for Permitted Indebted

1. General Basket Indebtedness of VHG and its Restricted Subsidiaries in an aggregate principal amount at any time outstanding not to exceed $75,000,000. This is a "free and clear" basket that provides VHG with flexibility to incur Indebtedness for general corporate purposes without needing to satisfy the ratio test. The general basket is measured on a "net outstanding" basis, such that repayments of Indebtedness pre

2. Credit Facility Basket Indebtedness incurred under a Credit Facility (including any replacement, renewal, or refinancing credit facility) in an aggregate principal amount at any time outstanding not to exceed the greater of (x) $150,000,000 and (y) the Borrowing Base Amount (as defined in the applicable Credit Facility agreement). This basket corresponds to VHG's existing $150 million committed revolving credit fa

3. Capital Lease / Purchase Money Basket Indebtedness arising under capital leases and purchase money obligations in an aggregate principal amount at any time outstanding not to exceed $25,000,000. This basket is intended to accommodate ordinary course property improvements, furniture, fixtures, and equipment ("FF&E") financing, and other capital-intensive expenditures typical of the hospitality industry.

4. Intercompany Indebtedness Indebtedness among VHG and its Restricted Subsidiaries in an unlimited amount, subject to the following subordination requirements: any Indebtedness owed by VHG or a Guarantor to a Restricted Subsidiary that is not a Guarantor must be unsecured and expressly subordinated in right of payment to VHG's obligations under the Notes or such Guarantor's obligations under its Guarantee, as applic

5. Acquired Indebtedness Indebtedness of a person existing at the time such person becomes a Restricted Subsidiary or is merged into or consolidated with VHG or a Restricted Subsidiary, provided that either (a) after giving pro forma effect to such acquisition, merger, or consolidation and the assumption of such Indebtedness, VHG's FCCR is at least 2.00 to 1.00, or (b) such Indebtedness was outstanding at the time of

6. Non-Recourse Property Indebtedness Indebtedness of Restricted Subsidiaries that is (a) secured solely by one or more hotel properties of such Restricted Subsidiary and (b) non-recourse to VHG and the other Restricted Subsidiaries (other than the Restricted Subsidiary that is the borrower and any Restricted Subsidiary whose sole assets consist of the equity interests in such borrower), in an aggregate principal amo

7. Refinancing Indebtedness Indebtedness issued in exchange for, or the net proceeds of which are used to refinance, extend, renew, or replace, existing Indebtedness, subject to the following customary conditions: (a) the principal amount of such Refinancing Indebtedness does not exceed the principal amount of the Indebtedness being refinanced (plus accrued interest, premiums, and fees and expenses), (b) the Refinanc

8. Hedging Obligations Indebtedness arising under Hedging Obligations entered into for bona fide hedging purposes and not for speculative purposes. This permits VHG to enter into interest rate swaps, caps, collars, and similar instruments to manage interest rate risk on its floating-rate Credit Facility obligations or other Indebtedness, as well as foreign currency hedging arrangements to the extent applicable.

9. Working Capital Facilities Indebtedness arising under short-term working capital facilities in an aggregate principal amount at any time outstanding not to exceed $20,000,000. This basket is intended to accommodate seasonal working capital needs, which can be significant in the hospitality industry given the cyclical nature of hotel occupancy and revenue. C. Benchmarking The general basket of $75 million is positi

VI. Limitation on Liens The Limitation on Liens covenant protects the noteholders' position as senior unsecured creditors by restricting the ability of VHG and its Restricted Subsidiaries to grant security interests or other liens on their assets, which would effectively subordinate the Notes to the secured claims. Given that the Notes are unsecured obligations, this covenant is of particular importance. A. Proposed

VII. Asset Sale Covenant The Asset Sale covenant governs the disposition of assets by VHG and its Restricted Subsidiaries, ensuring that asset sale proceeds are used for the benefit of the business (and, ultimately, the noteholders) rather than distributed to equity holders or used for other purposes that do not benefit the creditor class. This covenant is of particular importance in the hospitality sector, where ind

VIII. Change of Control Put The Change of Control covenant provides noteholders with the right to require VHG to repurchase the Notes at a premium upon the occurrence of a specified change of control event. This covenant is designed to protect noteholders from the risk that a change in ownership or control of VHG could adversely affect the credit quality of the Notes. A. Proposed Terms Upon a "Change of Control Trigg

IX. Optional Redemption and Equity Clawback The optional redemption and equity clawback provisions define VHG's ability to redeem the Notes prior to their stated maturity. These provisions are among the most standardized terms in high yield indentures and, accordingly, we expect limited negotiation on these points. A. Optional Redemption Schedule The Initial Draft provides that the Notes are not redeemable at VHG's o

X. Additional Covenants — Summary Analysis In addition to the core incurrence covenants analyzed in Sections III through IX above, the Initial Draft contains several additional covenants that are standard features of high yield indentures. This section provides a summary analysis of each. A. Limitation on Transactions with Affiliates The Limitation on Transactions with Affiliates covenant restricts VHG and its Restri