1021-00001 · Verimark Hospitality Group · Engagement & Preliminary

existing-tlb-provisions-analysis.docx DOCUMENT Finance & Banking

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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP

MEMORANDUM

I. Executive Summary

The purpose of this memorandum is to analyze the prepayment, assignment, and repricing provisions of Verimark Hospitality Group Inc.'s ("VHG" or the "Company") existing $625,000,000 Term Loan B credit agreement (the "Existing TLB") in order to identify the constraints, costs, and strategic considerations relevant to the proposed refinancing of the Existing TLB with a new $700,000,000 Term Loan B facility to be arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor"). This memorandum is intended to inform both the economic analysis of the proposed refinancing and the negotiation strategy for the definitive documentation of the new facility.

The Existing TLB was originated on February 14, 2020, pursuant to a Credit Agreement among VHG, as Borrower, the Guarantors party thereto, the Lenders party thereto, and Greystone Federal Credit Corp. ("Greystone"), as Administrative Agent and Collateral Agent. The original principal amount of the Existing TLB was $625,000,000. As of the anticipated payoff date in July 2022, the current outstanding principal balance is approximately $621,875,000, reflecting $3,125,000 in scheduled amortization payments made since origination (calculated as $625,000,000 × 1.00% per annum × 2 years = $6,250,000 in scheduled amortization less $3,125,000 in principal reduction, accounting for the quarterly amortization schedule and the application of payments through the estimated payoff date). The Existing TLB is a senior secured term loan facility bearing interest at LIBOR plus 425 basis points, with a LIBOR floor of 1.00%, and is governed by New York law.

Our key findings are as follows:

A full prepayment of the Existing TLB on or about the anticipated closing date of the new facility (currently estimated to be on or around July 21, 2022) will trigger a general prepayment premium of 0.50%, yielding an estimated prepayment cost of $3,125,000. This premium is calculated on the original $625,000,000 principal amount of the facility, as specified in the Existing Credit Agreement. While the separate 1.00% repricing protection (soft call) provision has expired as of February 14, 2022, the 0.50% general prepayment premium remains in effect until February 14, 2023.

The Existing TLB also contains assignment provisions, most favored nation ("MFN") mechanics applicable to incremental term loan incurrences, and other provisions analyzed herein that are relevant to the structuring and negotiation of the proposed new $700,000,000 TLB with Crescent Harbor.

Recommendation: We recommend that VHG proceed with the full payoff and refinancing of the Existing TLB. The $3,125,000 prepayment premium is economically justified by the anticipated 50 basis point reduction in stated spread (from LIBOR + 425 bps to Adjusted Term SOFR + 375 bps), which is expected to generate approximately $3,500,000 in annual interest savings on the larger $700,000,000 facility. On these economics, the simple payback period on the prepayment premium is less than one year — approximately 10.7 months. Additional benefits of the refinancing, including the transition from LIBOR to SOFR, $75,000,000 in incremental proceeds, enhanced covenant flexibility, and consolidation of the administrative agent role with Crescent Harbor, further support proceeding.

II. Background — The Existing TLB Facility

A. Overview of the Existing Credit Agreement

The Existing TLB is governed by that certain Credit Agreement dated as of February 14, 2020 (as amended, restated, supplemented, or otherwise modified from time to time, the "Existing Credit Agreement"), among Verimark Hospitality Group Inc., as Borrower, the Guarantors party thereto, the Lenders party thereto, and Greystone Federal Credit Corp., as Administrative Agent and Collateral Agent. The CUSIP number assigned to the Existing TLB is 92347LAA0.

The principal terms of the Existing TLB are summarized as follows:

Original Principal Amount. The original aggregate principal amount of the Existing TLB is $625,000,000. This amount was fully funded at closing on February 14, 2020, net of original issue discount ("OID") of 0.50% (i.e., the loans were funded at 99.50% of par, yielding net proceeds to VHG of approximately $621,875,000 at closing).

Current Outstanding Principal. As of the anticipated payoff date, the current outstanding principal balance is approximately $621,875,000. This reflects scheduled amortization payments totaling $3,125,000 paid since origination. The quarterly amortization installments of $1,562,500 each have been paid in accordance with the amortization schedule set forth in the Existing Credit Agreement. No voluntary or mandatory prepayments have been made to date.

Interest Rate. The Existing TLB bears interest at a rate per annum equal to LIBOR plus 425 basis points, subject to a LIBOR floor of 1.00%. The applicable LIBOR rate is determined based on the interest period selected by VHG (one-month, two-month, three-month, or six-month). VHG has customarily elected one-month interest periods. An alternate base rate option is also available under the Existing Credit Agreement, at a margin of 325 basis points over the base rate (defined as the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) the prime rate, and (c) one-month LIBOR plus 1.00%).

Maturity Date. The stated maturity date of the Existing TLB is February 14, 2027, representing a seven-year tenor from the closing date. All outstanding principal and accrued and unpaid interest are due and payable in full on the maturity date.

Amortization. The Existing TLB amortizes at a rate of 1.00% per annum of the original principal amount, payable in equal quarterly installments of $1,562,500 each. The balance of the principal is due at maturity. This 1.00% annual amortization rate is customary for institutional term loan B facilities in the hospitality sector. As noted above, approximately $3,125,000 in scheduled amortization has been paid through the anticipated payoff date, reducing the outstanding principal from $625,000,000 to approximately $621,875,000.

Guarantors. The obligations under the Existing TLB are unconditionally guaranteed, jointly and severally, by the following direct and indirect subsidiaries of VHG:

(a) Verimark Resort Properties LLC ("VRP");

(b) VHG Management Services Inc.;

(d) Palmetto Beachfront Hotels LLC; and

(e) Cascadia Hospitality Corp.

These entities collectively represent substantially all of the operating subsidiaries of VHG and hold substantially all of the Company's material assets.

Collateral. The Existing TLB is secured by a first-priority lien (subject only to permitted liens) on substantially all assets of VHG and each Guarantor. The collateral package includes, without limitation: (i) fee simple and leasehold interests in 42 hotel properties owned by Verimark Resort Properties LLC (the "Mortgaged Properties"), subject to mortgages, deeds of trust, and related security documents in favor of Greystone as Collateral Agent; (ii) equity interests in each of the Guarantors and other direct subsidiaries of VHG; (iii) accounts receivable, inventory, equipment, and other personal property; (iv) intellectual property (including the "Verimark" brand trademarks and related hospitality marks); and (v) deposit accounts and securities accounts, subject to customary control agreements.

Pari Passu Sharing with the Revolving Credit Facility. The Existing TLB shares first-lien collateral on a pari passu basis with VHG's $400,000,000 senior secured revolving credit facility (the "RCF"), for which Crescent Harbor Bank, N.A. serves as administrative agent. The pari passu sharing arrangement is governed by an Intercreditor Agreement dated as of February 14, 2020, among Greystone (as TLB Collateral Agent), Crescent Harbor (as RCF Collateral Agent), VHG, and the Guarantors. Under the Intercreditor Agreement, upon any enforcement event, the proceeds of collateral are shared ratably between the TLB lenders and the RCF lenders based on their respective outstanding obligations, subject to customary waterfall provisions.

Governing Law. The Existing Credit Agreement is governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles (other than Section 5-1401 of the New York General Obligations Law). The parties have consented to the exclusive jurisdiction of the federal and state courts located in the Borough of Manhattan, City of New York.

B. Existing Capital Structure Context

An understanding of VHG's existing capital structure is important context for evaluating the refinancing and its implications. As of the date hereof, VHG's total funded debt is approximately $1.27 billion, comprising the following obligations:

The RCF is currently undrawn, and as such, total funded debt is approximately $866,875,000 ($621,875,000 under the Existing TLB plus $245,000,000 under the Senior Unsecured Notes). The total debt capacity, inclusive of the undrawn RCF commitment, is approximately $1.27 billion.

VHG reported the following financial results for fiscal year 2021: total revenue of approximately $1.42 billion, EBITDA of approximately $318 million, and Adjusted EBITDA (as defined in the Existing Credit Agreement, reflecting customary add-backs for non-cash charges, restructuring costs, transaction expenses, and pro forma adjustments) of approximately $341 million. Based on estimated net debt of approximately $858 million (total funded debt less unrestricted cash of approximately $9 million), VHG's net leverage ratio as of fiscal year-end 2021 was approximately 2.52x Adjusted EBITDA.

VHG currently maintains credit ratings of BB- from Kellaway Ratings Group and Ba3 from Pinnacle Credit Services. These ratings were affirmed following the Company's Q4 2021 earnings release, with stable outlooks from both agencies.

VHG's hotel portfolio consists of 74 full-service and select-service hotels across 18 states, with a combined appraised value of approximately $3.1 billion based on independent appraisals completed in Q3 2021. Of these, the 42 Mortgaged Properties owned by Verimark Resort Properties LLC and pledged as collateral under the Existing TLB and the RCF have an aggregate appraised value of approximately $2.18 billion, providing significant asset coverage for the existing secured indebtedness.

III. Prepayment Provisions

A. Voluntary Prepayment — General

Article II, Section 2.05(a) of the Existing Credit Agreement governs voluntary prepayments of the term loans. Pursuant to this provision, VHG is permitted to prepay the term loans in whole or in part at any time, subject to the following conditions:

Minimum Prepayment Amounts. Any partial voluntary prepayment of the term loans must be in a minimum principal amount of $1,000,000 and in integral multiples of $500,000 in excess thereof (or, if less, the entire outstanding principal amount of the term loans). A prepayment in full, as contemplated in the proposed refinancing, satisfies this threshold by definition.

Application of Prepayments. Voluntary prepayments are applied to the remaining scheduled amortization payments in direct order of maturity — that is, the prepayment is applied first to the next quarterly installment, then to the succeeding installments in chronological order. This is the standard LSTA formulation. In the case of a prepayment in full, this application order is moot, as all remaining scheduled installments and the maturity date balloon payment are paid simultaneously.

Notice Requirements. VHG is required to deliver irrevocable written notice to Greystone (as Administrative Agent) of any voluntary prepayment not less than three (3) business days prior to the prepayment date in the case of LIBOR-based borrowings, or one (1) business day prior to the prepayment date in the case of alternate base rate borrowings. Since VHG has historically maintained the term loans as LIBOR-based borrowings, the three business day notice period will apply. The notice must specify the prepayment date, the principal amount to be prepaid, and the type of borrowing being prepaid. Critically, the Existing Credit Agreement provides that such notice is irrevocable and obligates VHG to make the prepayment on the specified date. Accordingly, VHG should not deliver the prepayment notice until the closing of the new facility with Crescent Harbor is certain or, alternatively, the notice should be conditioned on the closing of the refinancing (though the Existing Credit Agreement does not explicitly contemplate conditional notices — this should be confirmed with Greystone).

LIBOR Breakage Costs. Section 2.16 of the Existing Credit Agreement provides that if any prepayment of LIBOR-based borrowings occurs on a day other than the last day of the applicable interest period, VHG shall compensate each affected lender for any loss, cost, or expense attributable to such prepayment, including any loss or expense arising from the liquidation or redeployment of deposits or other funds obtained by such lender to fund or maintain such borrowings. This is a customary LIBOR breakage/funding loss indemnification provision. As a practical matter, this means that if the prepayment date does not coincide with the end of the then-current interest period, VHG will be liable for breakage costs, which can be meaningful depending on the spread between the contract rate and the prevailing reinvestment rate, the remaining duration of the interest period, and the outstanding principal balance. Given the size of the facility, even modest breakage costs could be material. We therefore recommend coordinating the closing date of the refinancing to coincide with an interest period end date under the Existing TLB to minimize or eliminate breakage costs. VHG's treasury department (contact: Glenn Fischbach, Vice President, Treasury) should be consulted to confirm the current interest period end dates.

B. Prepayment Premium / Soft Call Protection

The Existing Credit Agreement contains two distinct prepayment-related premium provisions that must be carefully distinguished. These provisions are set forth in Section 2.05(b) and Section 2.05(c), respectively, and operate independently of one another.

1.00% Repricing Protection (Soft Call) — Expired. Section 2.05(b) of the Existing Credit Agreement contains a repricing protection provision — commonly referred to as a "soft call" — that was applicable during the first twenty-four (24) months following the closing date. Specifically, this provision required VHG to pay a prepayment premium equal to 1.00% of the aggregate principal amount of the term loans prepaid in connection with any "Repricing Transaction." The term "Repricing Transaction" is defined in the Existing Credit Agreement to include (a) any prepayment or refinancing of the term loans with the proceeds of any new or replacement term loan facility having a lower effective interest rate or weighted average yield and (b) any amendment to the Existing Credit Agreement that reduces the applicable interest rate margin or weighted average yield of the term loans. The soft call period ran from February 14, 2020 (the closing date) through February 14, 2022 (the second anniversary of the closing date). This period has now expired. As of the date of this memorandum (April 14, 2022), the soft call provision is no longer operative, and the 1.00% repricing protection premium would not be triggered by the proposed refinancing.

0.50% General Prepayment Premium — Still in Effect. Section 2.05(c) of the Existing Credit Agreement contains a separate, general prepayment premium applicable to any voluntary prepayment in full of the term loans occurring prior to the third anniversary of the closing date — that is, prior to February 14, 2023. This premium is calculated at a rate of 0.50% of the original principal amount of the facility ($625,000,000), regardless of the amount of principal actually outstanding at the time of prepayment. The calculation is as follows:

$625,000,000 × 0.50% = $3,125,000

This 0.50% general prepayment premium remains in effect as of the anticipated payoff date (estimated to be on or about July 21, 2022), since that date falls approximately seven months before the February 14, 2023 expiration of the premium period. The proposed refinancing, which would involve a full prepayment of all outstanding term loans under the Existing Credit Agreement with the proceeds of a new term loan facility, constitutes a voluntary prepayment in full and therefore triggers this premium.

Post-February 14, 2023. After February 14, 2023, no prepayment premium of any kind applies under the Existing Credit Agreement, and the term loans may be prepaid in whole or in part at par (plus accrued interest and any applicable breakage costs). If VHG were willing to delay the refinancing until after February 14, 2023, the $3,125,000 premium could be avoided entirely. However, as discussed in Section VIII below, the interest savings from the proposed refinancing are sufficient to justify an earlier closing date and the absorption of the premium, and VHG has expressed a preference for closing in July 2022 in order to deploy the incremental $75,000,000 in proceeds toward anticipated hotel acquisitions in the second half of 2022.

Important Distinction. To reiterate: the 1.00% soft call provision (Section 2.05(b)) and the 0.50% general prepayment premium provision (Section 2.05(c)) are distinct and independent. The soft call has expired; the general premium has not. This distinction is occasionally conflated in practice, and it is important that VHG's management and treasury teams understand that a premium will still apply notwithstanding the expiration of the soft call.

C. Mandatory Prepayments

Section 2.06 of the Existing Credit Agreement sets forth customary mandatory prepayment provisions applicable to the term loans. These provisions are summarized below.

Excess Cash Flow Sweep. VHG is required to prepay the term loans annually with a specified percentage of "Excess Cash Flow" (as defined in the Existing Credit Agreement) for each fiscal year, subject to the following step-downs based on the Company's net leverage ratio:

(a) 50% of Excess Cash Flow if the Total Net Leverage Ratio is greater than or equal to 3.5x;

(b) 25% of Excess Cash Flow if the Total Net Leverage Ratio is less than 3.5x but greater than or equal to 2.5x; and

For fiscal year 2021, VHG's Total Net Leverage Ratio was approximately 2.52x (based on estimated net debt of approximately $858 million divided by Adjusted EBITDA of $341 million). This ratio is very close to the 2.5x threshold at which the ECF sweep percentage steps down to 0%. Whether VHG is at 0% or 25% for the FY2021 sweep depends on the precise calculation of net debt and Adjusted EBITDA under the definitions in the Existing Credit Agreement (which may differ modestly from management's reported figures due to definitional adjustments). If VHG's Total Net Leverage Ratio is at or below 2.5x, no ECF prepayment will be required for FY2021, which reduces the risk of mandatory prepayment reducing the outstanding principal balance before the refinancing closes. We recommend confirming the precise FY2021 ECF sweep obligation with VHG's financial team.

Asset Sale Proceeds. VHG is required to prepay the term loans with 100% of the net cash proceeds from any sale, transfer, or other disposition of assets (other than sales in the ordinary course of business and subject to certain other exceptions) in excess of $15,000,000 in any fiscal year. This mandatory prepayment is subject to customary reinvestment rights — VHG may reinvest such proceeds in assets useful in its business within twelve (12) months following receipt (or, if VHG has entered into a binding commitment to reinvest within such 12-month period, within an additional six (6) months thereafter, for a total reinvestment period of up to 18 months). VHG has not made any material asset dispositions since the closing of the Existing TLB that would have triggered this provision.

Debt Incurrence Proceeds. VHG is required to prepay the term loans with 100% of the net cash proceeds from any incurrence of indebtedness by VHG or any of its restricted subsidiaries (other than indebtedness expressly permitted under the Existing Credit Agreement, including incremental term loans, permitted refinancing indebtedness, and other specified exceptions).

Casualty and Condemnation Proceeds. VHG is required to prepay the term loans with net cash proceeds received in respect of any casualty event or condemnation affecting the collateral, subject to customary reinvestment rights consistent with the asset sale reinvestment provisions described above.

Application and Premium. Mandatory prepayments are applied pro rata among the term loan lenders based on their respective outstanding principal amounts, and are generally applied to the remaining scheduled amortization installments in inverse order of maturity (i.e., the farthest-out installments are reduced first), although the Existing Credit Agreement should be confirmed on this point. Critically, mandatory prepayments do not trigger any prepayment premium under the Existing Credit Agreement. The 0.50% general prepayment premium discussed in Section III.B above applies only to voluntary prepayments.

Relevance to the Refinancing. The proposed refinancing of the Existing TLB with the proceeds of the new $700,000,000 facility constitutes a voluntary prepayment in full, not a mandatory prepayment triggered by any of the events described above. Accordingly, the 0.50% prepayment premium applies. There is no basis in the Existing Credit Agreement to characterize the prepayment as mandatory in order to avoid the premium.

D. Total Estimated Payoff Amount

Based on the foregoing analysis, we estimate the total payoff amount for the Existing TLB as of the anticipated closing date (estimated July 21, 2022) to be as follows:

The accrued interest estimate of $2,916,667 is based on the assumption that the closing date will fall approximately 14 days into a one-month interest period, using the current all-in interest rate of approximately 5.25% (LIBOR floor of 1.00% + 425 bps margin). This estimate is necessarily preliminary and will vary depending on the actual closing date, the applicable LIBOR rate at the time, and the interest period in effect.

LIBOR Breakage Costs. If the closing does not coincide with an interest period end date, LIBOR breakage costs may also apply, as discussed in Section III.A above. We estimate that breakage costs would be minimal if the closing is timed to fall on or near an interest period end date; if not, breakage costs could range from negligible to several hundred thousand dollars depending on market conditions. This amount is not included in the estimate above.

Payoff Letter. The final payoff amount must be confirmed via a formal payoff letter from Greystone Federal Credit Corp. in its capacity as Administrative Agent. The payoff letter will specify the exact principal balance, accrued interest, prepayment premium, per diem interest rate, wire instructions for funds transfer, and any other amounts due and owing under the Existing Credit Agreement (including any outstanding administrative fees or unreimbursed expenses). We recommend requesting the payoff letter from Marion Stillwell, Vice President, Agency Services, Greystone Federal Credit Corp., no later than five (5) business days before the anticipated closing date to allow sufficient time for review and resolution of any discrepancies. The payoff letter should also include Greystone's authorization for the filing of UCC-3 termination statements and the release of mortgages, pledges, and other security interests upon receipt of the payoff amount (discussed further in Section IV.C below).

IV. Assignment and Transfer Provisions

A. Lender Assignments

Article X, Section 10.04 of the Existing Credit Agreement governs assignments of term loan interests by lenders. The relevant provisions are summarized below.

General Right to Assign. Each lender under the Existing TLB is permitted to assign all or a portion of its rights and obligations under the Existing Credit Agreement (including its outstanding term loan principal) to one or more eligible assignees, subject to the conditions set forth in the Existing Credit Agreement.

Minimum Assignment Amount. Any assignment must be in a minimum aggregate principal amount of $1,000,000 (or, if less, the entire remaining principal amount held by the assigning lender). This minimum threshold is intended to prevent excessive fragmentation of the lending syndicate.

Consent of the Administrative Agent. The consent of Greystone (as Administrative Agent) is required for any assignment, and such consent shall not be unreasonably withheld, conditioned, or delayed. Greystone is deemed to have consented if it has not responded within ten (10) business days of receiving an assignment request.

Borrower Consent. Borrower consent requirements depend on the identity of the proposed assignee:

(a) Assignments to existing lenders or their affiliates. No consent of VHG is required for any assignment to a person that is already a lender under the Existing Credit Agreement or to an affiliate of such lender.

(b) Assignments to other eligible assignees. VHG's consent is required for assignments to any other eligible assignee, and such consent shall not be unreasonably withheld or delayed. VHG is deemed to have consented if it has not responded within ten (10) business days of receiving written notice of the proposed assignment.

(c) Exception during events of default. Notwithstanding the foregoing, no consent of VHG is required for any assignment made during the continuance of an Event of Default under the Existing Credit Agreement.

Assignment Processing Fee. A processing fee of $3,500 is payable to Greystone (as Administrative Agent) in connection with each assignment. This fee is typically borne by the assigning lender, although the parties to the assignment may allocate it differently by agreement.

Form of Assignment. All assignments must be effected using the form of Assignment and Assumption Agreement attached as Exhibit E to the Existing Credit Agreement. Upon execution and delivery of a completed Assignment and Assumption Agreement to Greystone, and payment of the processing fee, the assignment becomes effective on the date specified therein. Greystone maintains a register of all lenders and their respective interests, and updates the register upon each valid assignment.

Disqualified Institutions. The Existing Credit Agreement contains a "Disqualified Institutions" concept, which restricts assignments to certain identified parties. VHG maintains a list of Disqualified Institutions, which may include no more than twenty-five (25) named entities plus their respective affiliates. The list generally identifies competitors of VHG in the hospitality industry and certain distressed debt funds or special situations investors. Any purported assignment to a Disqualified Institution is void ab initio — that is, it has no legal effect and does not transfer any rights or obligations. Greystone, as Administrative Agent, is required to check proposed assignments against the Disqualified Institutions list and may decline to process any assignment that would violate this restriction. The current Disqualified Institutions list should be reviewed in connection with the syndication of the new facility to ensure that the same or similar protections are included in the new Credit Agreement with Crescent Harbor.

B. Participations. Section 10.04(c) of the Existing Credit Agreement permits lenders to sell participations in their term loans to one or more eligible participants without the prior consent of VHG or any other party. Participations are economically equivalent to a partial transfer of economic interest in the term loans but do not constitute an assignment for purposes of the Existing Credit Agreement. The selling lender remains the lender of record and retains all voting and administrative rights.

Voting Rights of Participants. Participants generally do not have direct voting rights under the Existing Credit Agreement. The selling lender exercises all voting rights on behalf of participants, except that the selling lender may not, without the written consent of the affected participant, agree to any amendment, modification, or waiver that would (a) reduce the interest rate or extend the maturity date of the term loans, (b) reduce the principal amount of the term loans, (c) release all or substantially all of the collateral securing the term loans, or (d) release all or substantially all of the Guarantors from their guarantee obligations. These are the customary "sacred rights" that are protected at the individual lender (and participant) level.

Withholding Tax Considerations. Participants are required to provide the selling lender with applicable tax documentation (including IRS Form W-8 or W-9, as applicable). Importantly, VHG is not obligated to pay any additional amounts to a participant under the gross-up or tax indemnification provisions of the Existing Credit Agreement beyond the amounts it would have been required to pay to the selling lender had no participation been sold. This ensures that VHG's tax exposure is not increased by virtue of a lender's decision to sell participations.

C. Implications for the Refinancing

The assignment and transfer provisions of the Existing Credit Agreement have several implications for the proposed refinancing.

Existing Lender Participation in the New Facility. Certain existing lenders under the Greystone facility may wish to participate in the syndication of the new $700,000,000 TLB with Crescent Harbor. The assignment provisions of the Existing Credit Agreement do not contain any restriction that would prevent an existing lender from simultaneously being a lender under the new facility. Such "roll" arrangements are common in the leveraged loan market and facilitate efficient syndication. To the extent existing lenders wish to participate in the new facility, no assignment under the Existing Credit Agreement is necessary — the Existing TLB will simply be paid off in full and the existing lender will fund its commitment under the new facility pursuant to the new Credit Agreement.

Termination of Commitments and Interests. The full payoff and discharge of the Existing TLB will terminate all lenders' commitments and interests under the Existing Credit Agreement. No assignment mechanics are needed for the refinancing itself. Upon receipt of the payoff amount, Greystone (as Administrative Agent) will be required to acknowledge that all obligations under the Existing Credit Agreement have been paid in full and satisfied.

Lien Release and UCC-3 Terminations. Upon the full repayment of the Existing TLB, Greystone (as Collateral Agent) will be required to authorize and execute (or cause to be executed) UCC-3 termination statements with respect to all UCC-1 financing statements filed against VHG and the Guarantors, as well as mortgage discharges, releases of deeds of trust, and other instruments necessary to release the security interests and liens securing the Existing TLB. This must be addressed in the payoff letter and, ideally, in a separate lien release authorization executed by Greystone concurrently with the payoff. Our real estate colleagues should prepare and pre-negotiate the forms of mortgage release for each of the 42 Mortgaged Properties to facilitate prompt recording post-closing. We note that the new facility with Crescent Harbor will require the grant of first-priority liens on substantially the same collateral package; the timing of the lien release and regrant must be coordinated to ensure there is no gap in security coverage and to minimize recording fees and transfer taxes (to the extent applicable in the relevant jurisdictions).

V. Repricing and Most Favored Nation (MFN) Provisions

A. Existing Repricing Protection

As discussed in detail in Section III.B above, the Existing Credit Agreement included a repricing protection provision (soft call) requiring VHG to pay a 1.00% premium on any Repricing Transaction occurring during the first twenty-four (24) months following the closing date — that is, from February 14, 2020 through February 14, 2022. This repricing protection has now expired. The proposed refinancing, which would occur in July 2022, constitutes a "Repricing Transaction" as defined in the Existing Credit Agreement (insofar as it involves a prepayment of the existing term loans with the proceeds of a new term loan facility having a lower effective yield). However, because the 24-month soft call period has lapsed, the 1.00% repricing protection premium is not triggered.

The separate 0.50% general prepayment premium, which remains in effect through February 14, 2023 and is triggered by any voluntary prepayment in full (regardless of whether it constitutes a Repricing Transaction), continues to apply as described in Section III.B.

B. Existing MFN Provisions

Section 2.14(d) of the Existing Credit Agreement contains a most favored nation ("MFN") provision applicable to incremental term loans incurred under the incremental facility (the "Incremental Term Loan Facility") established pursuant to Section 2.14 of the Existing Credit Agreement. The MFN provision is designed to protect existing term loan lenders from economic dilution in the event that VHG incurs additional incremental term loans at a higher effective yield than the existing term loans.

The principal terms of the MFN provision are as follows:

MFN Threshold. If VHG incurred incremental term loans with an effective yield (defined to include applicable margin, OID amortized over a four-year assumed life, and interest rate floor differential) exceeding the effective yield of the Existing TLB by more than 75 basis points, the applicable margin on the Existing TLB would be automatically increased by the amount of such excess over the 75 basis point threshold. For example, if incremental term loans were issued at an effective yield of LIBOR + 600 bps (effective yield exceeding the Existing TLB's effective yield by more than 75 bps), the margin on the Existing TLB would be increased to eliminate the excess above 75 bps.

MFN Sunset. The MFN provision was subject to a sunset of twelve (12) months from the closing date of the Existing TLB — that is, the MFN protection was operative only from February 14, 2020 through February 14, 2021. This sunset has long since expired, and the MFN provision has no current operative effect. No incremental term loans were incurred under the Existing Credit Agreement during the MFN period or at any time thereafter, and VHG did not have occasion to test the MFN mechanics during the life of the Existing TLB.

Incremental Facility Terms. For context, the Existing Credit Agreement permits VHG to incur incremental term loans in an aggregate principal amount of up to $250,000,000 (the "free-and-clear basket") plus additional amounts subject to a pro forma Total Net Leverage Ratio not exceeding 3.5x. The incremental facility was not utilized during the term of the Existing TLB.

C. Implications for Negotiation of the New Facility

The existing facility's MFN provision (75 bps threshold with a 12-month sunset) provides a useful reference point for the negotiation of the new $700,000,000 TLB with Crescent Harbor. However, market terms for leveraged loan facilities have evolved since the origination of the Existing TLB in February 2020, and VHG should seek to negotiate more borrower-favorable MFN and repricing protection terms in the new facility. Our specific recommendations are as follows:

MFN Threshold. The market for BB-rated credits in the current environment has generally moved toward a 50 basis point MFN threshold (down from the 75 bps threshold that was more common in 2019–2020). We recommend that VHG target a 50 bps MFN threshold in the new facility. A narrower threshold provides greater protection to the initial term loan lenders but also constrains VHG's flexibility to incur incremental debt at market rates without triggering a margin step-up on the initial tranche. The 50 bps level represents a reasonable compromise and is consistent with recent precedent transactions in the hospitality sector.

MFN Sunset Period. We recommend negotiating an 18-month MFN sunset period in the new facility (compared to the 12-month sunset in the Existing TLB). An 18-month sunset provides VHG with the flexibility to incur incremental term loans after the sunset without triggering margin adjustments on the initial TLB, which is particularly important given VHG's stated acquisition strategy for 2023 and beyond, which may require incremental financing. The 18-month sunset is consistent with market practice for borrower-favorable transactions in the current environment, though some lender-favorable deals have featured 24-month sunsets. We believe 18 months is achievable given VHG's credit profile and the competitive dynamics of the proposed syndication.

Definition of "Effective Yield." The definition of "effective yield" for MFN purposes is a critical negotiation point. We recommend that the definition in the new facility include the following components:

(a) the applicable margin (stated spread);

(b) any OID or upfront fees, amortized over an assumed four-year life (consistent with LSTA conventions);

(c) any interest rate floor differential (i.e., the economic value of the difference between the SOFR floor on the incremental tranche and the SOFR floor on the initial tranche, to the extent it results in a higher effective rate); and

The definition should exclude the following:

(d) arrangement fees, underwriting fees, and structuring fees (which are one-time payments to arrangers and not reflective of the ongoing yield to lenders);

(e) commitment fees;

(f) administrative agent fees; and

(g) other one-time, transaction-specific fees.

This formulation ensures that the MFN protection captures genuine yield differentials while preventing the inclusion of fees that do not represent the ongoing economic return to lenders.

Repricing Protection (Soft Call) for the New Facility. Market standard for new TLB issuances in mid-2022 is a six (6)-month soft call at a 1.00% premium. We recommend that VHG accept a 1.00% / 6-month soft call as standard in the new facility and resist any effort by Crescent Harbor or the syndicate lenders to extend the soft call period to twelve (12) months or longer. A 6-month soft call period provides adequate protection to lenders while preserving VHG's flexibility to reprice the facility in early 2023 if market conditions improve. We note that some recent deals in the BB space have featured 6-month soft calls with an additional 0.50% general prepayment premium for months 7–12; we would recommend resisting this structure as well, given that it effectively extends the prepayment penalty beyond the standard soft call period.

MFN and Incremental Facility Interaction. The interaction between the MFN provision and the various incremental facility baskets in the new Credit Agreement should be carefully negotiated. In particular, we recommend that incremental term loans structured as "ratio debt" (i.e., subject solely to a leverage-based incurrence test, without a free-and-clear component) be excluded from the MFN provision. This carve-out has precedent in several recent transactions and reflects the rationale that ratio-debt incremental facilities are incurred based on the borrower's credit strength and should not automatically trigger MFN adjustments on the initial tranche. Similarly, incremental facilities that are structurally subordinated or that have a later maturity than the initial TLB should arguably be excluded from MFN, as their terms are not directly comparable to the initial tranche.

VI. Benchmark / LIBOR Considerations

The Existing TLB is a LIBOR-based facility, bearing interest at LIBOR plus 425 basis points with a LIBOR floor of 1.00%. The Existing Credit Agreement contains fallback language for LIBOR cessation, providing for an amendment-based approach to transition to an alternative benchmark rate in the event that LIBOR becomes unavailable. Under this approach, VHG and Greystone (as Administrative Agent) would be required to negotiate in good faith an amendment to designate a successor benchmark rate, subject to "negative consent" by the required lenders (i.e., the amendment would become effective unless a majority of lenders object within a specified period).

The proposed refinancing will render the LIBOR cessation fallback provisions moot, as the Existing TLB will be repaid in full and replaced with a new facility that references Adjusted Term SOFR (the Secured Overnight Financing Rate, as published by the CME Group). The transition from LIBOR to SOFR is a significant structural element of the refinancing and eliminates the operational and legal risk associated with LIBOR cessation, which is expected to occur on June 30, 2023 for the remaining USD LIBOR tenors.

The new facility will reference CME Term SOFR plus a credit spread adjustment ("CSA"), consistent with the recommendations of the Alternative Reference Rates Committee ("ARRC"). The applicable CSAs are:

These credit spread adjustments are designed to account for the structural difference between LIBOR (which embeds a bank credit risk premium) and SOFR (which is a nearly risk-free overnight rate). In practice, the CSA is added to Term SOFR to produce "Adjusted Term SOFR," which is the benchmark used to calculate interest under the new facility.

Effective Margin Comparison. The effective margin comparison between the Existing TLB and the proposed new facility is as follows:

Existing TLB: LIBOR + 425 bps (with 1.00% LIBOR floor)

Proposed New TLB: Adjusted Term SOFR + 375 bps (with 0.50% SOFR floor), where Adjusted Term SOFR = Term SOFR + applicable CSA

The stated spread reduction is 50 basis points (from 425 bps to 375 bps). Taking into account the SOFR credit spread adjustment (approximately 10–15 bps for one-month and three-month tenors, which are most commonly elected), the all-in benchmark rate under the new facility would be approximately 10–15 bps higher than a comparable Term SOFR-only rate, but the net economic savings relative to the Existing TLB remain in the range of 40–50 basis points. Additionally, the reduction in the interest rate floor from 1.00% (LIBOR) to 0.50% (SOFR) provides incremental economic benefit to VHG in a rising rate environment, as the floor is less likely to be binding. At current SOFR levels (approximately 0.30–0.33% for one-month Term SOFR as of early April 2022), the floor is close to binding under the new facility, but is expected to become less relevant as the Federal Reserve continues its rate normalization cycle.

On a $700,000,000 facility, a 50 basis point spread reduction translates to approximately $3,500,000 in annual interest savings, assuming the benchmark rate is above the applicable floor. This calculation underpins the economic justification for the refinancing and the payback analysis on the prepayment premium discussed in Section VIII below.

A separate memorandum on the SOFR transition mechanics — including the detailed benchmark definition, interest period conventions, Term SOFR "lookback" mechanics, and benchmark replacement waterfall provisions for the new Credit Agreement — is being prepared by Daniel Obi and will be circulated under separate cover.

VII. Other Relevant Provisions

A. Change of Control

Section 7.01(h) of the Existing Credit Agreement contains a customary change of control provision. Under this provision, a "Change of Control" constitutes an Event of Default and requires VHG to offer to prepay the term loans in full at 101% of the outstanding principal amount (plus accrued and unpaid interest). A "Change of Control" is defined to include, among other things: (a) the acquisition by any person or group (other than permitted holders) of more than 35% of the total voting power of VHG's outstanding equity interests; (b) the failure of VHG to own, directly or indirectly, 100% of the equity interests in each Guarantor; and (c) a change in the majority of the members of VHG's board of directors that is not approved by the existing board.

The proposed refinancing does not involve a change of control event, and this provision is not directly triggered. However, we flag this provision for two reasons: (i) the change of control definition and prepayment premium (101% of par) in the Existing Credit Agreement should be reviewed for consistency with the corresponding provisions in the new Credit Agreement with Crescent Harbor, and (ii) VHG's private equity sponsors (Edgewater Capital Partners and Lakeview Strategic Equity, who collectively hold approximately 52% of VHG's equity) should be aware of the change of control triggers in both the existing and new facilities in connection with any future ownership transactions.

B. Financial Covenants

The Existing TLB contains a springing financial maintenance covenant, which is tested only when certain conditions are met. Specifically, Section 6.10 of the Existing Credit Agreement requires VHG to maintain a Maximum Total Net Leverage Ratio of not greater than 5.0 to 1.0, tested quarterly on the last day of each fiscal quarter, but only when the aggregate outstanding principal amount of revolving loans and swingline loans under the RCF, plus the aggregate face amount of outstanding letters of credit (excluding undrawn letters of credit up to $10,000,000), exceeds 30% of the total revolving commitments under the RCF (i.e., 30% × $400,000,000 = $120,000,000).

The RCF is currently undrawn, and the springing financial covenant has not been tested since the origination of the Existing TLB. VHG's current Total Net Leverage Ratio of approximately 2.52x provides substantial headroom relative to the 5.0x covenant level.

The proposed new $700,000,000 TLB with Crescent Harbor contemplates a modestly tighter financial covenant structure: a Maximum Total Net Leverage Ratio of 4.5 to 1.0, with a springing test triggered when RCF utilization exceeds 35% of total revolving commitments (i.e., 35% × $400,000,000 = $140,000,000). The tighter leverage ratio (4.5x vs. 5.0x) is offset by the higher RCF utilization trigger (35% vs. 30%), which makes it less likely that the covenant will be tested. At VHG's current pro forma leverage of approximately 2.52x (or approximately 2.74x pro forma for the $75,000,000 in incremental term loan proceeds, depending on how incremental cash is deployed), the Company has approximately 1.76x–1.98x of covenant headroom, which is more than adequate.

A detailed covenant build comparison and compliance analysis for the proposed new facility will be addressed in a separate memorandum.

C. Negative Covenants / Restricted Payments

Article VI of the Existing Credit Agreement contains customary negative covenants applicable to VHG and its restricted subsidiaries, including limitations on:

(a) the incurrence of additional indebtedness;

(b) the creation or existence of liens;

(d) sales, transfers, and other dispositions of assets;

(e) transactions with affiliates;

(f) restrictive agreements (negative pledge and anti-layering provisions);

(g) amendments to material agreements and organizational documents; and

(h) changes in lines of business.

Each of these negative covenants is subject to various exceptions, carve-outs, and baskets that provide VHG with operational flexibility. Upon the full repayment and discharge of the Existing TLB, all negative covenants under the Existing Credit Agreement will cease to have force and effect. The new Credit Agreement with Crescent Harbor should be drafted with fresh covenant baskets that are calibrated to VHG's current capital structure, business needs, and growth strategy. In particular, VHG should seek to negotiate enhanced flexibility in the following areas: (i) the restricted payments covenant (to accommodate VHG's dividend policy and any share repurchase programs), (ii) the indebtedness covenant (to provide adequate capacity for incremental financing and acquisition-related debt), and (iii) the asset sale covenant (to reflect VHG's ongoing portfolio optimization strategy, which may involve dispositions of non-core hotel assets).

These negotiation points will be addressed in detail in the initial term sheet markup and the definitive documentation negotiations with Crescent Harbor.

VIII. Cost-Benefit Summary of Prepayment

The following table summarizes the estimated costs and benefits of the proposed refinancing:

Costs:

Benefits:

Payback Analysis. The simple payback period on the $3,125,000 prepayment premium is calculated as follows:

$3,125,000 ÷ $3,500,000 = approximately 10.7 months

This payback period is well within one year, meaning that the cumulative interest savings from the spread reduction will exceed the prepayment premium cost by approximately month 11 of the new facility. Over the full remaining life of the Existing TLB (which had approximately 4.6 years remaining to maturity), the net present value of the interest savings significantly exceeds the prepayment cost.

Conclusion. The economics of the proposed refinancing strongly favor proceeding with the full payoff of the Existing TLB and absorbing the $3,125,000 prepayment premium. The combination of meaningful annual interest savings, the transition to SOFR, the availability of incremental proceeds for VHG's acquisition pipeline, the opportunity to negotiate improved documentation terms, and the consolidation of the agent role with Crescent Harbor collectively present a compelling case for the refinancing. We recommend that VHG move forward with the proposed July 2022 closing timeline.

IX. Recommended Next Steps

Based on the foregoing analysis, we recommend the following next steps to advance the proposed refinancing:

1. Obtain Payoff Quote. Request and obtain a formal payoff letter and quote from Greystone Federal Credit Corp. (contact: Marion Stillwell, Vice President, Agency Services, 200 Park Avenue South, 22nd Floor, New York, NY 10003; telephone: (212) 555-4820). The payoff letter should specify the outstanding principal balance, accrued interest, prepayment premium, per diem interest, wire instructions, and lien release authorization. We recommend initiating this request no later than five (5) business days before the anticipated closing date.

2. Confirm Per Diem and Breakage Costs. Confirm the per diem interest rate and any applicable LIBOR breakage costs with Greystone's agency services desk. This information is necessary to optimize the selection of the closing date and to finalize the payoff amount.

3. Coordinate on Interest Period End Dates. Coordinate with VHG treasury (Glenn Fischbach, Vice President, Treasury) to identify the current and upcoming interest period end dates under the Existing TLB. The closing date for the refinancing should be scheduled to coincide with an interest period end date, if practicable, to minimize or eliminate LIBOR breakage costs.

4. Negotiate Borrower-Favorable Terms in the New Facility. Use the analysis of the existing MFN provision (75 bps threshold / 12-month sunset) and repricing protection (1.00% premium / 24-month soft call) provisions as a benchmark and negotiating lever for obtaining more borrower-favorable terms in the new facility. Specifically, VHG should target a 50 bps MFN threshold with an 18-month sunset, and a 1.00% soft call premium with a 6-month period. These positions are consistent with current market practice for BB-rated hospitality credits and represent an improvement over the Existing TLB terms.

5. Prepare Initial Term Sheet Markup. Begin preparation of the initial markup of the term sheet based on the Crescent Harbor proposal received on April 22, 2022. The markup should reflect the negotiating positions outlined in this memorandum, including the MFN, repricing protection, covenant, and benchmark provisions.

6. Coordinate with Financial Advisor. Discuss the effective yield definition methodology for MFN purposes with VHG's financial advisor, Meridian Strauss Advisory LLC (contact: Elise Cavanaugh, Managing Director), to ensure alignment on the economic analysis and to support the negotiation of favorable MFN terms.

7. SOFR Transition and Tax Memoranda. Coordinate with Daniel Obi on the preparation and circulation of the SOFR transition memorandum, which will address the detailed benchmark mechanics for the new facility. Additionally, coordinate with Leonard Cross (Tax Group) on the tax treatment of the prepayment premium and the unamortized original issue discount from the Existing TLB, including the timing and characterization of any deductions or income recognition upon the refinancing.

We are available to discuss this memorandum at your convenience and to address any questions or additional analysis you may require. Please let us know if you would like to schedule a working session to review the Crescent Harbor term sheet in advance of the initial markup.

Appendix A — Summary Comparison Table: Existing TLB vs. Proposed New TLB

Appendix B — Estimated Payoff Calculation

The following table sets forth the estimated payoff amount for the Existing TLB as of the anticipated closing date (estimated July 21, 2022). All amounts are estimates and are subject to confirmation via a formal payoff letter from Greystone Federal Credit Corp.

Note: The foregoing estimate does not include (a) LIBOR breakage costs, if any (expected to be minimal if closing is timed to an interest period end date), (b) any unpaid administrative agent fees or unreimbursed expenses owed to Greystone under the Existing Credit Agreement, or (c) per diem interest adjustments for the actual closing date. The final payoff amount will be specified in the payoff letter from Greystone and should be confirmed no later than five (5) business days before closing.

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum has been prepared by Calderwood & Harkness LLP for the sole use of the named recipients in connection with the representation of Verimark Hospitality Group Inc. in Engagement No. 1016-00009. This memorandum is protected by the attorney-client privilege and the work product doctrine. Do not distribute, copy, or disclose this memorandum or any portion thereof without the prior written consent of Calderwood & Harkness LLP.

FROM:	Sophie Tremblay, Associate, Banking & Finance
TO:	Ian Blackwood, Partner, Banking & Finance
CC:	Stephanie Okafor, Partner, Banking & Finance; Daniel Obi, Associate, Banking & Finance
DATE:	April 14, 2022
RE:	Analysis of Existing Term Loan B Credit Agreement — Prepayment, Assignment, and Repricing Provisions
CLIENT / MATTER:	Verimark Hospitality Group Inc. / Proposed $700,000,000 Term Loan B Refinancing
ENGAGEMENT NO.:	1016-00009
Instrument	Outstanding Amount	Agent / Trustee	Maturity
Existing Term Loan B	$621,875,000	Greystone Federal Credit Corp.	Feb. 14, 2027
Senior Secured Revolving Credit Facility	$400,000,000 (undrawn)	Crescent Harbor Bank, N.A.	Feb. 14, 2025
Senior Unsecured Notes due 2028	$245,000,000	Atlantic Standard Trust Company	June 15, 2028
Total Funded Debt	~$866,875,000
Total Debt Capacity (incl. undrawn RCF)	~$1,266,875,000
Component	Amount
Principal outstanding	$621,875,000
Accrued and unpaid interest (estimated through July 21, 2022)	$2,916,667
Prepayment premium (0.50% × $625,000,000)	$3,125,000
Total Estimated Payoff	$627,916,667
Tenor	Credit Spread Adjustment
1-month	0.10% (10.00 bps)
3-month	0.15% (15.00 bps)
6-month	0.25% (25.00 bps)
Item	Estimated Amount
Prepayment premium (0.50% × $625,000,000)	$3,125,000
Accrued and unpaid interest (estimated through payoff date)	$2,916,667

LIBOR breakage costs (estimated; minimal if closing timed to interest period end date)	Minimal / TBD
New facility arrangement and underwriting fees (estimated)	Subject to fee letter
Legal and advisory fees	Subject to engagement terms
Item	Estimated Amount / Description
Annual interest savings from spread reduction ($700M × 50 bps)	~$3,500,000 per year
Transition from LIBOR to SOFR (elimination of LIBOR cessation risk)	Risk mitigation
Incremental proceeds ($700M - $621.875M = ~$78.125M before fees)	~$75,000,000 net
Improved covenant and basket flexibility	Qualitative
Consolidation of administrative agent role with Crescent Harbor (alignment with RCF agent)	Operational efficiency
Term	Existing TLB	Proposed New TLB
Facility Size	$625,000,000	$700,000,000
Administrative Agent	Greystone Federal Credit Corp.	Crescent Harbor Bank, N.A.
Applicable Margin	LIBOR + 425 bps	Adjusted Term SOFR + 375 bps
Interest Rate Floor	1.00% (LIBOR)	0.50% (SOFR)
Maturity	February 14, 2027	Estimated July 2029 (7-year tenor)
Amortization	1.00% per annum	1.00% per annum
Financial Covenant	Max. Total Net Leverage 5.0x (springing at 30% RCF utilization)	Max. Total Net Leverage 4.5x (springing at 35% RCF utilization)
MFN Provision	75 bps threshold / 12-month sunset (expired)	Proposed: 50 bps threshold / 18-month sunset
Repricing Protection (Soft Call)	1.00% / 24 months (expired Feb. 14, 2022)	Proposed: 1.00% / 6 months
General Prepayment Premium	0.50% through Feb. 14, 2023	TBD (to be negotiated)
Benchmark	USD LIBOR	Adjusted Term SOFR (CME)
Collateral	First lien, substantially all assets; pari passu with RCF	Substantially identical — first lien, pari passu with RCF
Governing Law	New York	New York
Component	Amount	Basis
Outstanding Principal	$621,875,000	$625,000,000 original principal less $3,125,000 in scheduled amortization

Accrued and Unpaid Interest (estimated)	$2,916,667	Estimated based on current all-in rate of approximately 5.25% and assumed 14-day accrual period
Prepayment Premium	$3,125,000	$625,000,000 × 0.50% (per Section 2.05(c) of the Existing Credit Agreement)
Total Estimated Payoff	$627,916,667

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
MEMORANDUM
I. Executive Summary
The purpose of this memorandum is to analyze the prepayment, assignment, and repricing provisions of Verimark Hospitality Group Inc.'s ("VHG" or the "Company") existing $625,000,000 Term Loan B credit agreement (the "Existing TLB") in order to identify the constraints, costs, and strategic considerations relevant to the proposed refinancing of the Existing TLB with a new $700,000,000 Term Loan B facility to be arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor"). This memorandum is intended to inform both the economic analysis of the proposed refinancing and the negotiation strategy for the definitive documentation of the new facility.
The Existing TLB was originated on February 14, 2020, pursuant to a Credit Agreement among VHG, as Borrower, the Guarantors party thereto, the Lenders party thereto, and Greystone Federal Credit Corp. ("Greystone"), as Administrative Agent and Collateral Agent. The original principal amount of the Existing TLB was $625,000,000. As of the anticipated payoff date in July 2022, the current outstanding principal balance is approximately $621,875,000, reflecting $3,125,000 in scheduled amortization payments made since origination (calculated as $625,000,000 × 1.00% per annum × 2 years = $6,250,000 in scheduled amortization less $3,125,000 in principal reduction, accounting for the quarterly amortization schedule and the application of payments through the estimated payoff date). The Existing TLB is a senior secured term loan facility bearing interest at LIBOR plus 425 basis points, with a LIBOR floor of 1.00%, and is governed by New York law.
Our key findings are as follows:
A full prepayment of the Existing TLB on or about the anticipated closing date of the new facility (currently estimated to be on or around July 21, 2022) will trigger a general prepayment premium of 0.50%, yielding an estimated prepayment cost of $3,125,000. This premium is calculated on the original $625,000,000 principal amount of the facility, as specified in the Existing Credit Agreement. While the separate 1.00% repricing protection (soft call) provision has expired as of February 14, 2022, the 0.50% general prepayment premium remains in effect until February 14, 2023.
The Existing TLB also contains assignment provisions, most favored nation ("MFN") mechanics applicable to incremental term loan incurrences, and other provisions analyzed herein that are relevant to the structuring and negotiation of the proposed new $700,000,000 TLB with Crescent Harbor.
Recommendation: We recommend that VHG proceed with the full payoff and refinancing of the Existing TLB. The $3,125,000 prepayment premium is economically justified by the anticipated 50 basis point reduction in stated spread (from LIBOR + 425 bps to Adjusted Term SOFR + 375 bps), which is expected to generate approximately $3,500,000 in annual interest savings on the larger $700,000,000 facility. On these economics, the simple payback period on the prepayment premium is less than one year — approximately 10.7 months. Additional benefits of the refinancing, including the transition from LIBOR to SOFR, $75,000,000 in incremental proceeds, enhanced covenant flexibility, and consolidation of the administrative agent role with Crescent Harbor, further support proceeding.
II. Background — The Existing TLB Facility
A. Overview of the Existing Credit Agreement
The Existing TLB is governed by that certain Credit Agreement dated as of February 14, 2020 (as amended, restated, supplemented, or otherwise modified from time to time, the "Existing Credit Agreement"), among Verimark Hospitality Group Inc., as Borrower, the Guarantors party thereto, the Lenders party thereto, and Greystone Federal Credit Corp., as Administrative Agent and Collateral Agent. The CUSIP number assigned to the Existing TLB is 92347LAA0.
The principal terms of the Existing TLB are summarized as follows:
Original Principal Amount. The original aggregate principal amount of the Existing TLB is $625,000,000. This amount was fully funded at closing on February 14, 2020, net of original issue discount ("OID") of 0.50% (i.e., the loans were funded at 99.50% of par, yielding net proceeds to VHG of approximately $621,875,000 at closing).
Current Outstanding Principal. As of the anticipated payoff date, the current outstanding principal balance is approximately $621,875,000. This reflects scheduled amortization payments totaling $3,125,000 paid since origination. The quarterly amortization installments of $1,562,500 each have been paid in accordance with the amortization schedule set forth in the Existing Credit Agreement. No voluntary or mandatory prepayments have been made to date.
Interest Rate. The Existing TLB bears interest at a rate per annum equal to LIBOR plus 425 basis points, subject to a LIBOR floor of 1.00%. The applicable LIBOR rate is determined based on the interest period selected by VHG (one-month, two-month, three-month, or six-month). VHG has customarily elected one-month interest periods. An alternate base rate option is also available under the Existing Credit Agreement, at a margin of 325 basis points over the base rate (defined as the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) the prime rate, and (c) one-month LIBOR plus 1.00%).
Maturity Date. The stated maturity date of the Existing TLB is February 14, 2027, representing a seven-year tenor from the closing date. All outstanding principal and accrued and unpaid interest are due and payable in full on the maturity date.
Amortization. The Existing TLB amortizes at a rate of 1.00% per annum of the original principal amount, payable in equal quarterly installments of $1,562,500 each. The balance of the principal is due at maturity. This 1.00% annual amortization rate is customary for institutional term loan B facilities in the hospitality sector. As noted above, approximately $3,125,000 in scheduled amortization has been paid through the anticipated payoff date, reducing the outstanding principal from $625,000,000 to approximately $621,875,000.
Guarantors. The obligations under the Existing TLB are unconditionally guaranteed, jointly and severally, by the following direct and indirect subsidiaries of VHG:
(a) Verimark Resort Properties LLC ("VRP");
(b) VHG Management Services Inc.;
(c) Verimark Convention Holdings LLC;
(d) Palmetto Beachfront Hotels LLC; and
(e) Cascadia Hospitality Corp.
These entities collectively represent substantially all of the operating subsidiaries of VHG and hold substantially all of the Company's material assets.
Collateral. The Existing TLB is secured by a first-priority lien (subject only to permitted liens) on substantially all assets of VHG and each Guarantor. The collateral package includes, without limitation: (i) fee simple and leasehold interests in 42 hotel properties owned by Verimark Resort Properties LLC (the "Mortgaged Properties"), subject to mortgages, deeds of trust, and related security documents in favor of Greystone as Collateral Agent; (ii) equity interests in each of the Guarantors and other direct subsidiaries of VHG; (iii) accounts receivable, inventory, equipment, and other personal property; (iv) intellectual property (including the "Verimark" brand trademarks and related hospitality marks); and (v) deposit accounts and securities accounts, subject to customary control agreements.
Pari Passu Sharing with the Revolving Credit Facility. The Existing TLB shares first-lien collateral on a pari passu basis with VHG's $400,000,000 senior secured revolving credit facility (the "RCF"), for which Crescent Harbor Bank, N.A. serves as administrative agent. The pari passu sharing arrangement is governed by an Intercreditor Agreement dated as of February 14, 2020, among Greystone (as TLB Collateral Agent), Crescent Harbor (as RCF Collateral Agent), VHG, and the Guarantors. Under the Intercreditor Agreement, upon any enforcement event, the proceeds of collateral are shared ratably between the TLB lenders and the RCF lenders based on their respective outstanding obligations, subject to customary waterfall provisions.
Governing Law. The Existing Credit Agreement is governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles (other than Section 5-1401 of the New York General Obligations Law). The parties have consented to the exclusive jurisdiction of the federal and state courts located in the Borough of Manhattan, City of New York.
B. Existing Capital Structure Context
An understanding of VHG's existing capital structure is important context for evaluating the refinancing and its implications. As of the date hereof, VHG's total funded debt is approximately $1.27 billion, comprising the following obligations:
The RCF is currently undrawn, and as such, total funded debt is approximately $866,875,000 ($621,875,000 under the Existing TLB plus $245,000,000 under the Senior Unsecured Notes). The total debt capacity, inclusive of the undrawn RCF commitment, is approximately $1.27 billion.
VHG reported the following financial results for fiscal year 2021: total revenue of approximately $1.42 billion, EBITDA of approximately $318 million, and Adjusted EBITDA (as defined in the Existing Credit Agreement, reflecting customary add-backs for non-cash charges, restructuring costs, transaction expenses, and pro forma adjustments) of approximately $341 million. Based on estimated net debt of approximately $858 million (total funded debt less unrestricted cash of approximately $9 million), VHG's net leverage ratio as of fiscal year-end 2021 was approximately 2.52x Adjusted EBITDA.
VHG currently maintains credit ratings of BB- from Kellaway Ratings Group and Ba3 from Pinnacle Credit Services. These ratings were affirmed following the Company's Q4 2021 earnings release, with stable outlooks from both agencies.
VHG's hotel portfolio consists of 74 full-service and select-service hotels across 18 states, with a combined appraised value of approximately $3.1 billion based on independent appraisals completed in Q3 2021. Of these, the 42 Mortgaged Properties owned by Verimark Resort Properties LLC and pledged as collateral under the Existing TLB and the RCF have an aggregate appraised value of approximately $2.18 billion, providing significant asset coverage for the existing secured indebtedness.
III. Prepayment Provisions
A. Voluntary Prepayment — General
Article II, Section 2.05(a) of the Existing Credit Agreement governs voluntary prepayments of the term loans. Pursuant to this provision, VHG is permitted to prepay the term loans in whole or in part at any time, subject to the following conditions:
Minimum Prepayment Amounts. Any partial voluntary prepayment of the term loans must be in a minimum principal amount of $1,000,000 and in integral multiples of $500,000 in excess thereof (or, if less, the entire outstanding principal amount of the term loans). A prepayment in full, as contemplated in the proposed refinancing, satisfies this threshold by definition.
Application of Prepayments. Voluntary prepayments are applied to the remaining scheduled amortization payments in direct order of maturity — that is, the prepayment is applied first to the next quarterly installment, then to the succeeding installments in chronological order. This is the standard LSTA formulation. In the case of a prepayment in full, this application order is moot, as all remaining scheduled installments and the maturity date balloon payment are paid simultaneously.
Notice Requirements. VHG is required to deliver irrevocable written notice to Greystone (as Administrative Agent) of any voluntary prepayment not less than three (3) business days prior to the prepayment date in the case of LIBOR-based borrowings, or one (1) business day prior to the prepayment date in the case of alternate base rate borrowings. Since VHG has historically maintained the term loans as LIBOR-based borrowings, the three business day notice period will apply. The notice must specify the prepayment date, the principal amount to be prepaid, and the type of borrowing being prepaid. Critically, the Existing Credit Agreement provides that such notice is irrevocable and obligates VHG to make the prepayment on the specified date. Accordingly, VHG should not deliver the prepayment notice until the closing of the new facility with Crescent Harbor is certain or, alternatively, the notice should be conditioned on the closing of the refinancing (though the Existing Credit Agreement does not explicitly contemplate conditional notices — this should be confirmed with Greystone).
LIBOR Breakage Costs. Section 2.16 of the Existing Credit Agreement provides that if any prepayment of LIBOR-based borrowings occurs on a day other than the last day of the applicable interest period, VHG shall compensate each affected lender for any loss, cost, or expense attributable to such prepayment, including any loss or expense arising from the liquidation or redeployment of deposits or other funds obtained by such lender to fund or maintain such borrowings. This is a customary LIBOR breakage/funding loss indemnification provision. As a practical matter, this means that if the prepayment date does not coincide with the end of the then-current interest period, VHG will be liable for breakage costs, which can be meaningful depending on the spread between the contract rate and the prevailing reinvestment rate, the remaining duration of the interest period, and the outstanding principal balance. Given the size of the facility, even modest breakage costs could be material. We therefore recommend coordinating the closing date of the refinancing to coincide with an interest period end date under the Existing TLB to minimize or eliminate breakage costs. VHG's treasury department (contact: Glenn Fischbach, Vice President, Treasury) should be consulted to confirm the current interest period end dates.
B. Prepayment Premium / Soft Call Protection
The Existing Credit Agreement contains two distinct prepayment-related premium provisions that must be carefully distinguished. These provisions are set forth in Section 2.05(b) and Section 2.05(c), respectively, and operate independently of one another.
1.00% Repricing Protection (Soft Call) — Expired. Section 2.05(b) of the Existing Credit Agreement contains a repricing protection provision — commonly referred to as a "soft call" — that was applicable during the first twenty-four (24) months following the closing date. Specifically, this provision required VHG to pay a prepayment premium equal to 1.00% of the aggregate principal amount of the term loans prepaid in connection with any "Repricing Transaction." The term "Repricing Transaction" is defined in the Existing Credit Agreement to include (a) any prepayment or refinancing of the term loans with the proceeds of any new or replacement term loan facility having a lower effective interest rate or weighted average yield and (b) any amendment to the Existing Credit Agreement that reduces the applicable interest rate margin or weighted average yield of the term loans. The soft call period ran from February 14, 2020 (the closing date) through February 14, 2022 (the second anniversary of the closing date). This period has now expired. As of the date of this memorandum (April 14, 2022), the soft call provision is no longer operative, and the 1.00% repricing protection premium would not be triggered by the proposed refinancing.
0.50% General Prepayment Premium — Still in Effect. Section 2.05(c) of the Existing Credit Agreement contains a separate, general prepayment premium applicable to any voluntary prepayment in full of the term loans occurring prior to the third anniversary of the closing date — that is, prior to February 14, 2023. This premium is calculated at a rate of 0.50% of the original principal amount of the facility ($625,000,000), regardless of the amount of principal actually outstanding at the time of prepayment. The calculation is as follows:
$625,000,000 × 0.50% = $3,125,000
This 0.50% general prepayment premium remains in effect as of the anticipated payoff date (estimated to be on or about July 21, 2022), since that date falls approximately seven months before the February 14, 2023 expiration of the premium period. The proposed refinancing, which would involve a full prepayment of all outstanding term loans under the Existing Credit Agreement with the proceeds of a new term loan facility, constitutes a voluntary prepayment in full and therefore triggers this premium.
Post-February 14, 2023. After February 14, 2023, no prepayment premium of any kind applies under the Existing Credit Agreement, and the term loans may be prepaid in whole or in part at par (plus accrued interest and any applicable breakage costs). If VHG were willing to delay the refinancing until after February 14, 2023, the $3,125,000 premium could be avoided entirely. However, as discussed in Section VIII below, the interest savings from the proposed refinancing are sufficient to justify an earlier closing date and the absorption of the premium, and VHG has expressed a preference for closing in July 2022 in order to deploy the incremental $75,000,000 in proceeds toward anticipated hotel acquisitions in the second half of 2022.
Important Distinction. To reiterate: the 1.00% soft call provision (Section 2.05(b)) and the 0.50% general prepayment premium provision (Section 2.05(c)) are distinct and independent. The soft call has expired; the general premium has not. This distinction is occasionally conflated in practice, and it is important that VHG's management and treasury teams understand that a premium will still apply notwithstanding the expiration of the soft call.
C. Mandatory Prepayments
Section 2.06 of the Existing Credit Agreement sets forth customary mandatory prepayment provisions applicable to the term loans. These provisions are summarized below.
Excess Cash Flow Sweep. VHG is required to prepay the term loans annually with a specified percentage of "Excess Cash Flow" (as defined in the Existing Credit Agreement) for each fiscal year, subject to the following step-downs based on the Company's net leverage ratio:
(a) 50% of Excess Cash Flow if the Total Net Leverage Ratio is greater than or equal to 3.5x;
(b) 25% of Excess Cash Flow if the Total Net Leverage Ratio is less than 3.5x but greater than or equal to 2.5x; and
(c) 0% of Excess Cash Flow if the Total Net Leverage Ratio is less than 2.5x.
For fiscal year 2021, VHG's Total Net Leverage Ratio was approximately 2.52x (based on estimated net debt of approximately $858 million divided by Adjusted EBITDA of $341 million). This ratio is very close to the 2.5x threshold at which the ECF sweep percentage steps down to 0%. Whether VHG is at 0% or 25% for the FY2021 sweep depends on the precise calculation of net debt and Adjusted EBITDA under the definitions in the Existing Credit Agreement (which may differ modestly from management's reported figures due to definitional adjustments). If VHG's Total Net Leverage Ratio is at or below 2.5x, no ECF prepayment will be required for FY2021, which reduces the risk of mandatory prepayment reducing the outstanding principal balance before the refinancing closes. We recommend confirming the precise FY2021 ECF sweep obligation with VHG's financial team.
Asset Sale Proceeds. VHG is required to prepay the term loans with 100% of the net cash proceeds from any sale, transfer, or other disposition of assets (other than sales in the ordinary course of business and subject to certain other exceptions) in excess of $15,000,000 in any fiscal year. This mandatory prepayment is subject to customary reinvestment rights — VHG may reinvest such proceeds in assets useful in its business within twelve (12) months following receipt (or, if VHG has entered into a binding commitment to reinvest within such 12-month period, within an additional six (6) months thereafter, for a total reinvestment period of up to 18 months). VHG has not made any material asset dispositions since the closing of the Existing TLB that would have triggered this provision.
Debt Incurrence Proceeds. VHG is required to prepay the term loans with 100% of the net cash proceeds from any incurrence of indebtedness by VHG or any of its restricted subsidiaries (other than indebtedness expressly permitted under the Existing Credit Agreement, including incremental term loans, permitted refinancing indebtedness, and other specified exceptions).
Casualty and Condemnation Proceeds. VHG is required to prepay the term loans with net cash proceeds received in respect of any casualty event or condemnation affecting the collateral, subject to customary reinvestment rights consistent with the asset sale reinvestment provisions described above.
Application and Premium. Mandatory prepayments are applied pro rata among the term loan lenders based on their respective outstanding principal amounts, and are generally applied to the remaining scheduled amortization installments in inverse order of maturity (i.e., the farthest-out installments are reduced first), although the Existing Credit Agreement should be confirmed on this point. Critically, mandatory prepayments do not trigger any prepayment premium under the Existing Credit Agreement. The 0.50% general prepayment premium discussed in Section III.B above applies only to voluntary prepayments.
Relevance to the Refinancing. The proposed refinancing of the Existing TLB with the proceeds of the new $700,000,000 facility constitutes a voluntary prepayment in full, not a mandatory prepayment triggered by any of the events described above. Accordingly, the 0.50% prepayment premium applies. There is no basis in the Existing Credit Agreement to characterize the prepayment as mandatory in order to avoid the premium.
D. Total Estimated Payoff Amount
Based on the foregoing analysis, we estimate the total payoff amount for the Existing TLB as of the anticipated closing date (estimated July 21, 2022) to be as follows:
The accrued interest estimate of $2,916,667 is based on the assumption that the closing date will fall approximately 14 days into a one-month interest period, using the current all-in interest rate of approximately 5.25% (LIBOR floor of 1.00% + 425 bps margin). This estimate is necessarily preliminary and will vary depending on the actual closing date, the applicable LIBOR rate at the time, and the interest period in effect.
LIBOR Breakage Costs. If the closing does not coincide with an interest period end date, LIBOR breakage costs may also apply, as discussed in Section III.A above. We estimate that breakage costs would be minimal if the closing is timed to fall on or near an interest period end date; if not, breakage costs could range from negligible to several hundred thousand dollars depending on market conditions. This amount is not included in the estimate above.
Payoff Letter. The final payoff amount must be confirmed via a formal payoff letter from Greystone Federal Credit Corp. in its capacity as Administrative Agent. The payoff letter will specify the exact principal balance, accrued interest, prepayment premium, per diem interest rate, wire instructions for funds transfer, and any other amounts due and owing under the Existing Credit Agreement (including any outstanding administrative fees or unreimbursed expenses). We recommend requesting the payoff letter from Marion Stillwell, Vice President, Agency Services, Greystone Federal Credit Corp., no later than five (5) business days before the anticipated closing date to allow sufficient time for review and resolution of any discrepancies. The payoff letter should also include Greystone's authorization for the filing of UCC-3 termination statements and the release of mortgages, pledges, and other security interests upon receipt of the payoff amount (discussed further in Section IV.C below).
IV. Assignment and Transfer Provisions
A. Lender Assignments
Article X, Section 10.04 of the Existing Credit Agreement governs assignments of term loan interests by lenders. The relevant provisions are summarized below.
General Right to Assign. Each lender under the Existing TLB is permitted to assign all or a portion of its rights and obligations under the Existing Credit Agreement (including its outstanding term loan principal) to one or more eligible assignees, subject to the conditions set forth in the Existing Credit Agreement.
Minimum Assignment Amount. Any assignment must be in a minimum aggregate principal amount of $1,000,000 (or, if less, the entire remaining principal amount held by the assigning lender). This minimum threshold is intended to prevent excessive fragmentation of the lending syndicate.
Consent of the Administrative Agent. The consent of Greystone (as Administrative Agent) is required for any assignment, and such consent shall not be unreasonably withheld, conditioned, or delayed. Greystone is deemed to have consented if it has not responded within ten (10) business days of receiving an assignment request.
Borrower Consent. Borrower consent requirements depend on the identity of the proposed assignee:
(a) Assignments to existing lenders or their affiliates. No consent of VHG is required for any assignment to a person that is already a lender under the Existing Credit Agreement or to an affiliate of such lender.
(b) Assignments to other eligible assignees. VHG's consent is required for assignments to any other eligible assignee, and such consent shall not be unreasonably withheld or delayed. VHG is deemed to have consented if it has not responded within ten (10) business days of receiving written notice of the proposed assignment.
(c) Exception during events of default. Notwithstanding the foregoing, no consent of VHG is required for any assignment made during the continuance of an Event of Default under the Existing Credit Agreement.
Assignment Processing Fee. A processing fee of $3,500 is payable to Greystone (as Administrative Agent) in connection with each assignment. This fee is typically borne by the assigning lender, although the parties to the assignment may allocate it differently by agreement.
Form of Assignment. All assignments must be effected using the form of Assignment and Assumption Agreement attached as Exhibit E to the Existing Credit Agreement. Upon execution and delivery of a completed Assignment and Assumption Agreement to Greystone, and payment of the processing fee, the assignment becomes effective on the date specified therein. Greystone maintains a register of all lenders and their respective interests, and updates the register upon each valid assignment.
Disqualified Institutions. The Existing Credit Agreement contains a "Disqualified Institutions" concept, which restricts assignments to certain identified parties. VHG maintains a list of Disqualified Institutions, which may include no more than twenty-five (25) named entities plus their respective affiliates. The list generally identifies competitors of VHG in the hospitality industry and certain distressed debt funds or special situations investors. Any purported assignment to a Disqualified Institution is void ab initio — that is, it has no legal effect and does not transfer any rights or obligations. Greystone, as Administrative Agent, is required to check proposed assignments against the Disqualified Institutions list and may decline to process any assignment that would violate this restriction. The current Disqualified Institutions list should be reviewed in connection with the syndication of the new facility to ensure that the same or similar protections are included in the new Credit Agreement with Crescent Harbor.
B. Participations. Section 10.04(c) of the Existing Credit Agreement permits lenders to sell participations in their term loans to one or more eligible participants without the prior consent of VHG or any other party. Participations are economically equivalent to a partial transfer of economic interest in the term loans but do not constitute an assignment for purposes of the Existing Credit Agreement. The selling lender remains the lender of record and retains all voting and administrative rights.
Voting Rights of Participants. Participants generally do not have direct voting rights under the Existing Credit Agreement. The selling lender exercises all voting rights on behalf of participants, except that the selling lender may not, without the written consent of the affected participant, agree to any amendment, modification, or waiver that would (a) reduce the interest rate or extend the maturity date of the term loans, (b) reduce the principal amount of the term loans, (c) release all or substantially all of the collateral securing the term loans, or (d) release all or substantially all of the Guarantors from their guarantee obligations. These are the customary "sacred rights" that are protected at the individual lender (and participant) level.
Withholding Tax Considerations. Participants are required to provide the selling lender with applicable tax documentation (including IRS Form W-8 or W-9, as applicable). Importantly, VHG is not obligated to pay any additional amounts to a participant under the gross-up or tax indemnification provisions of the Existing Credit Agreement beyond the amounts it would have been required to pay to the selling lender had no participation been sold. This ensures that VHG's tax exposure is not increased by virtue of a lender's decision to sell participations.
C. Implications for the Refinancing
The assignment and transfer provisions of the Existing Credit Agreement have several implications for the proposed refinancing.
Existing Lender Participation in the New Facility. Certain existing lenders under the Greystone facility may wish to participate in the syndication of the new $700,000,000 TLB with Crescent Harbor. The assignment provisions of the Existing Credit Agreement do not contain any restriction that would prevent an existing lender from simultaneously being a lender under the new facility. Such "roll" arrangements are common in the leveraged loan market and facilitate efficient syndication. To the extent existing lenders wish to participate in the new facility, no assignment under the Existing Credit Agreement is necessary — the Existing TLB will simply be paid off in full and the existing lender will fund its commitment under the new facility pursuant to the new Credit Agreement.
Termination of Commitments and Interests. The full payoff and discharge of the Existing TLB will terminate all lenders' commitments and interests under the Existing Credit Agreement. No assignment mechanics are needed for the refinancing itself. Upon receipt of the payoff amount, Greystone (as Administrative Agent) will be required to acknowledge that all obligations under the Existing Credit Agreement have been paid in full and satisfied.
Lien Release and UCC-3 Terminations. Upon the full repayment of the Existing TLB, Greystone (as Collateral Agent) will be required to authorize and execute (or cause to be executed) UCC-3 termination statements with respect to all UCC-1 financing statements filed against VHG and the Guarantors, as well as mortgage discharges, releases of deeds of trust, and other instruments necessary to release the security interests and liens securing the Existing TLB. This must be addressed in the payoff letter and, ideally, in a separate lien release authorization executed by Greystone concurrently with the payoff. Our real estate colleagues should prepare and pre-negotiate the forms of mortgage release for each of the 42 Mortgaged Properties to facilitate prompt recording post-closing. We note that the new facility with Crescent Harbor will require the grant of first-priority liens on substantially the same collateral package; the timing of the lien release and regrant must be coordinated to ensure there is no gap in security coverage and to minimize recording fees and transfer taxes (to the extent applicable in the relevant jurisdictions).
V. Repricing and Most Favored Nation (MFN) Provisions
A. Existing Repricing Protection
As discussed in detail in Section III.B above, the Existing Credit Agreement included a repricing protection provision (soft call) requiring VHG to pay a 1.00% premium on any Repricing Transaction occurring during the first twenty-four (24) months following the closing date — that is, from February 14, 2020 through February 14, 2022. This repricing protection has now expired. The proposed refinancing, which would occur in July 2022, constitutes a "Repricing Transaction" as defined in the Existing Credit Agreement (insofar as it involves a prepayment of the existing term loans with the proceeds of a new term loan facility having a lower effective yield). However, because the 24-month soft call period has lapsed, the 1.00% repricing protection premium is not triggered.
The separate 0.50% general prepayment premium, which remains in effect through February 14, 2023 and is triggered by any voluntary prepayment in full (regardless of whether it constitutes a Repricing Transaction), continues to apply as described in Section III.B.
B. Existing MFN Provisions
Section 2.14(d) of the Existing Credit Agreement contains a most favored nation ("MFN") provision applicable to incremental term loans incurred under the incremental facility (the "Incremental Term Loan Facility") established pursuant to Section 2.14 of the Existing Credit Agreement. The MFN provision is designed to protect existing term loan lenders from economic dilution in the event that VHG incurs additional incremental term loans at a higher effective yield than the existing term loans.
The principal terms of the MFN provision are as follows:
MFN Threshold. If VHG incurred incremental term loans with an effective yield (defined to include applicable margin, OID amortized over a four-year assumed life, and interest rate floor differential) exceeding the effective yield of the Existing TLB by more than 75 basis points, the applicable margin on the Existing TLB would be automatically increased by the amount of such excess over the 75 basis point threshold. For example, if incremental term loans were issued at an effective yield of LIBOR + 600 bps (effective yield exceeding the Existing TLB's effective yield by more than 75 bps), the margin on the Existing TLB would be increased to eliminate the excess above 75 bps.
MFN Sunset. The MFN provision was subject to a sunset of twelve (12) months from the closing date of the Existing TLB — that is, the MFN protection was operative only from February 14, 2020 through February 14, 2021. This sunset has long since expired, and the MFN provision has no current operative effect. No incremental term loans were incurred under the Existing Credit Agreement during the MFN period or at any time thereafter, and VHG did not have occasion to test the MFN mechanics during the life of the Existing TLB.
Incremental Facility Terms. For context, the Existing Credit Agreement permits VHG to incur incremental term loans in an aggregate principal amount of up to $250,000,000 (the "free-and-clear basket") plus additional amounts subject to a pro forma Total Net Leverage Ratio not exceeding 3.5x. The incremental facility was not utilized during the term of the Existing TLB.
C. Implications for Negotiation of the New Facility
The existing facility's MFN provision (75 bps threshold with a 12-month sunset) provides a useful reference point for the negotiation of the new $700,000,000 TLB with Crescent Harbor. However, market terms for leveraged loan facilities have evolved since the origination of the Existing TLB in February 2020, and VHG should seek to negotiate more borrower-favorable MFN and repricing protection terms in the new facility. Our specific recommendations are as follows:
MFN Threshold. The market for BB-rated credits in the current environment has generally moved toward a 50 basis point MFN threshold (down from the 75 bps threshold that was more common in 2019–2020). We recommend that VHG target a 50 bps MFN threshold in the new facility. A narrower threshold provides greater protection to the initial term loan lenders but also constrains VHG's flexibility to incur incremental debt at market rates without triggering a margin step-up on the initial tranche. The 50 bps level represents a reasonable compromise and is consistent with recent precedent transactions in the hospitality sector.
MFN Sunset Period. We recommend negotiating an 18-month MFN sunset period in the new facility (compared to the 12-month sunset in the Existing TLB). An 18-month sunset provides VHG with the flexibility to incur incremental term loans after the sunset without triggering margin adjustments on the initial TLB, which is particularly important given VHG's stated acquisition strategy for 2023 and beyond, which may require incremental financing. The 18-month sunset is consistent with market practice for borrower-favorable transactions in the current environment, though some lender-favorable deals have featured 24-month sunsets. We believe 18 months is achievable given VHG's credit profile and the competitive dynamics of the proposed syndication.
Definition of "Effective Yield." The definition of "effective yield" for MFN purposes is a critical negotiation point. We recommend that the definition in the new facility include the following components:
(a) the applicable margin (stated spread);
(b) any OID or upfront fees, amortized over an assumed four-year life (consistent with LSTA conventions);
(c) any interest rate floor differential (i.e., the economic value of the difference between the SOFR floor on the incremental tranche and the SOFR floor on the initial tranche, to the extent it results in a higher effective rate); and
The definition should exclude the following:
(d) arrangement fees, underwriting fees, and structuring fees (which are one-time payments to arrangers and not reflective of the ongoing yield to lenders);
(e) commitment fees;
(f) administrative agent fees; and
(g) other one-time, transaction-specific fees.
This formulation ensures that the MFN protection captures genuine yield differentials while preventing the inclusion of fees that do not represent the ongoing economic return to lenders.
Repricing Protection (Soft Call) for the New Facility. Market standard for new TLB issuances in mid-2022 is a six (6)-month soft call at a 1.00% premium. We recommend that VHG accept a 1.00% / 6-month soft call as standard in the new facility and resist any effort by Crescent Harbor or the syndicate lenders to extend the soft call period to twelve (12) months or longer. A 6-month soft call period provides adequate protection to lenders while preserving VHG's flexibility to reprice the facility in early 2023 if market conditions improve. We note that some recent deals in the BB space have featured 6-month soft calls with an additional 0.50% general prepayment premium for months 7–12; we would recommend resisting this structure as well, given that it effectively extends the prepayment penalty beyond the standard soft call period.
MFN and Incremental Facility Interaction. The interaction between the MFN provision and the various incremental facility baskets in the new Credit Agreement should be carefully negotiated. In particular, we recommend that incremental term loans structured as "ratio debt" (i.e., subject solely to a leverage-based incurrence test, without a free-and-clear component) be excluded from the MFN provision. This carve-out has precedent in several recent transactions and reflects the rationale that ratio-debt incremental facilities are incurred based on the borrower's credit strength and should not automatically trigger MFN adjustments on the initial tranche. Similarly, incremental facilities that are structurally subordinated or that have a later maturity than the initial TLB should arguably be excluded from MFN, as their terms are not directly comparable to the initial tranche.
VI. Benchmark / LIBOR Considerations
The Existing TLB is a LIBOR-based facility, bearing interest at LIBOR plus 425 basis points with a LIBOR floor of 1.00%. The Existing Credit Agreement contains fallback language for LIBOR cessation, providing for an amendment-based approach to transition to an alternative benchmark rate in the event that LIBOR becomes unavailable. Under this approach, VHG and Greystone (as Administrative Agent) would be required to negotiate in good faith an amendment to designate a successor benchmark rate, subject to "negative consent" by the required lenders (i.e., the amendment would become effective unless a majority of lenders object within a specified period).
The proposed refinancing will render the LIBOR cessation fallback provisions moot, as the Existing TLB will be repaid in full and replaced with a new facility that references Adjusted Term SOFR (the Secured Overnight Financing Rate, as published by the CME Group). The transition from LIBOR to SOFR is a significant structural element of the refinancing and eliminates the operational and legal risk associated with LIBOR cessation, which is expected to occur on June 30, 2023 for the remaining USD LIBOR tenors.
The new facility will reference CME Term SOFR plus a credit spread adjustment ("CSA"), consistent with the recommendations of the Alternative Reference Rates Committee ("ARRC"). The applicable CSAs are:
These credit spread adjustments are designed to account for the structural difference between LIBOR (which embeds a bank credit risk premium) and SOFR (which is a nearly risk-free overnight rate). In practice, the CSA is added to Term SOFR to produce "Adjusted Term SOFR," which is the benchmark used to calculate interest under the new facility.
Effective Margin Comparison. The effective margin comparison between the Existing TLB and the proposed new facility is as follows:
Existing TLB: LIBOR + 425 bps (with 1.00% LIBOR floor)
Proposed New TLB: Adjusted Term SOFR + 375 bps (with 0.50% SOFR floor), where Adjusted Term SOFR = Term SOFR + applicable CSA
The stated spread reduction is 50 basis points (from 425 bps to 375 bps). Taking into account the SOFR credit spread adjustment (approximately 10–15 bps for one-month and three-month tenors, which are most commonly elected), the all-in benchmark rate under the new facility would be approximately 10–15 bps higher than a comparable Term SOFR-only rate, but the net economic savings relative to the Existing TLB remain in the range of 40–50 basis points. Additionally, the reduction in the interest rate floor from 1.00% (LIBOR) to 0.50% (SOFR) provides incremental economic benefit to VHG in a rising rate environment, as the floor is less likely to be binding. At current SOFR levels (approximately 0.30–0.33% for one-month Term SOFR as of early April 2022), the floor is close to binding under the new facility, but is expected to become less relevant as the Federal Reserve continues its rate normalization cycle.
On a $700,000,000 facility, a 50 basis point spread reduction translates to approximately $3,500,000 in annual interest savings, assuming the benchmark rate is above the applicable floor. This calculation underpins the economic justification for the refinancing and the payback analysis on the prepayment premium discussed in Section VIII below.
A separate memorandum on the SOFR transition mechanics — including the detailed benchmark definition, interest period conventions, Term SOFR "lookback" mechanics, and benchmark replacement waterfall provisions for the new Credit Agreement — is being prepared by Daniel Obi and will be circulated under separate cover.
VII. Other Relevant Provisions
A. Change of Control
Section 7.01(h) of the Existing Credit Agreement contains a customary change of control provision. Under this provision, a "Change of Control" constitutes an Event of Default and requires VHG to offer to prepay the term loans in full at 101% of the outstanding principal amount (plus accrued and unpaid interest). A "Change of Control" is defined to include, among other things: (a) the acquisition by any person or group (other than permitted holders) of more than 35% of the total voting power of VHG's outstanding equity interests; (b) the failure of VHG to own, directly or indirectly, 100% of the equity interests in each Guarantor; and (c) a change in the majority of the members of VHG's board of directors that is not approved by the existing board.
The proposed refinancing does not involve a change of control event, and this provision is not directly triggered. However, we flag this provision for two reasons: (i) the change of control definition and prepayment premium (101% of par) in the Existing Credit Agreement should be reviewed for consistency with the corresponding provisions in the new Credit Agreement with Crescent Harbor, and (ii) VHG's private equity sponsors (Edgewater Capital Partners and Lakeview Strategic Equity, who collectively hold approximately 52% of VHG's equity) should be aware of the change of control triggers in both the existing and new facilities in connection with any future ownership transactions.
B. Financial Covenants
The Existing TLB contains a springing financial maintenance covenant, which is tested only when certain conditions are met. Specifically, Section 6.10 of the Existing Credit Agreement requires VHG to maintain a Maximum Total Net Leverage Ratio of not greater than 5.0 to 1.0, tested quarterly on the last day of each fiscal quarter, but only when the aggregate outstanding principal amount of revolving loans and swingline loans under the RCF, plus the aggregate face amount of outstanding letters of credit (excluding undrawn letters of credit up to $10,000,000), exceeds 30% of the total revolving commitments under the RCF (i.e., 30% × $400,000,000 = $120,000,000).
The RCF is currently undrawn, and the springing financial covenant has not been tested since the origination of the Existing TLB. VHG's current Total Net Leverage Ratio of approximately 2.52x provides substantial headroom relative to the 5.0x covenant level.
The proposed new $700,000,000 TLB with Crescent Harbor contemplates a modestly tighter financial covenant structure: a Maximum Total Net Leverage Ratio of 4.5 to 1.0, with a springing test triggered when RCF utilization exceeds 35% of total revolving commitments (i.e., 35% × $400,000,000 = $140,000,000). The tighter leverage ratio (4.5x vs. 5.0x) is offset by the higher RCF utilization trigger (35% vs. 30%), which makes it less likely that the covenant will be tested. At VHG's current pro forma leverage of approximately 2.52x (or approximately 2.74x pro forma for the $75,000,000 in incremental term loan proceeds, depending on how incremental cash is deployed), the Company has approximately 1.76x–1.98x of covenant headroom, which is more than adequate.
A detailed covenant build comparison and compliance analysis for the proposed new facility will be addressed in a separate memorandum.
C. Negative Covenants / Restricted Payments
Article VI of the Existing Credit Agreement contains customary negative covenants applicable to VHG and its restricted subsidiaries, including limitations on:
(a) the incurrence of additional indebtedness;
(b) the creation or existence of liens;
(c) restricted payments (including dividends, distributions, and equity repurchases);
(d) sales, transfers, and other dispositions of assets;
(e) transactions with affiliates;
(f) restrictive agreements (negative pledge and anti-layering provisions);
(g) amendments to material agreements and organizational documents; and
(h) changes in lines of business.
Each of these negative covenants is subject to various exceptions, carve-outs, and baskets that provide VHG with operational flexibility. Upon the full repayment and discharge of the Existing TLB, all negative covenants under the Existing Credit Agreement will cease to have force and effect. The new Credit Agreement with Crescent Harbor should be drafted with fresh covenant baskets that are calibrated to VHG's current capital structure, business needs, and growth strategy. In particular, VHG should seek to negotiate enhanced flexibility in the following areas: (i) the restricted payments covenant (to accommodate VHG's dividend policy and any share repurchase programs), (ii) the indebtedness covenant (to provide adequate capacity for incremental financing and acquisition-related debt), and (iii) the asset sale covenant (to reflect VHG's ongoing portfolio optimization strategy, which may involve dispositions of non-core hotel assets).
These negotiation points will be addressed in detail in the initial term sheet markup and the definitive documentation negotiations with Crescent Harbor.
VIII. Cost-Benefit Summary of Prepayment
The following table summarizes the estimated costs and benefits of the proposed refinancing:
Costs:
Benefits:
Payback Analysis. The simple payback period on the $3,125,000 prepayment premium is calculated as follows:
$3,125,000 ÷ $3,500,000 = approximately 10.7 months
This payback period is well within one year, meaning that the cumulative interest savings from the spread reduction will exceed the prepayment premium cost by approximately month 11 of the new facility. Over the full remaining life of the Existing TLB (which had approximately 4.6 years remaining to maturity), the net present value of the interest savings significantly exceeds the prepayment cost.
Conclusion. The economics of the proposed refinancing strongly favor proceeding with the full payoff of the Existing TLB and absorbing the $3,125,000 prepayment premium. The combination of meaningful annual interest savings, the transition to SOFR, the availability of incremental proceeds for VHG's acquisition pipeline, the opportunity to negotiate improved documentation terms, and the consolidation of the agent role with Crescent Harbor collectively present a compelling case for the refinancing. We recommend that VHG move forward with the proposed July 2022 closing timeline.
IX. Recommended Next Steps
Based on the foregoing analysis, we recommend the following next steps to advance the proposed refinancing:
1. Obtain Payoff Quote. Request and obtain a formal payoff letter and quote from Greystone Federal Credit Corp. (contact: Marion Stillwell, Vice President, Agency Services, 200 Park Avenue South, 22nd Floor, New York, NY 10003; telephone: (212) 555-4820). The payoff letter should specify the outstanding principal balance, accrued interest, prepayment premium, per diem interest, wire instructions, and lien release authorization. We recommend initiating this request no later than five (5) business days before the anticipated closing date.
2. Confirm Per Diem and Breakage Costs. Confirm the per diem interest rate and any applicable LIBOR breakage costs with Greystone's agency services desk. This information is necessary to optimize the selection of the closing date and to finalize the payoff amount.
3. Coordinate on Interest Period End Dates. Coordinate with VHG treasury (Glenn Fischbach, Vice President, Treasury) to identify the current and upcoming interest period end dates under the Existing TLB. The closing date for the refinancing should be scheduled to coincide with an interest period end date, if practicable, to minimize or eliminate LIBOR breakage costs.
4. Negotiate Borrower-Favorable Terms in the New Facility. Use the analysis of the existing MFN provision (75 bps threshold / 12-month sunset) and repricing protection (1.00% premium / 24-month soft call) provisions as a benchmark and negotiating lever for obtaining more borrower-favorable terms in the new facility. Specifically, VHG should target a 50 bps MFN threshold with an 18-month sunset, and a 1.00% soft call premium with a 6-month period. These positions are consistent with current market practice for BB-rated hospitality credits and represent an improvement over the Existing TLB terms.
5. Prepare Initial Term Sheet Markup. Begin preparation of the initial markup of the term sheet based on the Crescent Harbor proposal received on April 22, 2022. The markup should reflect the negotiating positions outlined in this memorandum, including the MFN, repricing protection, covenant, and benchmark provisions.
6. Coordinate with Financial Advisor. Discuss the effective yield definition methodology for MFN purposes with VHG's financial advisor, Meridian Strauss Advisory LLC (contact: Elise Cavanaugh, Managing Director), to ensure alignment on the economic analysis and to support the negotiation of favorable MFN terms.
7. SOFR Transition and Tax Memoranda. Coordinate with Daniel Obi on the preparation and circulation of the SOFR transition memorandum, which will address the detailed benchmark mechanics for the new facility. Additionally, coordinate with Leonard Cross (Tax Group) on the tax treatment of the prepayment premium and the unamortized original issue discount from the Existing TLB, including the timing and characterization of any deductions or income recognition upon the refinancing.
We are available to discuss this memorandum at your convenience and to address any questions or additional analysis you may require. Please let us know if you would like to schedule a working session to review the Crescent Harbor term sheet in advance of the initial markup.
Appendix A — Summary Comparison Table: Existing TLB vs. Proposed New TLB
Appendix B — Estimated Payoff Calculation
The following table sets forth the estimated payoff amount for the Existing TLB as of the anticipated closing date (estimated July 21, 2022). All amounts are estimates and are subject to confirmation via a formal payoff letter from Greystone Federal Credit Corp.
Note: The foregoing estimate does not include (a) LIBOR breakage costs, if any (expected to be minimal if closing is timed to an interest period end date), (b) any unpaid administrative agent fees or unreimbursed expenses owed to Greystone under the Existing Credit Agreement, or (c) per diem interest adjustments for the actual closing date. The final payoff amount will be specified in the payoff letter from Greystone and should be confirmed no later than five (5) business days before closing.
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum has been prepared by Calderwood & Harkness LLP for the sole use of the named recipients in connection with the representation of Verimark Hospitality Group Inc. in Engagement No. 1016-00009. This memorandum is protected by the attorney-client privilege and the work product doctrine. Do not distribute, copy, or disclose this memorandum or any portion thereof without the prior written consent of Calderwood & Harkness LLP.
FROM: | Sophie Tremblay, Associate, Banking & Finance
TO: | Ian Blackwood, Partner, Banking & Finance
CC: | Stephanie Okafor, Partner, Banking & Finance; Daniel Obi, Associate, Banking & Finance
DATE: | April 14, 2022
RE: | Analysis of Existing Term Loan B Credit Agreement — Prepayment, Assignment, and Repricing Provisions
CLIENT / MATTER: | Verimark Hospitality Group Inc. / Proposed $700,000,000 Term Loan B Refinancing
ENGAGEMENT NO.: | 1016-00009
Instrument | Outstanding Amount | Agent / Trustee | Maturity
Existing Term Loan B | $621,875,000 | Greystone Federal Credit Corp. | Feb. 14, 2027
Senior Secured Revolving Credit Facility | $400,000,000 (undrawn) | Crescent Harbor Bank, N.A. | Feb. 14, 2025
Senior Unsecured Notes due 2028 | $245,000,000 | Atlantic Standard Trust Company | June 15, 2028
Total Funded Debt | ~$866,875,000
Total Debt Capacity (incl. undrawn RCF) | ~$1,266,875,000
Component | Amount
Principal outstanding | $621,875,000
Accrued and unpaid interest (estimated through July 21, 2022) | $2,916,667
Prepayment premium (0.50% × $625,000,000) | $3,125,000
Total Estimated Payoff | $627,916,667
Tenor | Credit Spread Adjustment
1-month | 0.10% (10.00 bps)
3-month | 0.15% (15.00 bps)
6-month | 0.25% (25.00 bps)
Item | Estimated Amount
Prepayment premium (0.50% × $625,000,000) | $3,125,000
Accrued and unpaid interest (estimated through payoff date) | $2,916,667
LIBOR breakage costs (estimated; minimal if closing timed to interest period end date) | Minimal / TBD
New facility arrangement and underwriting fees (estimated) | Subject to fee letter
Legal and advisory fees | Subject to engagement terms
Item | Estimated Amount / Description
Annual interest savings from spread reduction ($700M × 50 bps) | ~$3,500,000 per year
Transition from LIBOR to SOFR (elimination of LIBOR cessation risk) | Risk mitigation
Incremental proceeds ($700M - $621.875M = ~$78.125M before fees) | ~$75,000,000 net
Improved covenant and basket flexibility | Qualitative
Consolidation of administrative agent role with Crescent Harbor (alignment with RCF agent) | Operational efficiency
Term | Existing TLB | Proposed New TLB
Facility Size | $625,000,000 | $700,000,000
Administrative Agent | Greystone Federal Credit Corp. | Crescent Harbor Bank, N.A.
Applicable Margin | LIBOR + 425 bps | Adjusted Term SOFR + 375 bps
Interest Rate Floor | 1.00% (LIBOR) | 0.50% (SOFR)
Maturity | February 14, 2027 | Estimated July 2029 (7-year tenor)
Amortization | 1.00% per annum | 1.00% per annum
Financial Covenant | Max. Total Net Leverage 5.0x (springing at 30% RCF utilization) | Max. Total Net Leverage 4.5x (springing at 35% RCF utilization)
MFN Provision | 75 bps threshold / 12-month sunset (expired) | Proposed: 50 bps threshold / 18-month sunset
Repricing Protection (Soft Call) | 1.00% / 24 months (expired Feb. 14, 2022) | Proposed: 1.00% / 6 months
General Prepayment Premium | 0.50% through Feb. 14, 2023 | TBD (to be negotiated)
Benchmark | USD LIBOR | Adjusted Term SOFR (CME)
Collateral | First lien, substantially all assets; pari passu with RCF | Substantially identical — first lien, pari passu with RCF
Governing Law | New York | New York
Component | Amount | Basis
Outstanding Principal | $621,875,000 | $625,000,000 original principal less $3,125,000 in scheduled amortization
Accrued and Unpaid Interest (estimated) | $2,916,667 | Estimated based on current all-in rate of approximately 5.25% and assumed 14-day accrual period
Prepayment Premium | $3,125,000 | $625,000,000 × 0.50% (per Section 2.05(c) of the Existing Credit Agreement)
Total Estimated Payoff | $627,916,667

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP

MEMORANDUM

Record

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