PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP One Liberty Plaza, 52nd Floor New York, New York 10006
INTERNAL MEMORANDUM
June 1, 2022
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP in connection with its engagement as legal counsel to Verimark Hospitality Group Inc. It is protected by the attorney-client privilege and constitutes attorney work product. This memorandum is intended solely for the use of the addressees identified above and should not be disclosed, distributed, or reproduced, in whole or in part, to any third party without the prior written consent of Calderwood & Harkness LLP.
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I. PURPOSE AND SCOPE OF REVIEW
This memorandum summarizes Calderwood & Harkness LLP's ("C&H" or the "Firm") legal review of the draft Confidential Information Memorandum (the "CIM" or "Draft CIM") prepared by Crescent Harbor Bank, N.A. ("Crescent Harbor" or the "Arranger"), in its capacity as Lead Arranger and Bookrunner, for distribution to prospective lenders in connection with the syndication of the $700,000,000 Senior Secured Term Loan B (the "TLB" or the "Facility") to be entered into by Verimark Hospitality Group Inc. ("VHG," the "Borrower," or the "Company").
The Draft CIM was received by C&H on May 29, 2022 from the syndication desk of Crescent Harbor Bank, N.A. (contact: Anika Holm, Director, Loan Syndications). The Draft CIM bears a date of May 27, 2022 and is marked "Draft — Subject to Revision" on its cover page. The document totals 127 pages (exclusive of appendices) and was transmitted to C&H by e-mail, together with a summary of the proposed syndication timeline.
The scope of C&H's review encompasses the following areas:
(a) Accuracy of legal descriptions of the transaction structure, parties, and terms as set forth in the Draft CIM, including the summary of key terms, sources and uses, and pro forma capitalization table;
(b) Completeness and accuracy of disclosure regarding material contracts and litigation, including cross-references to VHG's public filings with the U.S. Securities and Exchange Commission (the "SEC");
(c) Rule 10b-5 considerations and liability exposure for VHG as a company whose common stock is listed on the New York Stock Exchange (ticker: VMRK), including analysis of material misstatement and omission risks inherent in the CIM's distribution to prospective lenders who may also be holders of, or traders in, VHG's publicly traded securities;
(d) Consistency between the CIM and the Commitment Letter executed May 27, 2022 (the "Commitment Letter"), between VHG and Crescent Harbor, and the near-final Credit Agreement terms as reflected in C&H's first circulated draft of the Credit Agreement dated May 16, 2022 (the "Draft Credit Agreement"); and
(e) Identification of any material omissions or misstatements requiring correction prior to syndication launch, which is currently targeted for June 6, 2022.
It should be noted that Meridian Strauss Advisory LLC ("Meridian Strauss"), acting through Elise Cavanaugh, Managing Director, served as VHG's financial advisor in connection with this refinancing transaction. Meridian Strauss contributed certain financial projections and market data sections to the Draft CIM. C&H's review does not extend to the accuracy of financial projections or market data, which remain the sole responsibility of VHG management and Meridian Strauss. C&H expresses no opinion, and provides no assurance, regarding such projections or data.
Additionally, Clearmont & Wharton LLP (Ronald Ashby, CPA, Engagement Partner) audited VHG's consolidated financial statements for the fiscal year ended December 31, 2021 ("FY2021"), which are referenced extensively throughout the Draft CIM. C&H has not independently verified the audited financial figures and has relied upon the audit report of Clearmont & Wharton LLP dated March 15, 2022 for purposes of this review.
II. SUMMARY OF KEY COMMENTS AND RECOMMENDATIONS
Set forth below is an overview of the fourteen (14) substantive comments identified by C&H during its legal review of the Draft CIM. These comments are organized into the following categories for ease of reference and tracking:
(A) Transaction Structure and Terms (Comments 1–8)
(B) Description of the Borrower and Guarantors (Comments 9–10)
(C) Collateral and Security (Comment 11)
(D) Financial Information (Comment 12)
(E) Material Contracts and Litigation (Comment 13)
(F) Risk Factors (addressed in narrative discussion in Section VIII below, not separately numbered)
(G) Rule 10b-5 / Securities Law Considerations (addressed in narrative discussion in Section IX below, not separately numbered)
(H) Disclaimer and Confidentiality Language (Comment 14)
Each of the fourteen comments is discussed in detail in the sections that follow. A tabular summary of all comments, including CIM section references, nature of comment (correction, addition, or clarification), priority level, and assigned responsible party, is provided in the Appendix attached hereto as Section XIV.
C&H strongly recommends that all fourteen comments be addressed before the CIM is finalized and distributed to prospective lenders. Several of the comments address factual inaccuracies (including a mathematical error in the pro forma capitalization table and an incorrect corporate organizational chart) that, if left uncorrected, could expose VHG and Crescent Harbor to reputational risk and potential legal liability. VHG and Crescent Harbor should independently confirm the factual accuracy of all corrected sections before the CIM is finalized.
The target timeline for addressing these comments and finalizing the CIM is as follows:
This timeline is tight but achievable, provided that all parties remain responsive. C&H (Sophie Tremblay and Daniel Obi) will remain available throughout the June 3–6 period to address follow-up questions and provide any required sign-offs on revised language.
III. TRANSACTION STRUCTURE AND TERMS — COMMENTS
A. Description of the Facility
Comment 1 — Facility Size and Single-Draw Confirmation
The Draft CIM describes the Facility as a "$700,000,000 Senior Secured Term Loan B." C&H has confirmed that this description is consistent with the Commitment Letter dated May 27, 2022 and the Draft Credit Agreement. However, the Draft CIM does not affirmatively state that the Facility is a single-draw term loan, as opposed to a delayed draw term loan. Given that the term loan market regularly features both single-draw and delayed draw structures, and that the distinction has material implications for lender economics (including the timing of OID payment and interest accrual), C&H recommends that the CIM be revised to clearly state that the TLB is a single-draw term loan, to be funded in full on the closing date, with no delayed draw option.
This revision should appear in both the "Summary of Terms" section on page 4 of the Draft CIM and the "Description of the Facility" section beginning on page 12. The Draft Credit Agreement, at Section 2.01(a), defines the term loan commitments as a single-draw facility, and the CIM should be consistent with that definition.
Comment 2 — Purpose of Facility / Use of Proceeds
The "Purpose" section of the Draft CIM (page 5) states, in relevant part, that the proceeds of the TLB will be used to "refinance existing indebtedness and for general corporate purposes." C&H recommends that this description be revised to provide substantially greater detail regarding the use of proceeds, as prospective lenders will expect clarity on how the $700,000,000 in proceeds will be allocated. Specifically, the purpose section should be revised to clearly state the following dual purpose:
(i) Refinancing of Existing Term Loan B. Refinance in full the existing $625,000,000 Senior Secured Term Loan B (the "Existing TLB"), which was originally closed on February 14, 2020, with Greystone Federal Credit Corp. ("Greystone") serving as administrative agent. The Existing TLB bears CUSIP 92347LAA0. The estimated payoff amount at closing is approximately $627,916,667, comprising:
• Outstanding principal of approximately $621,875,000 (reflecting $3,125,000 in scheduled amortization payments made since the Existing TLB's closing date, calculated at 1.00% per annum amortization on the original $625,000,000 principal amount, or $6,250,000 per year / $1,562,500 per quarter);
• Accrued and unpaid interest of approximately $2,916,667 (estimated based on the LIBOR + 425 bps rate applicable to the Existing TLB, accrued from the most recent interest payment date to the anticipated closing date); and
• A prepayment premium of approximately $3,125,000, calculated at 0.50% of the original $625,000,000 principal amount, payable pursuant to the repricing protection provision of the Existing TLB credit agreement.
(ii) Permitted Acquisitions and General Corporate Purposes. Fund up to approximately $75,000,000 (representing the difference between the $700,000,000 Facility size and the approximately $625,000,000 Existing TLB refinancing) for permitted acquisitions (as defined in the Draft Credit Agreement) and general corporate purposes of VHG and its subsidiaries, net of transaction fees and expenses.
The revised purpose section should be reviewed by Renata Haines (VHG CFO) and Glenn Fischbach (VHG Treasurer) to confirm the accuracy of the payoff amount and to ensure that the estimated accrued interest and prepayment premium figures are current as of the anticipated closing date.
Comment 3 — Pricing / Interest Rate
The "Pricing" section of the Draft CIM (page 6) describes the interest rate applicable to the TLB as "Adjusted Term SOFR + 375 basis points (3.75%)." While this spread is correctly stated and is consistent with the Commitment Letter, C&H has identified two material omissions in this section that must be corrected:
First, the Draft CIM omits the SOFR floor of 0.50%. The Commitment Letter and the Draft Credit Agreement both specify a Term SOFR floor of 0.50%, meaning that for purposes of calculating the applicable interest rate, the Term SOFR rate shall be deemed to be not less than 0.50% per annum. This is a market-standard provision that protects lenders in a low-rate environment and has material economic significance. Its omission from the CIM is an error that must be corrected.
Second, the Draft CIM does not specify the credit spread adjustment ("CSA") applicable to each tenor of Adjusted Term SOFR. The Commitment Letter specifies the following CSAs, consistent with prevailing market convention for SOFR-based credit facilities:
• 1-month Adjusted Term SOFR: CSA of 0.10% (10 basis points)
• 3-month Adjusted Term SOFR: CSA of 0.15% (15 basis points)
• 6-month Adjusted Term SOFR: CSA of 0.25% (25 basis points)
These CSAs should be disclosed in the pricing section of the CIM, as they affect the all-in cost of borrowing and are material to prospective lenders' yield calculations.
C&H also notes, for context, that the Existing TLB was priced at LIBOR + 425 basis points. The refinancing to Adjusted Term SOFR + 375 basis points represents a nominal spread reduction of 50 basis points, yielding estimated annual interest savings of approximately $3,500,000 (calculated on the full $700,000,000 principal amount). This savings figure is referenced in the CIM's "Transaction Rationale" section and should be confirmed by VHG's finance team, taking into account the CSA differential between LIBOR and Adjusted Term SOFR.
Comment 4 — Original Issue discount (OID)
The Draft CIM references an original issue discount ("OID") of 1.00% on page 7. The dollar amount of the OID should be stated as $7,000,000 (1.00% × $700,000,000). The current draft of the CIM rounds this figure to "$7.0M" in one instance but then states "$6,930,000" in the sources and uses table on page 23, which appears to be an erroneous calculation (possibly applying the 1.00% OID to the $693,000,000 net funding amount rather than the $700,000,000 face amount). This error must be corrected throughout the CIM.
The net funding amount to VHG at closing is $693,000,000 ($700,000,000 gross proceeds less $7,000,000 OID). This should be consistently stated in the CIM's executive summary, sources and uses, and pro forma capitalization sections.
Comment 5 — Illustrative All-In Interest Rate
The Draft CIM includes an illustrative all-in interest rate example on page 8 that uses a Term SOFR reference rate of 0.95% (1-month), which appears to be based on the CME Term SOFR rate published on or about May 16, 2022. Given the rapidly changing interest rate environment and the Federal Reserve's recent and anticipated rate increases, C&H recommends one of the following approaches:
(a) Update the reference rate to a more current indicative Term SOFR rate closer to the syndication launch date of June 6, 2022. As of the date of this memorandum (June 1, 2022), the 1-month CME Term SOFR rate is approximately 1.20%, and it is likely to increase further prior to syndication launch; or
(b) Include a date disclaimer clearly indicating the date on which the reference SOFR rate used in the illustration was published, together with a statement that actual interest rates will be based on the Term SOFR rate in effect as of the applicable interest period commencement date.
C&H recommends approach (b) as the more practical option, given the lead time required for CIM production and distribution. However, if Crescent Harbor intends to update the CIM immediately prior to syndication launch, approach (a) would be preferable.
B. Maturity and Amortization
The Draft CIM states a maturity date of July 21, 2029, representing a seven (7) year tenor from the anticipated closing date of July 21, 2022. C&H has confirmed that this maturity date is consistent with the Commitment Letter and the Draft Credit Agreement. No comment is required on this point, other than to confirm that the closing date has not shifted since the Commitment Letter was executed.
The amortization schedule described in the Draft CIM is consistent with the Commitment Letter: amortization of 1.00% per annum of the original principal amount of $700,000,000, payable in equal quarterly installments of $1,750,000 (i.e., $7,000,000 per year ÷ 4 quarters). Over the seven-year tenor, the cumulative scheduled amortization will total approximately $49,000,000 (28 quarterly payments × $1,750,000), resulting in a balloon payment at maturity of approximately $651,000,000 ($700,000,000 − $49,000,000). The Draft CIM correctly states the quarterly amortization amount and balloon payment figure. No revision is required on this point.
C. Most Favored Nation Provision
Comment 6 — Most Favored Nation (MFN) Description
The Draft CIM's description of the Most Favored Nation ("MFN") provision (page 10) is oversimplified and, in C&H's view, could be misleading to prospective lenders. The current description states only that "incremental term loans shall be subject to customary MFN protection." This level of generality is insufficient for a sophisticated syndicated loan market, where MFN provisions are a key lender protection and vary materially in their terms.
C&H recommends that the MFN description be revised to include the following specific terms, which are set forth in the Commitment Letter and the Draft Credit Agreement:
(i) MFN Threshold. If VHG incurs incremental term loans (including incremental equivalent debt) with an effective yield exceeding the effective yield on the initial TLB by more than 50 basis points, the applicable margin on the initial TLB shall be automatically increased to a level that is within 50 basis points of the effective yield on such incremental term loans. For purposes of the MFN calculation, "effective yield" includes the applicable margin, any SOFR floor benefit (to the extent the SOFR floor on the incremental term loans exceeds the SOFR floor on the initial TLB), and any OID or upfront fees (amortized over a four-year assumed life), but excludes arrangement, structuring, underwriting, and similar fees.
(ii) MFN Sunset. The MFN protection described above shall expire 18 months from the closing date — i.e., the MFN shall be in effect from July 21, 2022 through January 21, 2024 (the "MFN Sunset Date"). After the MFN Sunset Date, VHG may incur incremental term loans at any yield without triggering an upward adjustment to the initial TLB margin.
(iii) Distinction from Repricing Protection. The Draft CIM, in its current "Summary of Terms" section, conflates the MFN provision with the repricing protection (soft call) provision discussed in Section III.D below. These are distinct protections that serve different purposes: the MFN provision protects existing lenders against yield dilution from incremental debt, while the repricing protection provision protects existing lenders against prepayment or refinancing at a lower yield within a specified period. The CIM should clearly distinguish between these two provisions and describe each separately.
C&H has prepared suggested revised language for the MFN section, which is attached to this memorandum under separate cover and has been provided to Anika Holm at Crescent Harbor for incorporation into the revised CIM.
D. Repricing Protection / Soft Call
Comment 7 — Repricing Protection Period and Premium
The Draft CIM correctly describes the repricing protection provision (also commonly referred to as "soft call" protection) applicable to the TLB. For completeness, C&H confirms that the following terms should be stated in the CIM:
• Repricing Protection Period: Six (6) months from the closing date — from July 21, 2022 through January 21, 2023 (the "Repricing Protection Period").
• Repricing Premium: If, during the Repricing Protection Period, the TLB is prepaid, refinanced, repriced, or otherwise modified to achieve a lower effective yield, VHG shall pay a premium of 1.00% of the principal amount prepaid or repriced. On the full $700,000,000 principal amount, this premium would equal $7,000,000.
• Post-Repricing Protection Period: After January 21, 2023, the TLB may be prepaid, refinanced, or repriced without any premium or penalty.
The Draft CIM correctly describes the Repricing Protection Period and premium but does not include the clarification that the TLB may be prepaid or repriced without premium after the expiration of the Repricing Protection Period on January 21, 2023. C&H recommends adding this clarification for the benefit of prospective lenders, as it affects their assessment of prepayment risk and expected hold period.
E. Financial Covenants
Comment 8 — Springing Financial Covenant
The financial covenant section of the Draft CIM (page 14) describes a "maximum total net leverage ratio of 4.5x." While this is technically accurate, the description is incomplete and could be misleading because it does not disclose the springing nature of the covenant. The TLB itself is covenant-lite in the traditional sense — the leverage ratio covenant is tested only with respect to the revolving credit facility and springs into effect only under specified conditions.
C&H recommends that the CIM be revised to clearly state the following:
• The financial covenant is a springing maximum total net leverage ratio of 4.50 to 1.00, tested on a quarterly basis based on the trailing four fiscal quarter period then ended.
• The financial covenant springs into effect only when the aggregate revolving credit exposure (comprising outstanding revolving loans and letters of credit, but excluding undrawn revolving commitments) under VHG's $400,000,000 revolving credit facility (the "RCF") exceeds 35% of total revolving commitments — i.e., exceeds $140,000,000 in aggregate revolving credit exposure.
• The financial covenant is not tested with respect to the TLB directly; rather, it is a condition associated with the RCF that has indirect implications for TLB lenders given the shared collateral arrangement.
For context, and to demonstrate the substantial headroom available under this covenant, the CIM should include the following pro forma calculations:
• Pro Forma Total Net Leverage at Closing: Approximately 2.52x, calculated as follows:
• Total funded debt at closing: $700,000,000 (new TLB) + $245,000,000 (senior unsecured notes due 2028, Atlantic Standard Trust Company as indenture trustee) = $945,000,000
• Less: unrestricted cash on hand at closing: ($87,000,000)
• Net funded debt: $858,000,000
• LTM Adjusted EBITDA (FY2021): $341,000,000
• Pro forma total net leverage: $858,000,000 ÷ $341,000,000 = 2.52x
• Covenant Headroom: The 2.52x pro forma net leverage provides approximately 1.98 turns of headroom versus the 4.50x springing covenant, or approximately $675,000,000 of incremental net debt capacity (assuming constant LTM Adjusted EBITDA of $341,000,000).
• The $400,000,000 RCF is undrawn at closing and is therefore excluded from the funded debt calculation. Moreover, because the RCF is undrawn, the springing financial covenant is not tested at closing.
C&H notes that there is no minimum interest coverage ratio applicable to this Facility, which is consistent with current market convention for broadly syndicated term loan B facilities.
F. Benchmark Replacement Language
C&H has reviewed the benchmark replacement language in the Draft CIM and confirms that it appropriately references the transition from LIBOR to Adjusted Term SOFR as the primary benchmark for the TLB. The Draft CIM includes a note regarding the inclusion of "hardwired" fallback language consistent with the recommendations of the Alternative Reference Rates Committee ("ARRC"), which is consistent with the Draft Credit Agreement.
The CIM should confirm the following benchmark hierarchy:
• Primary Benchmark: Term SOFR (as published by CME Group Benchmark Administration Limited), plus the applicable credit spread adjustment.
• First Fallback: Daily Simple SOFR, in the event that Term SOFR becomes unavailable or is no longer representative.
• Subsequent Fallbacks: As determined in accordance with the ARRC-recommended hardwired fallback waterfall.
No further comment is required on this section, provided that the CIM's language remains consistent with Section 2.14 of the Draft Credit Agreement.
IV. DESCRIPTION OF THE BORROWER AND GUARANTORS — COMMENTS
A. Borrower Description
Comment 9 — Entity Details and Officer Listings
C&H has reviewed the description of the Borrower contained in the Draft CIM (pages 18–32) and recommends that VHG's in-house legal team verify the accuracy of the following entity details:
• Legal Name: Verimark Hospitality Group Inc.
• Jurisdiction of Incorporation: State of Delaware
• Stock Exchange Listing: New York Stock Exchange (NYSE)
• Ticker Symbol: VMRK
• Headquarters: 8200 West Palmetto Park Road, Suite 1500, Boca Raton, Florida 33433
• Employer Identification Number (EIN): 82-3741956
• Delaware Secretary of State File Number: 7291843
The officers listed in the Draft CIM should be confirmed to match the current incumbents as of the CIM date. Based on C&H's records and VHG's most recent proxy statement (filed April 12, 2022), the following officers should be listed:
• Marcus Delvecchio — Chief Executive Officer
• Renata Haines — Chief Financial Officer
• Priya Narayanan — General Counsel & Corporate Secretary
• Glenn Fischbach — Treasurer
The Draft CIM describes VHG as an "owner-operator of 74 full-service and select-service hotels across 18 states, with a portfolio appraised value of approximately $3.1 billion." C&H recommends that Priya Narayanan confirm whether this appraised value is current and supported by recent appraisals. If the $3.1 billion figure is based on appraisals conducted more than 12 months prior to the CIM date, C&H recommends either (a) updating the appraisal figure to reflect more recent valuations, or (b) adding a qualification stating the date(s) on which the appraisals were conducted.
The FY2021 financial highlights set forth in the Draft CIM should accurately reflect the following figures, which C&H understands to be consistent with the audited financial statements prepared by Clearmont & Wharton LLP:
• Revenue: $1,420,000,000
• EBITDA: $318,000,000
• Adjusted EBITDA: $341,000,000 (reflecting $23,000,000 in add-backs for non-recurring items, as described in the adjustments schedule included as Appendix C to the Draft CIM)
Additionally, the Draft CIM includes VHG's corporate family credit ratings but omits the facility-level ratings for the TLB. C&H recommends that the CIM be revised to include both corporate family and facility-level ratings, as follows:
Facility-level ratings are customarily included in CIMs for syndicated term loans and are material to prospective lenders' credit analysis, regulatory capital treatment, and portfolio allocation decisions. The omission of facility-level ratings should be corrected.
B. Guarantor Descriptions
Comment 10 — Organizational Chart Error
The Draft CIM includes a corporate organizational chart (page 25) depicting VHG's subsidiary structure. C&H has identified the following Guarantor entities, which are accurately listed in the Draft CIM's Guarantor summary (page 26):
1. Verimark Resort Properties LLC — a Delaware limited liability company; owns 42 of the 74 hotel properties in VHG's portfolio; direct wholly owned subsidiary of VHG.
2. VHG Management Services Inc. — a Delaware corporation; hotel management subsidiary providing management services for all 74 properties; direct wholly owned subsidiary of VHG.
3. Verimark Convention Holdings LLC — a Delaware limited liability company; convention center and event space subsidiary; direct wholly owned subsidiary of VHG.
4. Palmetto Beachfront Hotels LLC — a Florida limited liability company; owns and operates 12 coastal resort properties in the State of Florida; direct wholly owned subsidiary of VHG.
5. Cascadia Hospitality Corp. — a Delaware corporation; owns and operates 8 hotel properties in the Pacific Northwest (Washington and Oregon); direct wholly owned subsidiary of VHG.
However, the organizational chart on page 25 incorrectly depicts Cascadia Hospitality Corp. as a wholly owned subsidiary of Verimark Resort Properties LLC (shown as a second-tier subsidiary) rather than as a direct subsidiary of VHG (i.e., a first-tier subsidiary on the same level as Verimark Resort Properties LLC, VHG Management Services Inc., Verimark Convention Holdings LLC, and Palmetto Beachfront Hotels LLC).
This is a material error because the corporate structure directly affects the analysis of (a) the scope of the Guarantor obligations, (b) the pledge of equity interests in Guarantor subsidiaries, and (c) the structural subordination analysis applicable to the TLB. If Cascadia Hospitality Corp. were a subsidiary of Verimark Resort Properties LLC (rather than a direct subsidiary of VHG), then VHG's pledge of "100% of equity interests in each direct domestic subsidiary" would not directly capture the equity interests in Cascadia Hospitality Corp.
C&H requests that Crescent Harbor correct the organizational chart and that Priya Narayanan confirm the actual corporate structure of VHG and its subsidiaries. If there has been any recent restructuring or change in the ownership of Cascadia Hospitality Corp., VHG should advise C&H immediately so that the Credit Agreement documentation can be updated accordingly.
V. COLLATERAL AND SECURITY — COMMENTS
A. Collateral Package Description
Comment 11 — Pari Passu Sharing Arrangement with RCF
The Draft CIM (pages 33–36) describes the collateral package securing the TLB, which comprises a first-priority lien on substantially all assets of VHG and the Guarantors. C&H has reviewed this description and confirms that it is generally consistent with the Commitment Letter and the Draft Credit Agreement. The collateral package includes:
• Real Property: Fee simple and leasehold interests in 42 hotel properties owned by Verimark Resort Properties LLC, with an aggregate appraised value of approximately $2.18 billion.
• Equity Interests: A pledge of 100% of the equity interests in each direct domestic subsidiary of VHG and each Guarantor, and a pledge of 65% of the equity interests in any first-tier foreign subsidiaries (if any), in each case subject to customary exceptions for immaterial subsidiaries and unrestricted subsidiaries.
• Personal Property: A security interest in substantially all personal property of VHG and each Guarantor, including accounts, inventory, equipment, intellectual property (including trademarks, trade names, and domain names), and general intangibles.
However, the Draft CIM does not mention the pari passu sharing arrangement between the TLB and the $400,000,000 revolving credit facility. This is a significant omission. The TLB and the RCF share first-lien collateral on a pari passu basis — that is, neither facility has priority over the other with respect to the shared collateral. This arrangement is governed by an Amended and Restated Intercreditor Agreement (the "Intercreditor Agreement"), to be entered into on the closing date by Crescent Harbor Bank, N.A. in its dual capacity as administrative agent under the TLB and administrative agent under the RCF, and by each of VHG and the Guarantors.
The CIM should clearly disclose the following:
(a) The TLB and the RCF share first-lien collateral on a pari passu basis, with no lien priority or subordination as between the two facilities.
(b) The pari passu sharing arrangement is governed by the Intercreditor Agreement, which provides for pro rata sharing of collateral proceeds in the event of an enforcement action or insolvency proceeding.
(c) Crescent Harbor Bank, N.A. serves as both administrative agent under the TLB and administrative agent under the RCF, which means that a single agent controls collateral enforcement decisions with respect to both facilities. This dual-agent arrangement is customary in syndicated lending transactions but should be disclosed to prospective lenders.
(d) In the event of an enforcement action, TLB lenders and RCF lenders would share collateral proceeds on a pro rata basis based on their respective outstanding obligations, subject to the terms of the Intercreditor Agreement.
The failure to disclose the pari passu sharing arrangement could mislead prospective TLB lenders into believing that the TLB has an exclusive first-priority lien on the collateral, which is not the case. C&H views the correction of this omission as a high-priority item.
B. Mortgage Properties
The Draft CIM (pages 37–39) provides a summary of the mortgage properties securing the TLB. C&H has reviewed this section and recommends that the CIM reference the following:
• Mortgages and/or deeds of trust (as applicable under state law) will be delivered covering hotel properties in 12 states, distributed as follows:
• Title insurance for all mortgage properties will be provided by Continental Fidelity Title Company, with lender's title insurance policies issued in favor of Crescent Harbor Bank, N.A. as administrative agent for the benefit of the TLB lenders and the RCF lenders.
• Certain mortgage deliverables may be subject to post-closing delivery pursuant to a Post-Closing Letter Agreement to be entered into on the closing date. The Post-Closing Letter Agreement will provide an August 5, 2022 deadline (approximately 15 days post-closing) for delivery of outstanding mortgage deliverables, including title endorsements, surveys, and environmental site assessments for specified properties. The CIM should reference the existence of the Post-Closing Letter Agreement and the applicable deadline.
VI. FINANCIAL INFORMATION — COMMENTS
A. Historical Financials
The Draft CIM includes a detailed presentation of VHG's historical financial results for FY2019, FY2020, and FY2021, as well as quarterly results for Q1 2022. C&H's review of the historical financial section is limited to confirming that the FY2021 financial highlights are consistent with VHG's audited financial statements and public filings. C&H has confirmed the following key FY2021 figures:
• Revenue: $1,420,000,000
• EBITDA: $318,000,000
• Adjusted EBITDA: $341,000,000
These figures are confirmed by the audited financial statements of VHG prepared by Clearmont & Wharton LLP (Ronald Ashby, CPA, Engagement Partner), with an audit report dated March 15, 2022. The Adjusted EBITDA figure of $341,000,000 reflects $23,000,000 in add-backs for non-recurring items, including approximately $8,200,000 in pandemic-related costs (temporary property closures, enhanced cleaning protocols, and health and safety compliance), approximately $7,100,000 in one-time transaction and restructuring costs, and approximately $7,700,000 in other non-cash charges and adjustments. C&H recommends that VHG's finance team confirm that these add-backs are consistent with the definitions of "Consolidated EBITDA" and permitted adjustments in the Draft Credit Agreement.
VHG's total debt prior to the refinancing transaction is approximately $1,270,000,000, comprising:
• Existing TLB: approximately $621,875,000 outstanding principal
• $400,000,000 revolving credit facility (RCF): undrawn
• $245,000,000 senior unsecured notes due 2028: $245,000,000 outstanding principal
• Other indebtedness: approximately $3,125,000 (capital leases and other obligations)
As noted in Section I of this memorandum, C&H has not independently verified the financial projections included in the Draft CIM, which were prepared by Meridian Strauss Advisory LLC (Elise Cavanaugh, Managing Director) in consultation with VHG management. These projections cover the period FY2022 through FY2027 and include revenue, EBITDA, capital expenditure, and free cash flow forecasts. C&H recommends that the CIM include prominent disclaimers regarding forward-looking information, including:
(a) A statement that the financial projections are based on assumptions and estimates that are subject to significant uncertainties and contingencies, many of which are beyond VHG's control;
(b) A statement that VHG does not undertake any obligation to update or revise the projections;
(c) A cautionary statement that actual results may differ materially from the projections; and
(d) A reference to the risk factors section of the CIM and VHG's public filings for a discussion of factors that could cause actual results to differ from the projections.
B. Pro Forma Capitalization
Comment 12 — Capitalization Table Calculation Error
C&H has identified a material calculation error in the pro forma capitalization table on page 48 of the Draft CIM. Specifically, the "Net Funded Debt" line in the table fails to subtract VHG's $87,000,000 in unrestricted cash on hand from total funded debt. As a result, the Draft CIM overstates pro forma net leverage at closing.
The corrected pro forma capitalization is as follows:
The Draft CIM's capitalization table shows pro forma net leverage of approximately 2.77x ($945,000,000 ÷ $341,000,000), which is the gross leverage ratio — not the net leverage ratio. The financial covenant in the Draft Credit Agreement is defined as a net leverage ratio (i.e., net of unrestricted cash), and the CIM should present the pro forma leverage figure on the same basis.
This error is particularly significant because (a) it affects prospective lenders' assessment of credit quality and covenant headroom, and (b) the "net" leverage metric is the standard used in the leveraged loan market for Term Loan B facilities. C&H views the correction of this error as a high-priority item.
In addition to correcting the capitalization table, C&H recommends that the sources and uses table on page 23 of the Draft CIM be verified for internal consistency. The corrected sources and uses should reconcile as follows:
Sources:
Uses:
C&H notes that the figure shown above as "Net Proceeds to VHG" of approximately $56,983,333 differs slightly from the approximately $60,483,333 referenced in the Draft CIM's sources and uses table. This discrepancy appears to result from a rounding difference in the Greystone payoff figure and/or the estimated legal costs. VHG's finance team (Renata Haines and Glenn Fischbach) should reconcile these figures and confirm the final amounts before the CIM is finalized.
C. Fees Summary
For reference, and to ensure consistency between the CIM and the Commitment Letter, C&H sets forth below a summary of the transaction fees:
C&H notes that the specific amounts set forth in the Fee Letter dated May 27, 2022 between VHG and Crescent Harbor are confidential as between those parties and are not intended for disclosure in the CIM beyond what is customary for syndication materials. The CIM should not disclose the specific arrangement fee or other fee letter amounts, except to the extent that such amounts are embedded in the OID or upfront fee structure visible to prospective lenders. C&H recommends that Crescent Harbor's syndication desk confirm which fee details may appropriately be included in the CIM and which should remain subject to the confidentiality provisions of the Fee Letter.
VII. MATERIAL CONTRACTS AND LITIGATION — COMMENTS
A. Material Contracts
Comment 13 — Material Contract Disclosure
The Draft CIM includes a brief summary of VHG's material contracts (pages 55–58). C&H recommends that this section be expanded to provide a more complete description of material contracts, consistent with the standard of disclosure provided by VHG in its SEC filings. The CIM is the primary document that prospective lenders will use in their credit analysis, and incomplete disclosure of material contracts could undermine lender confidence and give rise to potential liability.
C&H recommends cross-referencing VHG's most recent Annual Report on Form 10-K (filed March 1, 2022) and Quarterly Report on Form 10-Q (filed May 10, 2022) to ensure that all material contracts disclosed therein are appropriately summarized or referenced in the CIM.
At a minimum, the following key contracts should be mentioned or described in the CIM:
(a) Existing Revolving Credit Facility. The $400,000,000 revolving credit facility (Crescent Harbor Bank, N.A. as administrative agent), originally closed on February 14, 2020 (contemporaneously with the Existing TLB). The CIM should note that the RCF will remain outstanding following the closing of the new TLB, will be undrawn at closing, and will share first-lien collateral with the new TLB on a pari passu basis pursuant to the Intercreditor Agreement. The CIM should also note the RCF's maturity date and any material terms that interact with the TLB, including the springing financial covenant described in Section III.E above.
(b) Senior Unsecured Notes due 2028. The $245,000,000 in aggregate principal amount of senior unsecured notes due 2028, issued by VHG with Atlantic Standard Trust Company as indenture trustee. The CIM should note any restrictive covenants in the unsecured notes indenture that interact with or restrict VHG's ability to incur, maintain, or refinance the new TLB. C&H has reviewed the indenture and has confirmed that the incurrence of the new $700,000,000 TLB and repayment of the Existing TLB does not trigger any change of control provision, cross-default provision, or other adverse provision under the unsecured notes indenture, provided that the new TLB does not exceed the "Permitted Secured Debt" basket set forth in Section 4.09 of the indenture. C&H has confirmed that the $700,000,000 TLB, together with the $400,000,000 RCF, falls within the Permitted Secured Debt basket (which permits secured indebtedness up to the greater of $1,200,000,000 and 3.5x LTM Adjusted EBITDA).
(c) Hotel Management Agreements. VHG and its subsidiaries (principally VHG Management Services Inc.) are party to management agreements for each of the 74 hotel properties in VHG's portfolio. The CIM provides a general description of these management agreements but does not identify the key counterparties. C&H recommends that the CIM include at least a summary description of the material management agreements, including the identity of any third-party managers (if any) and the key economic terms (management fee rates, term, and termination provisions).
C&H further recommends that VHG confirm in writing that the incurrence of the new $700,000,000 TLB and the repayment of the Existing TLB do not trigger any change of control, cross-default, or other adverse provision under the unsecured notes indenture, the RCF credit agreement, or any other material contract to which VHG or any Guarantor is a party.
B. Litigation Disclosure
C&H has reviewed the litigation disclosure section of the Draft CIM (pages 59–61). The Draft CIM provides a summary of pending and threatened litigation involving VHG and its subsidiaries, including a description of the nature of each proceeding, the parties involved, the relief sought, and VHG's assessment of the likelihood and potential magnitude of any adverse outcome.
C&H does not express an opinion on the completeness or accuracy of the litigation disclosures, as these are factual matters within VHG's knowledge. However, C&H recommends the following:
(a) Priya Narayanan (VHG General Counsel) should review the litigation disclosure section and confirm in writing that it is complete and accurate as of the date of the CIM, taking into account all litigation matters described in VHG's most recent 10-K and 10-Q filings, as well as any developments that have occurred since those filings;