ANNOTATED TERM SHEET
CALDERWOOD & HARKNESS LLP COMMENTS ON CRESCENT HARBOR BANK, N.A. INITIAL PROPOSAL
$700,000,000 Senior Secured Term Loan B Facility
Client: Verimark Hospitality Group Inc.
Date of Crescent Harbor Initial Term Sheet: April 22, 2022
Date of C&H Comments: April 29, 2022
Prepared by: Sophie Tremblay, Associate, Banking & Finance; Daniel Obi, Associate, Banking & Finance
Reviewed by: Ian Blackwood, Partner, Banking & Finance
Engagement Number: 1016-00009
Classification: PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
Format Note: Throughout this document, Calderwood & Harkness LLP annotations and comments appear in bracketed bold text following the corresponding Crescent Harbor term sheet provision. Original Crescent Harbor Bank, N.A. language from the April 22, 2022 indicative term sheet is presented in plain text. Where C&H recommends a specific counter-position or identifies a significant negotiation point, the annotation is flagged accordingly.
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INTRODUCTORY NOTE
This document reproduces, in its entirety, the Summary Indicative Term Sheet delivered by Crescent Harbor Bank, N.A. ("Crescent Harbor" or the "Agent") on April 22, 2022, in connection with the proposed $700,000,000 senior secured Term Loan B refinancing for Verimark Hospitality Group Inc. ("VHG" or the "Borrower"). The Summary Indicative Term Sheet was transmitted via email from Theodore Marchetti, Managing Director, Leveraged Finance at Crescent Harbor, to Priya Narayanan, General Counsel of VHG, with a copy to Elise Cavanaugh, Managing Director at Meridian Strauss Advisory LLC, VHG's financial advisor.
Calderwood & Harkness LLP ("C&H"), as outside legal counsel to VHG, has annotated each section of the Crescent Harbor term sheet with comments, proposed revisions, open questions, risk assessments, and recommended counter-positions. These annotations are intended to inform and guide discussions with VHG management — specifically, Priya Narayanan (General Counsel), Glenn Fischbach (Treasurer), and Renata Haines (Chief Financial Officer) — as well as to frame the anticipated negotiation with Crescent Harbor and its counsel, Whitfield Gage & Partridge LLP (Harrison Whitfield III, Partner; Megan Yeung, Associate).
This annotated markup is intended to be discussed at the internal strategy call currently scheduled for May 2, 2022, prior to the preparation and delivery of a revised term sheet to Crescent Harbor. We anticipate that VHG management's input on the business and strategic considerations identified herein will be essential to finalizing C&H's recommended negotiation positions. VHG management should also be prepared to make determinations on certain trade-offs between individual term sheet provisions that are identified in the annotations, particularly as between the Most Favored Nation provision (Section 7) and the Repricing Protection period (Section 8), which we recommend presenting as a package to Crescent Harbor.
This document should be read in conjunction with the following prior C&H work product:
• C&H's Preliminary Assessment Memorandum dated April 11, 2022, which provided an initial evaluation of VHG's refinancing objectives and the anticipated market conditions for a Term Loan B issuance in the current environment.
• C&H's Analysis of Existing TLB Provisions Memorandum dated April 14, 2022, which detailed the material terms of VHG's existing $625,000,000 Term Loan B facility with Greystone Federal Credit Corp. as administrative agent and identified provisions in the existing credit agreement that VHG may wish to improve upon in the refinancing.
This document is protected by the attorney-client privilege and the attorney work product doctrine. It is intended solely for the use of VHG and its authorized representatives and advisors and should not be distributed externally or to Crescent Harbor, Whitfield Gage & Partridge LLP, or any other third party without the prior written consent of C&H.
SECTION 1: PARTIES
1.1 Borrower. Crescent Harbor Term: Verimark Hospitality Group Inc., a Delaware corporation.
[C&H Comment: Confirmed. Verimark Hospitality Group Inc. is incorporated in the State of Delaware (Secretary of State File Number 7291843), with its principal executive offices located at 8200 West Palmetto Park Road, Suite 1500, Boca Raton, Florida 33433. VHG is publicly traded on the New York Stock Exchange under the ticker symbol "VMRK." The Borrower's Employer Identification Number (EIN) is 82-3741956. C&H has confirmed that VHG is in good standing in Delaware as of the date hereof and has verified the corporate formation documents on file. There are no issues with the identification of the Borrower entity. No further action is required with respect to this provision.]
1.2 Guarantors. Crescent Harbor Term: Each existing and future direct and indirect material domestic subsidiary of the Borrower.
[C&H Comment: Crescent Harbor's formulation references "material domestic subsidiaries" but does not define "material" or specify a threshold for determining materiality. Additionally, the term sheet does not enumerate the initial guarantors by name. C&H recommends the following clarifications and revisions for the revised term sheet and the definitive Credit Agreement:
Identification of Initial Guarantors. The following entities should be specifically identified as initial Guarantors on the closing date:
(a) Verimark Resort Properties LLC, a Delaware limited liability company (the principal property-owning subsidiary, holding title to 42 hotel properties);
(b) VHG Management Services Inc., a Delaware corporation (the management company subsidiary providing hotel management services to VHG properties and third-party properties);
(c) Verimark Convention Holdings LLC, a Delaware limited liability company (owner and operator of convention center and meeting facilities associated with certain VHG resort properties);
(d) Palmetto Beachfront Hotels LLC, a Florida limited liability company (owner and operator of VHG's Florida beachfront hotel portfolio); and
(e) Cascadia Hospitality Corp., a Delaware corporation (owner and operator of VHG's Pacific Northwest hotel portfolio, including properties in Washington and Oregon).
Materiality Threshold for Future Subsidiary Guarantors. C&H recommends that the Credit Agreement define "material domestic subsidiary" to include any domestic subsidiary that represents 5% or more of consolidated total assets or 5% or more of consolidated EBITDA of the Borrower and its subsidiaries, in each case as determined based on the most recently delivered financial statements. This threshold is consistent with market practice for Term Loan B facilities of this size and type, and should be calibrated to avoid imposing guaranty obligations on immaterial operating entities or special-purpose vehicles that may be formed from time to time in the ordinary course.
Consistency with RCF Guarantor Group. VHG should confirm that the proposed guarantor group under the new TLB is consistent with the guarantor group under the existing $400,000,000 revolving credit facility for which Crescent Harbor serves as administrative agent (the "RCF"). Because the TLB and the RCF will share first-lien collateral on a pari passu basis, the guarantor group under both facilities should be coextensive. C&H will review the existing RCF credit agreement to confirm alignment.
Excluded Subsidiaries and Unrestricted Subsidiaries. The Crescent Harbor term sheet does not contemplate the existence of any excluded subsidiaries or unrestricted subsidiaries at this time. VHG should confirm whether it intends to designate any subsidiaries as "unrestricted" for purposes of the Credit Agreement. If VHG anticipates the need for an unrestricted subsidiary framework (e.g., for future joint ventures or development projects), C&H recommends including the necessary mechanics in the Credit Agreement even if no designations are made at closing.]
1.3 Administrative Agent / Collateral Agent
Crescent Harbor Term: Crescent Harbor Bank, National Association.
[C&H Comment: Confirmed. Crescent Harbor Bank, National Association is located at 600 Lexington Avenue, 34th Floor, New York, New York 10022. Crescent Harbor also serves as the administrative agent under VHG's existing $400,000,000 revolving credit facility. This dual agency role — Crescent Harbor as agent under both the RCF and the new TLB — should meaningfully simplify the negotiation and documentation of the intercreditor arrangements, inasmuch as a single agent acting in both capacities avoids the inter-agent coordination issues that can complicate pari passu first-lien structures where different agents administer the respective facilities.
VHG's primary banking contact at Crescent Harbor for this transaction is Theodore "Ted" Marchetti, Managing Director, Leveraged Finance. The syndication process will be led by Anika Holm, Director, Loan Syndications. C&H has been in contact with Whitfield Gage & Partridge LLP (Harrison Whitfield III, Partner; Megan Yeung, Associate), counsel to Crescent Harbor in its capacity as administrative agent and lead arranger. No issues with the identification of the Agent.]
1.4 Lead Arranger / Bookrunner
Crescent Harbor Term: Crescent Harbor Bank, N.A. as sole lead arranger and sole bookrunner.
[C&H Comment: Acceptable. Crescent Harbor will act as the sole lead arranger and sole bookrunner for the $700,000,000 Term Loan B facility. Fee arrangements associated with Crescent Harbor's role as arranger and bookrunner will be set forth in a separate Fee Letter to be negotiated and executed concurrently with the Commitment Letter.
C&H notes that, based on preliminary indications provided by Ted Marchetti during the call on April 20, 2022, Crescent Harbor intends to retain approximately $50,000,000 of the $700,000,000 facility on its own book following syndication. This retention level should be confirmed in the Commitment Letter and will be relevant to the syndication strategy discussion with Meridian Strauss Advisory LLC. No additional co-arrangers or co-bookrunners are contemplated at this time.]
1.5 Lenders. Crescent Harbor Term: A syndicate of institutional lenders to be identified during the syndication process.
[C&H Comment: The term sheet appropriately does not name specific lenders at this stage, as the syndicate will be assembled during the syndication process in June 2022. C&H makes the following recommendations:
Disqualified Lender Provisions. VHG should have consent rights over the identity of lenders in the syndicate and, critically, should be entitled to designate a list of "Disqualified Lenders" — entities to whom assignments and participations are prohibited without the Borrower's consent. The Disqualified Lender list should include competitors of VHG in the hospitality industry (including major hotel chains and real estate investment trusts focused on the lodging sector), as well as entities known to be disruptive or hostile in workout and restructuring scenarios. C&H will work with VHG management to prepare the initial Disqualified Lender list for inclusion in the Credit Agreement. The Disqualified Lender concept should extend to affiliates and funds managed by or associated with any Disqualified Lender, and the list should be permitted to be updated by VHG from time to time (subject to customary limitations — i.e., updates do not retroactively disqualify existing lenders).
Syndicate Composition. VHG management and Meridian Strauss Advisory LLC should discuss the desired composition of the lender syndicate. Typical TLB syndicate participants include collateralized loan obligation (CLO) funds, institutional credit funds, insurance company investors, and, in some cases, regional banks with leveraged lending capabilities. The syndicate composition will affect secondary trading dynamics, amendment and waiver mechanics, and the overall relationship between VHG and its lender group.
Meridian Strauss Advisory LLC (Elise Cavanaugh, Managing Director) has been engaged by VHG as its financial advisor to assist with syndication positioning, pricing analysis, and lender outreach. The Meridian Strauss engagement is governed by a separate engagement letter dated March 28, 2022.]
SECTION 2: FACILITY
2.1 Type. Crescent Harbor Term: Senior Secured Term Loan B.
[C&H Comment: Confirmed. The proposed facility is a senior secured Term Loan B, which is consistent with VHG's existing capital structure and the stated refinancing objective. The "Term Loan B" designation reflects the institutional nature of the loan — the facility will be funded by institutional investors (CLO funds, credit funds, etc.) as opposed to commercial banks, and will feature the longer tenor, lower amortization, and covenant-lite structure characteristic of the institutional term loan market. This is the same structural format as VHG's existing Term Loan B with Greystone Federal Credit Corp., and the refinancing will maintain VHG's position in the broadly syndicated loan market. No issues.]
2.2 Amount. Crescent Harbor Term: $700,000,000.
[C&H Comment: Confirmed. The $700,000,000 facility size has been sized to accomplish VHG's dual refinancing and incremental proceeds objectives, as follows:
(i) Refinancing of Existing TLB: Approximately $625,000,000 to refinance in full the existing Term Loan B facility originated on February 14, 2020, with Greystone Federal Credit Corp. as administrative agent. The original principal amount of the existing TLB was $625,000,000. After 8 quarterly amortization payments of $1,562,500 each (reflecting 1.00% annual amortization of original principal), the outstanding principal balance is estimated at approximately $621,875,000 as of the anticipated payoff date ($625,000,000 − $12,500,000 in aggregate amortization through eight quarterly payments, adjusted for the timing of the closing). The total payoff amount, inclusive of accrued and unpaid interest and the prepayment premium described below, is estimated at approximately $627,916,667.
(ii) Incremental Proceeds: Approximately $75,000,000 in incremental proceeds (before fees, expenses, and OID) for permitted acquisitions and general corporate purposes, providing VHG with additional balance sheet liquidity and acquisition capacity.
Net proceeds to VHG after payoff of the existing Greystone TLB and payment of all transaction fees and expenses are estimated at approximately $60,483,333. This estimate is based on a preliminary funds flow analysis prepared by C&H in consultation with Meridian Strauss Advisory and is subject to adjustment as final fee amounts, the closing date, and the exact payoff amount are confirmed. A detailed funds flow memorandum will be circulated in advance of closing.]
2.3 Purpose. Crescent Harbor Term: (i) Refinance in full the existing Term Loan B facility; (ii) pay fees, costs, and expenses incurred in connection with the transactions contemplated hereby; (iii) fund permitted acquisitions; (iv) general corporate purposes.
[C&H Comment: The purpose clause as drafted by Crescent Harbor is acceptable in substance and is consistent with VHG's intended use of proceeds. C&H recommends the following refinements for inclusion in the revised term sheet and the definitive Credit Agreement:
Specificity of Existing TLB. The purpose clause should specifically identify the existing Term Loan B being refinanced as the $625,000,000 senior secured Term Loan B facility with Greystone Federal Credit Corp. as administrative agent, dated as of February 14, 2020 (CUSIP: 92347LAA0). This specificity avoids any ambiguity regarding the debt being retired and is important for payoff and lien release mechanics.
Permitted Acquisitions. The reference to "permitted acquisitions" in clause (iii) will need to be backed by a defined term in the Credit Agreement setting forth the conditions under which VHG may use proceeds to fund acquisitions. C&H will negotiate a robust "Permitted Acquisition" definition that includes, at a minimum: (a) the acquisition must be of a business or assets in the same or a complementary line of business; (b) the acquired entity becomes a Guarantor (if domestic) within a specified period; (c) no Event of Default exists or would result; (d) pro forma compliance with financial covenants; and (e) VHG's board of directors has approved the acquisition. The specific dollar baskets and other parameters for Permitted Acquisitions will be subject to negotiation.
Payoff Amount Breakdown. For reference, the estimated total payoff amount under the existing Greystone TLB of approximately $627,916,667 consists of: (a) outstanding principal of approximately $621,875,000; (b) accrued and unpaid interest of approximately $2,916,667 (estimated based on the current interest rate of LIBOR + 425 bps and an assumed interest accrual period through the closing date); and (c) a prepayment premium of $3,125,000, calculated as 0.50% of the original $625,000,000 principal amount, as required by Section 2.05(a)(iv) of the existing Greystone credit agreement (the prepayment premium applies to prepayments made prior to the third anniversary of the closing date, i.e., February 14, 2023). These amounts are estimates and will be confirmed by the payoff letter from Greystone.]
SECTION 3: PRICING
3.1 Applicable Margin
Crescent Harbor Term: 375 basis points (3.75%) per annum over Adjusted Term SOFR.
[C&H Comment: The proposed applicable margin of SOFR + 375 basis points represents a meaningful reduction of approximately 50 basis points from the pricing on the existing Greystone TLB, which carries a margin of LIBOR + 425 basis points. On the proposed $700,000,000 facility, this 50 basis point reduction in the applicable margin would yield estimated annual gross interest savings of approximately $3,500,000 ($700,000,000 × 0.50%), although C&H notes that a precise LIBOR-to-SOFR comparison requires accounting for the credit spread adjustment embedded in the Adjusted Term SOFR definition (discussed in Section 3.2 below). Even after this adjustment, the net savings remain meaningful and compare favorably to VHG's existing cost of borrowing.
The proposed pricing has been reviewed with Renata Haines (CFO) and Glenn Fischbach (Treasurer) and is acceptable to VHG based on preliminary discussions. Meridian Strauss Advisory LLC has independently confirmed that a spread of SOFR + 375 basis points is within the competitive market range for BB-/Ba3 rated hospitality-sector Term Loan B issuances in the second quarter of 2022, based on their proprietary analysis of recent comparable transactions. The Meridian Strauss market survey identified a range of SOFR + 350–400 basis points for comparable issuances, with the midpoint at approximately SOFR + 375 basis points, confirming that Crescent Harbor's initial proposal is at the center of the range.
For reference, VHG's current corporate credit ratings are BB- from Kellaway Ratings Group and Ba3 from Pinnacle Credit Services. These ratings are expected to be reaffirmed following the refinancing, with facility-level ratings anticipated at B+ (KRG) and B1 (PCS).
No counter-position is recommended on the applicable margin at this time. However, VHG should be aware that the flex provisions in the Fee Letter (see Section 16.2) may permit Crescent Harbor to increase the spread by up to an additional 25–50 basis points if syndication conditions require — C&H will negotiate appropriate caps on flex.]
3.2 Interest Rate Benchmark
Crescent Harbor Term: Adjusted Term SOFR (CME Term SOFR plus a credit spread adjustment of 0.10% for 1-month interest periods, 0.15% for 3-month interest periods, and 0.25% for 6-month interest periods).
[C&H Comment: The transition from LIBOR (the benchmark under the existing Greystone TLB) to Adjusted Term SOFR (the benchmark under the proposed new TLB) is appropriate and aligns with the prevailing market transition away from LIBOR following the Alternative Reference Rates Committee ("ARRC") recommendations and the cessation of most USD LIBOR tenors after June 30, 2023. The credit spread adjustments proposed by Crescent Harbor (10 bps for 1-month, 15 bps for 3-month, and 25 bps for 6-month tenors) are the standard ARRC-recommended credit spread adjustments for SOFR replacing LIBOR and have been widely adopted in the syndicated loan market.
C&H recommends that the definitive Credit Agreement include hardwired benchmark replacement fallback language consistent with the ARRC's recommended best practices, with the following waterfall:
(a) Primary benchmark: CME Term SOFR (administered by CME Group Benchmark Administration Limited), plus the applicable credit spread adjustment;
(b) First fallback: Daily Simple SOFR, plus the applicable credit spread adjustment;
(c) Second fallback: An alternative benchmark rate selected by the Administrative Agent and the Borrower in accordance with then-prevailing market conventions, giving due consideration to any rate recommended by the Relevant Governmental Body (as defined in the ARRC recommendations).
C&H Associate Daniel Obi is preparing a separate SOFR Transition Memorandum addressing the benchmark mechanics in detail, including conforming changes, benchmark unavailability triggers, and the interaction between the benchmark fallback provisions and the flex provisions.
Illustrative All-In Rate Calculation. For purposes of illustration, assuming a 1-month interest period, the current all-in borrowing rate under the proposed facility would be approximately:
• 1-month Term SOFR (as of approximately April 27, 2022): 2.29%
• Credit Spread Adjustment (1-month): 0.10%
• Adjusted Term SOFR: 2.39%
• Applicable Margin: 3.75%
• All-In Rate: approximately 6.14%
This compares to the current all-in rate under the existing Greystone TLB of approximately 5.25% (1-month LIBOR of approximately 1.00% + 425 bps), reflecting the substantial increase in benchmark rates since the Greystone TLB was originated in February 2020. The higher absolute interest rate environment underscores the importance of the 50 bps margin reduction in the refinancing.]
3.3 SOFR Floor
Crescent Harbor Term: 0.50% (50 basis points).
[C&H Comment: A 50 basis point SOFR floor is standard for current Term Loan B issuances and is acceptable. C&H notes the following contextual considerations for VHG management's awareness:
The existing Greystone TLB has a LIBOR floor of 0.75% (75 basis points). The lower SOFR floor proposed by Crescent Harbor (50 bps versus 75 bps) is favorable to VHG in the current rising rate environment because it reduces the floor's impact on the all-in rate if benchmark rates were to decline. However, VHG management should be aware that the lower floor provides less downside protection if interest rates decline significantly — i.e., if SOFR were to fall below 0.50%, VHG would not benefit from the floor as meaningfully as it would under a higher floor.
As a practical matter, given the current trajectory of the Federal Reserve's monetary policy tightening cycle (the federal funds target rate was increased by 25 basis points at the March 2022 FOMC meeting, with additional increases widely expected), the SOFR floor is unlikely to be operative at closing or for the foreseeable future. The floor is primarily relevant as structural protection for lenders in a future rate environment.
No counter-position is recommended.]
3.4 Default Rate
Crescent Harbor Term: Applicable rate plus 200 basis points.
[C&H Comment: Standard provision. A 200 basis point increase to the applicable rate upon the occurrence and during the continuance of an Event of Default is consistent with market practice for Term Loan B facilities. Acceptable. No counter-position is recommended.]
3.5 Interest Payment Dates
Crescent Harbor Term: Last business day of each interest period (monthly for 1-month SOFR; quarterly for 3-month SOFR).
[C&H Comment: Standard provision. C&H recommends confirming VHG's preference for 1-month interest periods for the initial borrowing, which provides maximum flexibility to manage interest rate exposure and aligns with VHG's existing cash management practices. The Credit Agreement should provide VHG with the ability to select interest periods of 1-month, 3-month, or 6-month duration (and, if available, other periods agreed to by the Administrative Agent), with the standard mechanics for continuation and conversion notices. No counter-position is recommended on the interest payment date mechanics.]
SECTION 4: ORIGINAL ISSUE DISCOUNT
4.1 OID. Crescent Harbor Term: 99.00% of par (1.00% discount).
[C&H Comment: The proposed OID of 1.00% results in the following economics:
• Dollar amount of OID: $700,000,000 × 1.00% = $7,000,000
• Net funding to Borrower (before other fees and expenses): $700,000,000 − $7,000,000 = $693,000,000
This OID level is within the market range for BB-/Ba3 rated Term Loan B issuances in Q2 2022, as confirmed by Meridian Strauss Advisory LLC based on their April 2022 market survey data. Meridian Strauss identified OID levels ranging from 99.00% to 99.50% for comparable hospitality-sector TLB issuances, with the proposed 99.00% (i.e., 1.00% discount) at the wider end of the range. C&H notes that the OID level is subject to potential adjustment pursuant to the syndication flex provisions set forth in the separate confidential flex letter (see Section 16.2 below) and that Crescent Harbor may seek to increase the OID (i.e., widen the discount) if syndication conditions warrant.
Tax Considerations. C&H's tax colleague Leonard Cross (Tax Department, Calderwood & Harkness LLP) is analyzing the OID amortization treatment under Section 1272 of the Internal Revenue Code and the related provisions governing the treatment of debt instruments issued with original issue discount. In particular, Leonard is evaluating whether the proposed TLB could constitute an "applicable high yield discount obligation" ("AHYDO") under IRC Section 163(i), which would have adverse consequences for VHG in terms of the deductibility of interest and the classification of a portion of the OID as a dividend equivalent. The preliminary assessment is that the TLB would not constitute an AHYDO, given the relatively modest OID of 1.00% and the fact that the TLB will provide for current cash interest payments at least annually (a key factor in the AHYDO analysis). A formal memorandum on the tax treatment will follow.
No counter-position is recommended on the OID at this time, subject to review of the flex letter provisions.]
SECTION 5: FEES
5.1 Arrangement Fee
Crescent Harbor Term: 0.50% of the facility amount ($3,500,000), payable to Crescent Harbor at closing.
[C&H Comment: The arrangement fee of 0.50% of $700,000,000, equaling $3,500,000, will be payable to Crescent Harbor at closing in its capacity as sole lead arranger and sole bookrunner. This fee will be documented in a separate Fee Letter to be negotiated and executed concurrently with the Commitment Letter. The proposed arrangement fee is within the market range for transactions of this size and type.
C&H recommends confirming with Crescent Harbor that the arrangement fee is in addition to (and not inclusive of) the original issue discount discussed in Section 4 above. This is the standard formulation — the OID compensates the syndicate lenders, while the arrangement fee compensates the arranger for its underwriting and syndication services — but it should be explicitly confirmed to avoid any ambiguity in the Fee Letter.
VHG may wish to discuss with Meridian Strauss Advisory whether to negotiate a reduction in the arrangement fee in the event that the syndication is oversubscribed (i.e., if total lender commitments received during syndication exceed the $700,000,000 facility size). An oversubscription provision would provide VHG with a fee rebate reflecting the reduced syndication risk borne by Crescent Harbor. While such provisions are not universal, they are occasionally included in Fee Letters for strong credits with favorable syndication prospects.]
5.2 Upfront Fee to Syndicate Lenders
Crescent Harbor Term: 0.25% of each lender's commitment, embedded in the OID.
[C&H Comment: Standard provision. The upfront fee of 0.25% is payable to each syndicate lender on its allocated commitment amount and is embedded within (not in addition to) the 1.00% OID described in Section 4. That is, of the 1.00% OID, 0.25% represents the upfront fee allocated to syndicate lenders and 0.75% represents the remaining discount economics. C&H recommends confirming this understanding with Crescent Harbor in the Fee Letter to ensure that VHG's total day-one economics are not greater than expected. No counter-position is recommended.]
5.3 Administrative Agent Fee
Crescent Harbor Term: $150,000 per annum, payable annually in advance.
[C&H Comment: An annual administrative agent fee of $150,000 is standard for a syndicated credit facility of this size. The fee compensates Crescent Harbor for its ongoing administrative functions as agent, including the maintenance of the register of lenders, processing of interest and principal payments, distribution of notices and financial statements, and coordination of amendments and waivers. The fee is payable annually in advance, commencing on the closing date. Acceptable. No counter-position is recommended.]
SECTION 6: MATURITY AND AMORTIZATION
6.1 Maturity Date
Crescent Harbor Term: 7 years from the closing date.
[C&H Comment: Assuming a closing date of July 21, 2022 (consistent with the proposed timeline set forth in Section 20 below), the maturity date of the Term Loan B would be July 21, 2029. A 7-year tenor is the standard maturity for institutional Term Loan B facilities and is consistent with the existing Greystone TLB, which also had a 7-year maturity at origination (maturing February 14, 2027).
C&H recommends confirming with VHG management that a 7-year maturity is consistent with VHG's capital planning and liability management strategy. In particular, C&H notes the following:
Interaction with Senior Unsecured Notes. VHG has $245,000,000 in aggregate principal amount of senior unsecured notes outstanding, which mature in 2028 — one year prior to the proposed TLB maturity of July 2029. VHG management should consider whether the senior unsecured notes will be refinanced, redeemed, or repaid prior to the TLB maturity date, as a scenario in which the notes mature and require repayment while the TLB remains outstanding could create liquidity pressure. The Credit Agreement's restricted payment and indebtedness covenants should be drafted to accommodate the anticipated refinancing or repayment of the senior unsecured notes. This issue should be flagged for discussion on the May 2 call.
No counter-position is recommended on the 7-year maturity, which is appropriate and market-standard for this facility.]
6.2 Amortization. Crescent Harbor Term: 1.00% per annum of the original principal amount, payable in equal quarterly installments.
[C&H Comment: The proposed amortization schedule results in the following cash flow profile:
• Quarterly amortization payment: $700,000,000 × 1.00% ÷ 4 = $1,750,000 per quarter
• Total scheduled amortization over the 7-year term (28 quarterly installments): $1,750,000 × 28 = $49,000,000
• Balloon payment at maturity: $700,000,000 − $49,000,000 = $651,000,000
An amortization rate of 1.00% per annum is the standard rate for institutional Term Loan B facilities and is consistent with the amortization rate on the existing Greystone TLB. The minimal amortization is characteristic of the institutional term loan market, where the vast majority of principal repayment occurs at maturity (here, approximately 93% of original principal). The annual cash outflow for amortization of $7,000,000 is modest relative to VHG's operating cash flow and should not present any liquidity concerns.
C&H notes that the amortization installments will be payable on the last business day of each fiscal quarter, commencing with the first full fiscal quarter ending after the closing date. Acceptable. No counter-position is recommended.]
SECTION 7: MOST FAVORED NATION PROVISION
7.1 MFN Clause
Crescent Harbor Term: If the Borrower incurs incremental term loans with an effective yield exceeding the yield on the initial Term Loan B by more than 75 basis points, the applicable margin on the initial Term Loan B shall be increased to within 75 bps of the incremental term loan yield. MFN sunset: 12 months from closing.
— SIGNIFICANT NEGOTIATION POINT —
[C&H Comment: The Most Favored Nation ("MFN") provision is one of the most consequential economic terms in the term sheet from VHG's perspective, as it constrains VHG's ability to price future incremental term loans at lower spreads without triggering an upward adjustment to the margin on the initial TLB. Crescent Harbor's initial proposal includes a 75 basis point MFN threshold and a 12-month sunset period. C&H recommends the following counter-positions on behalf of VHG, which we believe represent a balanced approach that trades marginal borrower flexibility for improved syndication execution:
MFN Threshold — C&H Recommends 50 Basis Points.
C&H recommends that VHG propose reducing the MFN threshold from 75 basis points to 50 basis points. While a wider 75 bps threshold would give VHG greater flexibility to price incremental term loans without triggering an adjustment to the initial TLB margin, C&H believes that a 50 bps threshold is the superior strategic position for the following reasons:
(a) Market Standard. A 50 bps MFN threshold is increasingly the market standard for BB-/Ba3 rated hospitality-sector borrowers. Meridian Strauss Advisory has confirmed that recent comparable transactions — including the March 2022 TLB for Ridgewater Resorts Inc. (SOFR + 400, 50 bps MFN, 18-month sunset) and the January 2022 TLB for Arcadian Lodging Holdings (SOFR + 350, 50 bps MFN, 12-month sunset) — have trended toward 50 bps thresholds.
(b) Syndication Execution. A tighter MFN threshold (50 bps) is viewed favorably by institutional term loan investors, who benefit from the protection against yield compression on future incremental issuances. Accepting a 50 bps threshold proactively, rather than allowing the lender group to push for it during syndication, should facilitate smoother and more efficient syndication execution and may avoid reverse flex pressure.
(c) Limited Practical Impact. VHG's current acquisition pipeline does not contemplate incremental term loan needs within the first 18 months following closing (see further discussion under "MFN Sunset Period" below). Accordingly, the difference between a 50 bps and 75 bps MFN threshold is largely theoretical during the period when the MFN would be operative.
MFN Sunset Period — C&H Recommends 18 Months.
C&H recommends that VHG propose extending the MFN sunset period from 12 months to 18 months (i.e., from the closing date through approximately January 21, 2024, assuming a July 21, 2022 closing). An 18-month sunset is favorable to the initial lender group and should further improve syndication execution and demand. After the MFN sunset date, VHG would be free to incur incremental term loans at any yield — regardless of the spread differential relative to the initial TLB — without triggering any adjustment to the initial TLB margin.
Rationale for VHG's Acceptance of Tighter MFN Terms. The combination of a 50 bps threshold and an 18-month sunset trades marginally increased theoretical constraint on VHG's incremental financing flexibility against meaningfully improved syndication pricing and execution. Given that VHG does not currently anticipate incurring incremental term loans within the first 18 months following closing, the cost to VHG of these tighter MFN terms is, in practical terms, de minimis. Meanwhile, the benefit — a more enthusiastic lender reception during syndication, potentially leading to tighter pricing or a reduction in OID — is concrete and valuable. C&H recommends discussing this strategic trade-off with Ian Blackwood and VHG management on the May 2 call before finalizing the counter-position.
Open Issue — Yield Calculation Methodology. The MFN clause requires a definition of "effective yield" (or, in the Credit Agreement, likely defined as "All-In Yield") to determine whether an incremental term loan's yield exceeds the initial TLB yield by more than the MFN threshold. C&H recommends that "All-In Yield" be defined to include the following components:
(i) The applicable margin (spread over the benchmark rate);
(ii) Original issue discount, if any, amortized to the earlier of (A) the first date on which a repricing transaction may be consummated without payment of a prepayment premium and (B) four years following the funding of the applicable incremental term loans;
(iii) Upfront fees payable to the lenders, calculated on the same amortization basis as OID;
(iv) The benchmark floor (SOFR floor), to the extent the floor is operative (i.e., exceeds the then-current benchmark rate);
And should exclude the following:
(v) Arrangement fees, structuring fees, or other fees payable solely to the administrative agent or lead arranger;
(vi) Commitment fees;
(vii) Other one-time fees or expense reimbursements.
The precise definition of "All-In Yield" will need to be carefully drafted in the Credit Agreement to avoid manipulation or unintended consequences.
Interaction with Incremental Facility Provisions. The MFN clause should apply only to pari passu incremental term loans — that is, incremental term loans that share the same lien priority and right of payment as the initial TLB. The MFN should not apply to:
(a) Incremental revolving commitments under the RCF;
(b) Incremental term loans that are contractually subordinated in right of payment to the initial TLB (i.e., "junior" or "last out" tranches);
(c) Incremental term loans secured by liens that are junior in priority to the liens securing the initial TLB (i.e., second-lien incremental debt); or
(d) Fixed-rate incremental debt, which is not directly comparable to floating-rate debt for yield calculation purposes.
C&H will ensure that these carve-outs are clearly documented in the Credit Agreement.]
SECTION 8: REPRICING PROTECTION (SOFT CALL)
8.1 Repricing Protection Period and Premium
Crescent Harbor Term: 12 months from closing; 1.00% premium on any repricing or refinancing at a lower effective yield within the repricing protection period.
— NEGOTIATION POINT —
[C&H Comment: Crescent Harbor proposes a 12-month repricing protection (or "soft call") period during which any prepayment, repricing, or refinancing of the TLB that results in a lower effective yield would trigger a prepayment premium of 1.00% of the principal amount prepaid, repriced, or refinanced. C&H recommends that VHG counter with a 6-month repricing protection period, while accepting the 1.00% premium, for the following reasons:
6-Month Soft Call Is Increasingly Market Standard.
The institutional term loan market has exhibited a clear trend toward shorter repricing protection periods over the past several quarters. Recent hospitality-sector and REIT-adjacent TLB transactions have moved to 6-month soft calls, and a 12-month period is viewed by borrower-side advisors as aggressive and outside current market norms for issuers with VHG's credit profile. Meridian Strauss Advisory has confirmed that the majority of recent BB-rated TLB issuances (across all sectors, not limited to hospitality) have featured 6-month soft call periods.
Premium Amount.
The 1.00% premium is standard and acceptable — C&H does not recommend attempting to negotiate the premium percentage. If VHG were to reprice the full $700,000,000 facility within the soft call period, the premium would be $7,000,000. This represents a meaningful but not prohibitive cost, and VHG would only incur the premium if the interest savings from the repricing justified the upfront payment. Following the expiration of the repricing protection period (proposed: January 21, 2023, six months following the assumed July 21, 2022 closing), VHG would be free to prepay, reprice, or refinance the TLB at par without any premium.
Trade-Off with MFN Concessions — Package Negotiation.
C&H's recommended counter-position on the repricing protection period is designed to work as part of a package negotiation with the MFN clause (Section 7). Specifically, C&H recommends that VHG present the following positions to Crescent Harbor as a unified package:
• VHG concedes to a tighter MFN clause (50 bps threshold, 18-month sunset — more lender-friendly than Crescent Harbor's initial proposal), in exchange for
• Crescent Harbor concedes to a shorter soft call period (6 months — more borrower-friendly than Crescent Harbor's initial proposal).
This approach positions VHG as accommodating on a provision that matters significantly to the lender syndicate (the MFN), while securing flexibility on a provision that matters to VHG (the ability to reprice after 6 months if market conditions are favorable). From a syndication perspective, the tighter MFN terms should more than offset the shorter soft call period in terms of investor appetite.
Dollar Impact Analysis.
If interest rates were to decline significantly in the months following closing and VHG wished to execute a repricing transaction within the first six months, the $7,000,000 premium would be a meaningful but potentially justified cost. For example, if VHG could reprice from SOFR + 375 to SOFR + 325 (a 50 bps reduction), the annual interest savings would be approximately $3,500,000 ($700M × 50 bps), yielding a payback period of approximately 2 years on the $7M premium. If the soft call period were extended to 12 months as Crescent Harbor proposes, VHG would lose the flexibility to execute such a repricing during a potentially favorable 6-month window, potentially foregoing significant cumulative interest savings over the remaining life of the facility.
C&H recommends discussing the package negotiation strategy with Ian Blackwood and VHG management on the May 2 call.]
SECTION 9: FINANCIAL COVENANTS
9.1 Maximum Total Net Leverage Ratio
Crescent Harbor Term: Maximum Total Net Leverage Ratio of 4.50:1.00, tested quarterly on a trailing four-quarter basis, applicable at all times.
— SIGNIFICANT NEGOTIATION POINT —
[C&H Comment: The Crescent Harbor term sheet proposes a maintenance financial covenant — that is, a Maximum Total Net Leverage Ratio of 4.50x that is tested on a quarterly basis and is applicable at all times, regardless of whether VHG has drawn on its revolving credit facility. C&H strongly recommends negotiating for a springing financial covenant, as described below. This is the single most important structural issue in the term sheet from a Credit Agreement perspective.
Springing Financial Covenant — C&H's Recommended Position.
The Maximum Total Net Leverage Ratio of 4.50:1.00 should spring into effect and be tested only when the aggregate revolving credit exposure under the $400,000,000 RCF exceeds 35% of total revolving commitments. For these purposes, "aggregate revolving credit exposure" should include drawn revolving loans and outstanding letters of credit, but should exclude undrawn revolving commitments. At the current RCF size of $400,000,000, the springing trigger would be activated at an aggregate revolving credit exposure of $140,000,000 (35% × $400M).
This structure is overwhelmingly standard in the institutional Term Loan B market. True maintenance financial covenants — covenants that are tested at all times regardless of revolving exposure — are exceedingly rare in TLB facilities and are generally limited to pro rata (bank) term loan tranches or revolving credit facilities. Institutional term loan investors in the broadly syndicated market have come to expect a "covenant-lite" or "springing covenant" structure, and the inclusion of a maintenance covenant would be viewed as anomalous and could adversely affect syndication demand and pricing.
C&H anticipates that Crescent Harbor — as an experienced TLB arranger — likely included the maintenance covenant formulation as a starting position with the expectation that it would be negotiated to a springing structure. If Crescent Harbor resists a springing covenant, this should be escalated to Ian Blackwood and potentially to senior relationship discussions between VHG and Crescent Harbor.
Pro Forma Compliance Analysis.
VHG's pro forma Total Net Leverage Ratio at closing is estimated at 2.52x, calculated as follows:
• Total Funded Indebtedness:
• New Term Loan B: $700,000,000
• Senior Unsecured Notes due 2028: $245,000,000
• Revolving Credit Facility: $0 (undrawn at closing)
• Total: $945,000,000
• Less: Unrestricted Cash and Cash Equivalents: ($87,000,000)
• Total Net Debt: $858,000,000
• LTM Adjusted EBITDA (trailing four quarters ending December 31, 2021): $341,000,000
• Total Net Leverage Ratio: $858,000,000 ÷ $341,000,000 = 2.52x
This provides approximately 1.98 turns of headroom below the proposed 4.50x maximum, demonstrating substantial cushion under the financial covenant even if tested on a maintenance basis. VHG's strong leverage profile supports both the negotiation for a springing covenant (which is a structural, not credit-quality, argument) and the overall creditworthiness of the refinancing.
Testing Methodology — Key Definitions.
C&H recommends the following approach to the definitions underlying the financial covenant:
(a) "Total Net Leverage Ratio" should be defined as the ratio of (i) Consolidated Total Funded Indebtedness minus unrestricted cash and cash equivalents, to (ii) Consolidated Adjusted EBITDA for the most recently ended period of four consecutive fiscal quarters. The deduction of unrestricted cash from the numerator (the "net" in "net leverage") is critical to VHG and should be preserved.
(b) "Adjusted EBITDA" should include customary add-backs to consolidated net income, including: (I) interest expense; (II) income tax expense; (III) depreciation and amortization; (IV) non-cash stock-based compensation expense; (V) non-recurring charges and restructuring costs (subject to a cap, typically 15–20% of LTM EBITDA); (VI) acquisition-related and integration costs; (VII) management fees and advisory fees; and (VIII) other customary items. A detailed covenant build analysis — comparing the add-back provisions in the existing Greystone TLB credit agreement with the add-backs expected to be available under the new TLB — will be prepared in a separate memorandum.
No Interest Coverage Ratio.