mfn-repricing-negotiation-strategy-memo.docx

1021-00001 · Verimark Hospitality Group · Term Sheet & Commitment Letter

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein and may not be disclosed, copied, or distributed to any other person or entity without the prior written consent of Calderwood & Harkness LLP.

MEMORANDUM

From: Sophie Tremblay, Associate, Banking & Finance, Calderwood & Harkness LLP

To: Ian Blackwood, Partner, Banking & Finance, Calderwood & Harkness LLP

Date: May 10, 2022

Re: Verimark Hospitality Group Inc. — $700,000,000 Term Loan B Refinancing: MFN Sunset and Repricing Protection Negotiation Strategy

Engagement: 1016-00009

CC: Stephanie Okafor (Billing Partner); Daniel Obi (Working Associate)

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I. Executive Summary

The purpose of this memorandum is to set forth Calderwood & Harkness's recommended negotiation strategy with respect to two key borrower-protective provisions in the proposed $700,000,000 senior secured Term Loan B refinancing by Verimark Hospitality Group Inc. ("VHG" or the "Borrower"): (i) the "most favored nation" (MFN) sunset provision and (ii) the repricing protection (soft call) provision. These two provisions are among the most commercially significant open terms in the transaction, and their resolution will directly affect VHG's cost of capital, financing flexibility, and ability to execute on its stated acquisition pipeline in the near and medium term.

Transaction Context. VHG is refinancing its existing $625,000,000 Term Loan B facility (originally closed on February 14, 2020, with Greystone Federal Credit Corp. as administrative agent, priced at LIBOR + 425 basis points) with a new $700,000,000 Term Loan B to be arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor") at Adjusted Term SOFR + 375 basis points. The refinancing achieves a 50 basis point reduction in the applicable margin, translating to approximately $3,500,000 in annual interest expense savings for VHG. The incremental $75,000,000 in proceeds (representing the difference between the $700,000,000 new facility and the approximately $627,916,667 payoff amount on the existing facility) will be available to fund VHG's acquisition pipeline and for general corporate purposes.

Current State of Negotiations. Crescent Harbor's initial term sheet, received on April 22, 2022, proposed a 24-month MFN sunset with a 25 basis point threshold and a 12-month soft call at a 1.00% premium. Our revised term sheet on behalf of VHG, delivered on May 6, 2022, countered with a 12-month MFN sunset, a 75 basis point threshold, and a 6-month soft call at the same 1.00% premium level. Both proposals represent positions at opposite ends of the market spectrum, and the parties are now engaged in substantive negotiations to find a commercially reasonable middle ground.

Recommended Settlement Position. Based on our analysis of market precedent, VHG's strategic objectives, and the likely positions of Crescent Harbor and anticipated syndicate participants, this memorandum recommends settling on the following terms:

• MFN Sunset Period: 18 months from the closing date (i.e., from July 21, 2022 through January 21, 2024);

• MFN Threshold: 50 basis points;

• Soft Call Period: 6 months from the closing date (i.e., from July 21, 2022 through January 21, 2023); and

• Soft Call Premium: 1.00% of the principal amount repriced or refinanced (market standard; not contested).

These positions are squarely aligned with current market norms for BB-/Ba3 rated hospitality-sector Term Loan B facilities and should be achievable in negotiations with Crescent Harbor and its counsel, Whitfield Gage & Partridge LLP ("WGP"). The recommended terms balance VHG's need for flexibility with the legitimate yield-protection expectations of syndicate lenders, thereby supporting a successful syndication process.

This memorandum should be read in connection with the parallel negotiation of the commitment letter (targeted for execution on May 27, 2022), the first draft credit agreement circulated by WGP on May 16, 2022, and our ongoing communications with VHG's management team and financial advisor, Meridian Strauss Advisory LLC.

II. Background on the Transaction and VHG's Capital Structure

A. Transaction Overview

The key terms of the proposed refinancing transaction are summarized below:

Borrower. Verimark Hospitality Group Inc., a corporation organized and existing under the laws of the State of Delaware, publicly traded on the New York Stock Exchange under the ticker symbol "VMRK." VHG's principal executive offices are located at 8200 West Palmetto Park Road, Suite 1500, Boca Raton, Florida 33433. VHG operates a diversified portfolio of hotel and resort properties across the United States and is one of the largest publicly traded hospitality companies in the upper-upscale and luxury segments.

Facility. $700,000,000 Senior Secured Term Loan B (the "TLB" or the "Facility").

Administrative Agent / Lead Arranger / Bookrunner. Crescent Harbor Bank, N.A., a national banking association headquartered in Charlotte, North Carolina. Crescent Harbor also serves as administrative agent under VHG's existing $400,000,000 senior secured revolving credit facility, giving it an established relationship with the Borrower and familiarity with VHG's credit profile and collateral package.

Agent's Counsel. Whitfield Gage & Partridge LLP, New York office. Our primary contacts at WGP are Harrison Whitfield III, Partner, and Megan Yeung, Associate. WGP is responsible for drafting the credit agreement and related loan documentation on behalf of the administrative agent.

Financial Advisor to VHG. Meridian Strauss Advisory LLC ("Meridian Strauss"). Elise Cavanaugh, Managing Director, is the lead advisor responsible for advising VHG on the refinancing structure, pricing, and syndication strategy. Meridian Strauss has been instrumental in identifying the spread savings opportunity and structuring the incremental proceeds to support VHG's acquisition pipeline.

Pricing. Adjusted Term SOFR + 375 basis points. The Facility includes a SOFR floor of 0.50% (50 basis points), ensuring a minimum reference rate regardless of prevailing SOFR levels. The original issue discount ("OID") is 1.00%, resulting in net proceeds to VHG of $693,000,000 on a $700,000,000 funded principal amount (i.e., an OID of $7,000,000).

Maturity. Seven-year tenor from the closing date, resulting in a final maturity date of July 21, 2029 (based on an assumed closing date of July 21, 2022).

Amortization. 1.00% per annum of the original principal amount ($7,000,000 per annum), payable in equal quarterly installments of $1,750,000. The remaining balance at maturity (the "balloon") will be approximately $651,000,000, assuming no voluntary or mandatory prepayments are made during the term.

Sign and Close. A simultaneous sign-and-close is anticipated, with both the execution of the credit agreement and the funding of the TLB occurring on the closing date. This structure simplifies the transaction mechanics and avoids the need for delayed-draw provisions or "certain funds" conditions.

B. VHG's Existing Capital Structure

Understanding VHG's current capital structure is essential to evaluating the MFN and repricing protection provisions, as these provisions directly affect VHG's ability to incur incremental debt and to adjust the cost of existing debt over time.

Existing $625,000,000 Term Loan B. VHG's current TLB facility was closed on February 14, 2020, with Greystone Federal Credit Corp. ("Greystone") serving as administrative agent. The facility was priced at LIBOR + 425 basis points and was originally syndicated to a broad group of institutional lenders. As of the anticipated closing date of the refinancing, the outstanding principal balance on the Greystone TLB will be approximately $621,875,000, reflecting $3,125,000 in scheduled amortization payments made since the February 2020 origination (representing 1.00% per annum of the original $625,000,000 principal amount). The total payoff amount for the Greystone TLB is estimated at approximately $627,916,667, comprised of (i) $621,875,000 in outstanding principal, (ii) approximately $2,916,667 in accrued and unpaid interest through the anticipated payoff date, and (iii) a $3,125,000 prepayment premium calculated at 0.50% of the outstanding principal balance. The refinancing of this facility is the primary purpose of the new TLB, and the 50 basis point reduction in the applicable margin (from 425 bps to 375 bps) represents significant annual interest expense savings for VHG.

$400,000,000 Senior Secured Revolving Credit Facility. VHG maintains a $400,000,000 senior secured revolving credit facility (the "Revolver") with Crescent Harbor serving as administrative agent. The Revolver is expected to be undrawn at the anticipated closing date of the TLB refinancing. Crescent Harbor's dual role as agent under both the Revolver and the new TLB creates institutional alignment and simplifies intercreditor considerations. The Revolver shares the same collateral package as the TLB on a pari passu basis.

$245,000,000 Senior Unsecured Notes Due 2028. VHG has $245,000,000 in aggregate principal amount of senior unsecured notes outstanding, with Atlantic Standard Trust Company serving as indenture trustee. These notes mature in 2028, approximately one year prior to the maturity of the proposed new TLB. The notes are structurally and contractually subordinated to the TLB and Revolver with respect to the collateral package.

Credit Ratings. VHG's corporate credit is rated BB- by the Kellaway Ratings Group ("KRG") and Ba3 by Pinnacle Credit Services ("PCS"). These ratings place VHG squarely in the non-investment-grade / leveraged finance category but at the higher end of the speculative-grade spectrum. The BB-/Ba3 rating is an important reference point for our market precedent analysis, as it determines the relevant comparison set of transactions.

FY2021 Financial Performance. For the fiscal year ended December 31, 2021, VHG reported revenue of approximately $1.42 billion and EBITDA of approximately $318 million. Adjusted EBITDA, after giving effect to certain non-recurring charges, stock-based compensation add-backs, and other customary adjustments, was approximately $341 million. The Adjusted EBITDA figure is the relevant metric for purposes of calculating leverage ratios under the credit agreement and for assessing VHG's capacity to incur incremental indebtedness.

Hotel Portfolio. VHG's portfolio consists of 74 properties located across 18 states. The aggregate appraised value of the portfolio is approximately $3.1 billion. Of these 74 properties, 42 are owned by Verimark Resort Properties LLC, a wholly-owned subsidiary of VHG, and are subject to first-priority mortgage liens securing the TLB and Revolver. The aggregate appraised value of the 42 mortgaged properties is approximately $2.18 billion, providing substantial collateral coverage relative to the $700,000,000 TLB.

C. Pro Forma Leverage

The pro forma capital structure at closing will be as follows:

• Total Funded Debt: $945,000,000 (comprised of the $700,000,000 new TLB and the $245,000,000 senior unsecured notes)

• Unrestricted Cash: $87,000,000 (estimated at closing after giving effect to the use of proceeds, including the payoff of the Greystone TLB, transaction fees and expenses, and retention of net incremental proceeds)

• Pro Forma Net Debt: $858,000,000 ($945,000,000 total funded debt less $87,000,000 unrestricted cash)

• Pro Forma Total Net Leverage Ratio: $858,000,000 ÷ $341,000,000 (LTM Adjusted EBITDA) = 2.52x

The credit agreement is expected to include a springing financial covenant in the form of a maximum Total Net Leverage Ratio of 4.5x, tested only when Revolver utilization exceeds a specified threshold (typically 35% of total commitments). VHG's pro forma leverage of 2.52x provides significant headroom relative to the 4.5x covenant — approximately 1.98 turns of EBITDA, or approximately $675,000,000 in additional debt capacity before the covenant would be breached (on a static basis, not accounting for EBITDA growth or other adjustments).

This substantial leverage headroom is directly relevant to the MFN analysis. VHG's low leverage relative to the covenant threshold means that VHG has ample capacity to incur incremental term loans under both the "freebie" basket and the ratio-based basket in the credit agreement. To the extent VHG exercises this capacity during the MFN sunset period, the MFN threshold will determine whether the pricing on the initial TLB is adjusted upward. This reinforces the importance of negotiating a 50 basis point threshold — a threshold that provides VHG with meaningful room to incur incremental debt at competitive rates without triggering an involuntary increase in the cost of the initial TLB.

III. The "Most Favored Nation" (MFN) Provision

A. Description and Mechanics

The MFN provision is a yield-protection mechanism that operates for the benefit of the lenders under the initial TLB. In essence, the MFN provides that if the Borrower incurs incremental term loans at an effective yield that exceeds the effective yield on the initial TLB by more than a specified threshold (the "MFN Threshold"), the applicable margin on the initial TLB is automatically increased so that it is within the MFN Threshold of the effective yield on the incremental term loans. The MFN provision is typically subject to a sunset — that is, it ceases to apply after a specified period following the closing date (the "MFN Sunset Period"), after which the Borrower may incur incremental term loans at any yield without triggering an adjustment to the initial TLB margin.

The MFN provision addresses a legitimate concern of initial TLB lenders: that the Borrower may, shortly after closing, incur additional term loans at a higher yield, effectively subordinating the initial lenders' return expectations relative to the new money lenders. By requiring that the initial TLB margin be adjusted upward to remain competitive with new incremental issuances, the MFN protects the initial lenders' relative yield position during the period in which they are most vulnerable — typically the syndication and initial trading period.

The three key variables in an MFN provision are as follows:

MFN Threshold. The MFN Threshold is the permitted yield differential between the initial TLB and any incremental term loans. Only if the effective yield on the incremental term loans exceeds the initial TLB yield by more than the MFN Threshold is the step-up triggered. Crescent Harbor's initial proposal set the MFN Threshold at 25 basis points — a very tight threshold that would give VHG extremely limited room to price incremental facilities above the initial TLB spread. Our counter-proposal on behalf of VHG proposed a 75 basis point threshold, which would provide substantially more flexibility. As discussed in Section III.D below, we recommend settling at 50 basis points, which is at the market median and provides an appropriate balance between lender protection and borrower flexibility.

MFN Sunset Period. The MFN Sunset Period defines the temporal window during which the MFN protection applies. After the sunset, incremental term loans may be incurred at any yield without triggering an adjustment to the initial TLB margin. Crescent Harbor initially proposed a 24-month sunset; our counter-proposal sought a 12-month sunset. We recommend settling at 18 months (from July 21, 2022 through January 21, 2024), consistent with the market median.

Yield Definition. The definition of "effective yield" is a critical drafting point that determines which components of the incremental term loan pricing are included in the comparison with the initial TLB. The effective yield definition should include the applicable margin, OID or upfront fees (amortized over the shorter of the expected life of the loan and 4 years, which is the market-standard assumed life for OID amortization purposes), and the benefit of any SOFR floor to the extent the incremental facility has a higher floor than the initial TLB's 0.50% floor and such higher floor is "in the money" at the time of incurrence. The effective yield definition should exclude arrangement fees, commitment fees, administrative agent fees, consent fees, amendment fees, and other fees that are not shared ratably among all lenders in the relevant tranche. This distinction is important because including non-ratable fees would distort the yield comparison and could inadvertently trigger the MFN based on fees that do not reflect the true cost of borrowing to VHG.

B. VHG's Negotiation Objectives

VHG's principal objectives with respect to the MFN provision are as follows:

First, VHG seeks to preserve maximum flexibility to incur incremental term loans at competitive pricing in connection with future acquisitions. VHG's acquisition pipeline is a stated use of the incremental proceeds from the refinancing, and the company's management team has indicated that it expects to pursue one or more acquisitions in the next 12 to 24 months. The MFN provision, if too restrictive, could constrain VHG's ability to price incremental acquisition financing competitively, either by forcing VHG to accept a lower spread on the incremental facility (reducing its attractiveness to new-money lenders) or by triggering an automatic increase in the initial TLB margin (increasing VHG's overall cost of capital).

Second, VHG seeks to minimize the period during which its cost of capital on the initial TLB could be involuntarily increased. The MFN sunset directly addresses this concern: a shorter sunset means a shorter period of vulnerability. After the sunset expires, VHG has complete freedom to price incremental facilities as the market dictates without any impact on the initial TLB.

Third, VHG recognizes the need to balance its flexibility objectives against the legitimate expectations of syndicate lenders and the practical requirements of a successful syndication. An MFN threshold that is too wide, or a sunset that is too short, could signal to potential syndicate participants that the Borrower does not intend to provide meaningful yield protection, potentially reducing demand for the Facility or requiring pricing concessions elsewhere. VHG therefore seeks to land on terms that are defensible by reference to market precedent and that provide sufficient protection to support syndication without unnecessarily restricting VHG's future financing flexibility.

A critical consideration in the MFN negotiation is its interaction with the incremental facility basket in the credit agreement. The credit agreement is expected to include two types of incremental capacity: (i) a "freebie" incremental basket (expected to be in the range of $150,000,000 to $200,000,000), which permits VHG to incur additional term loans or revolving commitments without satisfying a pro forma leverage test, and (ii) a ratio-based incremental basket, which permits incurrence of additional term loans or revolving commitments so long as VHG satisfies a pro forma Total Net Leverage Ratio test (expected to be set at 4.5x, consistent with the springing financial covenant). The MFN provision applies to incremental term loans incurred under both baskets during the sunset period. This means that VHG's incremental borrowing capacity — which is substantial given the 2.52x pro forma leverage and the 4.5x covenant — is effectively constrained by the MFN during the sunset period, further underscoring the importance of negotiating both a reasonable threshold and a reasonable sunset duration.

C. Market Precedent Analysis

To inform our recommended position, we have analyzed 15 comparable BB-/Ba3 rated leveraged Term Loan B facilities in the hospitality, lodging, and real estate sectors that closed between Q1 2021 and Q1 2022. This comparison set was developed in consultation with Meridian Strauss and reflects transactions with similar credit profiles, industry dynamics, and structural characteristics. A full summary of these transactions, including borrower names, facility sizes, pricing, MFN terms, and repricing protection terms, is set forth in Appendix A (to be provided under separate cover).

The results of our precedent analysis with respect to MFN terms are as follows:

MFN Sunset Period. The MFN sunset periods in the comparable transactions ranged from a low of 6 months to a high of 24 months, with a median of 18 months. Of the 15 transactions, 9 (60%) had 18-month sunsets, 3 (20%) had 12-month sunsets, and 3 (20%) had 24-month sunsets. The strong clustering around the 18-month mark reflects a well-established market convention that balances lender protection (covering the initial syndication and trading period, as well as the typical CLO ramp-up window) with borrower flexibility (providing a definitive and foreseeable expiration date).

MFN Threshold. The MFN thresholds ranged from 25 basis points to 75 basis points, with a median of 50 basis points. Of the 15 transactions, 10 (67%) used a 50 basis point threshold, 3 (20%) used 25 basis points, and 2 (13%) used 75 basis points. The dominance of the 50 basis point threshold reflects a market consensus that 50 basis points provides an appropriate level of protection — tight enough to prevent significant yield disadvantage for initial lenders, but wide enough to give borrowers meaningful room to price incremental facilities in a dynamic market.

We note that the broader leveraged finance market (not limited to the hospitality and real estate sectors) shows a similar clustering around the 18-month / 50 basis point combination, though sponsor-backed transactions tend to achieve shorter sunsets and wider thresholds, reflecting the greater negotiating leverage of private equity sponsors. VHG, as a publicly traded corporation without a controlling sponsor, does not benefit from this dynamic, but its strong credit profile and low leverage provide compensating negotiating strength.

Key Observation. Crescent Harbor's initial proposal of a 24-month sunset with a 25 basis point threshold was aggressive relative to market norms — positioned at or beyond the lender-favorable end of the range. Conversely, our counter-proposal of a 12-month sunset with a 75 basis point threshold was equally aggressive in the borrower-favorable direction. The recommended settlement position of 18 months / 50 basis points is squarely at the market median on both dimensions and should be readily defensible in negotiations. We expect that WGP, as experienced leveraged finance counsel, will recognize these terms as market-standard and advise Crescent Harbor accordingly.

D. Recommended Position and Rationale

MFN Sunset Period: 18 Months

We recommend an MFN sunset period of 18 months from the closing date, expiring on January 21, 2024 (assuming a July 21, 2022 closing date).

The 18-month sunset is consistent with the market median observed in our comparable transactions analysis. It provides Crescent Harbor and the syndicate lenders with meaningful protection during the period that matters most to them: the initial syndication hold period (typically 60 to 90 days) and the first 12 to 18 months of secondary market trading, during which lenders are most sensitive to yield dilution from incremental issuances.

The 18-month sunset also aligns with the typical CLO ramp-up period. This is particularly relevant given that Ridgeline Capital Partners, LP and Ironbridge Loan Management LLC — both CLO managers — are expected to be significant participants in the syndicate. CLO managers typically warehouse loans during a ramp-up period of 12 to 18 months before closing their CLO vehicles. During this ramp-up period, CLO managers are sensitive to changes in the yield profile of their warehouse assets, as such changes can affect the economics of the CLO structure. By providing MFN protection through the end of the typical ramp-up window, the 18-month sunset addresses this concern directly.

At the same time, the 18-month sunset gives VHG a clear and definitive expiration date. After January 21, 2024, VHG will have complete flexibility to incur incremental term loans at any yield without any impact on the initial TLB margin. This is important for VHG's medium-term planning, as it allows the company to structure its acquisition financing strategy around the sunset date with confidence.

MFN Threshold: 50 Basis Points

We recommend an MFN threshold of 50 basis points.

The 50 basis point threshold provides meaningful headroom for VHG to price incremental term loans competitively. Under this threshold, VHG could incur incremental term loans at an effective yield of up to Adjusted Term SOFR + 425 basis points (i.e., 375 bps initial margin + 50 bps threshold) without triggering an automatic increase in the initial TLB margin. This means that, even during the MFN sunset period, VHG could price incremental facilities at a spread equal to or below the spread on the existing Greystone TLB (which was priced at LIBOR + 425 bps) without any adverse effect on the initial TLB.

The 50 basis point threshold also creates a natural conceptual symmetry with the overall refinancing transaction: VHG is achieving a 50 basis point spread savings in the refinancing (from 425 bps to 375 bps), and the MFN threshold preserves VHG's ability to incur incremental debt at up to 50 basis points above the new spread before any step-up is triggered. This symmetry may be useful as a rhetorical point in negotiations, framing the threshold as a return to the prior pricing level rather than an expansion beyond it.

Furthermore, the 50 basis point threshold is at the market median in our comparable transactions analysis, with 10 of 15 (67%) comparable deals using this precise threshold. This strong market precedent makes the 50 basis point position highly defensible and difficult for Crescent Harbor to resist on a principled basis.

Post-Sunset Freedom. After January 21, 2024, VHG may incur incremental term loans under the credit agreement at any effective yield — whether higher or lower than the initial TLB yield — without triggering any adjustment to the initial TLB margin. This complete post-sunset freedom is a standard feature of MFN provisions and is not expected to be contested.

E. Yield Calculation Methodology

The definition of "effective yield" is a critical drafting point that will be negotiated in the context of the credit agreement itself. We recommend the following approach:

Included in Effective Yield. The effective yield calculation should include:

(i) the applicable margin (i.e., the spread over Adjusted Term SOFR);

(ii) any original issue discount ("OID") or upfront fees payable to lenders, in each case amortized over the shorter of (x) the expected weighted average life of the applicable term loans and (y) four years (the four-year assumed life is market convention and prevents distortion from very long-dated facilities where OID amortization over the full term would produce a negligible per-annum yield contribution);

(iii) the benefit of any SOFR floor, calculated as the excess (if any) of the SOFR floor applicable to the incremental term loans over the SOFR floor applicable to the initial TLB (0.50%), but only to the extent such excess is "in the money" at the time of incurrence (i.e., only to the extent the applicable SOFR rate at the time of incurrence is below the incremental facility's SOFR floor); and

(iv) the 10 basis point SOFR credit spread adjustment applicable to 1-month tenor borrowings, which should be included in the yield calculation for both the initial TLB and any incremental term loans to ensure consistency. Because the credit spread adjustment applies equally to both sides of the comparison, its inclusion is neutral but avoids potential disputes about whether it constitutes part of the "margin" or is a separate component.

Excluded from Effective Yield. The effective yield calculation should exclude:

(i) arrangement fees payable to the lead arranger or bookrunner in connection with the incremental term loans (these fees compensate the arranger for syndication risk and effort and are not shared with all lenders);

(ii) administrative agent fees;

(iii) commitment fees (applicable to undrawn revolving commitments, not term loans, but included here for the avoidance of doubt);

(iv) consent fees, amendment fees, and waiver fees paid to lenders in connection with modifications to the credit agreement; and

(v) any other fees that are not shared ratably among all lenders in the relevant tranche.

The rationale for these exclusions is straightforward: the MFN is intended to protect initial lenders against yield dilution — i.e., a situation in which new-money lenders receive a higher return on the same credit risk. Fees that are specific to the syndication process or that compensate the administrative agent for services do not affect the yield available to rank-and-file lenders and should therefore be excluded from the comparison.

SOFR Credit Spread Adjustment. We note that the treatment of the 10 basis point SOFR credit spread adjustment (applicable to 1-month SOFR borrowings) requires specific attention. As the market continues to transition from LIBOR to SOFR, there is ongoing debate about whether the credit spread adjustment should be treated as part of the "margin" for purposes of yield calculations, or as a separate component of the all-in rate. We recommend including the credit spread adjustment in the yield calculation for both the initial TLB and any incremental term loans. This ensures a consistent apples-to-apples comparison and avoids potential disputes. Because the credit spread adjustment is expected to apply equally to both tranches, its inclusion does not change the relative yield comparison but eliminates a potential source of ambiguity.

F. Carve-Outs and Exceptions

We recommend negotiating the following carve-outs and exceptions to the MFN provision:

Incremental Revolving Commitments. The MFN should not apply to incremental revolving commitments incurred under the credit agreement. Revolving credit facilities are structurally different from term loans — they are undrawn contingent commitments, not funded debt — and it is standard market practice to exclude them from MFN protection. Crescent Harbor is not expected to resist this carve-out.

Acquisition-Related Incremental Term Loans. We recommend seeking a carve-out for incremental term loans incurred to finance permitted acquisitions where the aggregate consideration exceeds a specified size threshold (the threshold to be negotiated, but we suggest $100,000,000 as a starting point). This carve-out recognizes that acquisition financing often requires pricing concessions to attract lenders on an expedited timeline, and that constraining the Borrower's ability to price acquisition financing competitively would undermine one of the stated purposes of the incremental facility. This carve-out is increasingly common in the market, though it remains a borrower-favorable provision that some CLO lenders may resist. We should be prepared to offer a cap on the aggregate amount of incremental term loans eligible for this carve-out (e.g., no more than $250,000,000 in aggregate) as a compromise if necessary.

Full Refinancing of the TLB. The MFN should not apply to any refinancing of the TLB in its entirety. If VHG refinances the entire $700,000,000 facility with a new term loan, the MFN protection becomes moot — there are no "initial TLB lenders" remaining to protect. This is a standard carve-out and is not expected to be controversial.

Fungible Incremental Term Loans. We should consider seeking an exemption for incremental term loans that are issued as part of the same tranche as the initial TLB (i.e., fungible with the initial TLB, carrying the same CUSIP number and trading as a single facility). The theory behind this exemption is that, if the incremental term loans are fungible, the higher yield would apply to the entire tranche (including the initial TLB), meaning that initial lenders would benefit from the higher pricing rather than being diluted by it. This is a more aggressive borrower-favorable position that Crescent Harbor may resist, particularly if the fungibility feature is structured in a way that only requires the OID on the incremental tranche to be higher (with the applicable margin remaining the same). We should raise this point in negotiations but be prepared to concede it if necessary in exchange for firmness on the sunset period and threshold.

IV. Repricing Protection (Soft Call) Provision

A. Description and Mechanics

The repricing protection provision — commonly referred to as the "soft call" premium — requires the Borrower to pay a premium to lenders if it reprices or refinances the TLB at a lower effective yield within a specified period after closing. The purpose of the soft call is to protect the lenders' initial investment economics, particularly the OID, by discouraging the Borrower from using the leveraged loan market's structural features (amendment mechanics or refinancing) to reduce its borrowing cost shortly after closing.

Unlike a traditional prepayment premium (which applies to all voluntary prepayments regardless of purpose), the soft call applies only to repricing transactions — that is, amendments that reduce the applicable margin or refinancing transactions whose primary purpose is to achieve a lower effective yield. This distinction is important because it ensures that the Borrower retains full flexibility to make voluntary prepayments (from operating cash flow, asset sales, or other sources) without incurring a premium, so long as the prepayment is not part of a broader repricing strategy.

The key variables in a soft call provision are:

Soft Call Period. The window during which the premium applies. Crescent Harbor initially proposed a 12-month period; our counter-proposal sought 6 months. We recommend settling at 6 months (from July 21, 2022 through January 21, 2023), which is at the market median.

Soft Call Premium. The premium payable on the repriced or refinanced principal amount, expressed as a percentage of par. Both sides have proposed 1.00%, which is effectively universal in the leveraged loan market and is not a point of contention in these negotiations.

Triggers. The soft call is triggered by a repricing or refinancing that has the primary purpose of reducing the effective yield on the TLB. It does not apply to prepayments arising from asset sales, change of control events, mandatory prepayments (such as excess cash flow sweeps), or other voluntary prepayments that are not undertaken primarily for the purpose of achieving a lower cost of borrowing.

B. VHG's Negotiation Objectives

VHG's principal objective with respect to the soft call provision is to secure the shortest possible soft call period, thereby preserving maximum flexibility to capture further rate savings if the leveraged loan market tightens in the months following closing. While the current market environment (characterized by Federal Reserve tightening and rising base rates) suggests that a near-term repricing is unlikely, VHG's management has expressed a preference for maintaining optionality. If credit spreads in the BB-/Ba3 hospitality sector were to compress in late 2022 or early 2023 — for example, due to a recovery in investor demand for leveraged loan product or a reduction in new-issue supply — VHG would want the ability to reprice the TLB promptly.

VHG is comfortable with the 1.00% premium level, which is market standard and not a point of negotiation. The focus of VHG's negotiation strategy is exclusively on the duration of the soft call period.

The dollar exposure is material but manageable. If VHG were to reprice the full $700,000,000 within the soft call window, the premium would be $7,000,000. This is a significant sum, but it would only be triggered if VHG determined that the present value of the rate savings from a repricing exceeded the $7,000,000 premium — in other words, VHG would only incur the premium if it made economic sense to do so. The soft call premium thus functions as a "break-even" hurdle: VHG would need to achieve rate savings with a net present value exceeding $7,000,000 to justify a repricing within the soft call period.

C. Market Precedent Analysis

Our analysis of the same 15 comparable TLB transactions yields the following results with respect to repricing protection terms:

Soft Call Period. The soft call periods ranged from 6 months to 12 months, with a median of 6 months. Of the 15 transactions, 11 (73%) had 6-month soft call periods, and 4 (27%) had 12-month periods. The strong clustering around the 6-month mark reflects a market consensus that 6 months provides sufficient protection for lenders to recoup their initial economics (principally the OID) without unduly constraining the Borrower's flexibility.

Soft Call Premium. All 15 transactions used a 1.00% premium on the repriced or refinanced principal amount. The 1.00% premium is effectively universal in the leveraged loan market and has been the standard for many years. There were no instances in our comparison set of a premium above or below 1.00%.

Observation. Crescent Harbor's initial proposal of a 12-month soft call period was above the market median — only 4 of 15 comparable transactions used a 12-month period. Our 6-month counter-proposal is squarely at the market median, with 11 of 15 comparable transactions using a 6-month period. We therefore expect that Crescent Harbor will concede to the 6-month position relatively quickly, particularly given the strength of the market data.

Market Dynamics. It is worth noting the current interest rate environment. As of May 2022, the Federal Reserve has embarked on a tightening cycle, having raised the federal funds rate by 25 basis points in March 2022 and by 50 basis points in May 2022, with further rate increases widely anticipated. In a rising-rate environment, the probability that VHG would seek to reprice the TLB at a lower effective yield within 6 months of closing is relatively low — if anything, the market expects spreads to widen, not tighten, as the rate cycle progresses. This observation should make Crescent Harbor and the syndicate lenders more willing to accept a shorter soft call period, as the practical likelihood of a repricing during the soft call window is diminished.

D. Recommended Position and Rationale

Soft Call Period: 6 Months

We recommend a soft call period of 6 months from the closing date, expiring on January 21, 2023 (assuming a July 21, 2022 closing date).

The 6-month period is at the market median, with 73% of comparable transactions using this duration. It provides lenders with sufficient protection to recoup their initial economics — principally the OID of $7,000,000 — without imposing unnecessary constraints on VHG's flexibility.

The economics support this position. The $7,000,000 OID, amortized on a straight-line basis over a 6-month period, yields approximately $1,167,000 per month. If VHG were to reprice the TLB at, for example, month 4 of the soft call period, lenders would have recovered approximately $4,667,000 of the $7,000,000 OID through the passage of time (i.e., through the higher effective yield they received during the first four months). The remaining $2,333,000 of unrecovered OID would be more than covered by the 1.00% soft call premium of $7,000,000. In other words, even in a worst-case scenario for lenders (a repricing early in the soft call window), the combination of accrued OID benefit and the 1.00% premium provides full economic protection for the initial investment.

Lenders' primary concern with respect to the soft call is protecting their upfront economics — the OID, arrangement fees, and the initial spread — over the period in which they are most vulnerable to a "bait and switch" repricing. A 6-month window addresses this concern directly. Beyond 6 months, lenders will have had sufficient time to realize the yield they bargained for, and the marginal benefit of extending the soft call period diminishes rapidly.

Soft Call Premium: 1.00%

We recommend a soft call premium of 1.00% of the principal amount repriced or refinanced. This is market standard, has been proposed by both sides, and is not a point of negotiation. The premium, applied to the full $700,000,000 facility, would be $7,000,000.

Post-Expiration Freedom. After January 21, 2023, VHG may prepay, reprice, or refinance the TLB at any time without payment of any premium. This is standard and is not expected to be contested.

E. Scope and Exceptions

The scope of the soft call provision must be carefully defined to ensure that it captures only true repricing transactions while preserving VHG's flexibility for all other types of prepayment activity. We recommend the following approach:

Covered Transactions (Repricing Transactions). The soft call premium should apply to:

(a) any amendment to the credit agreement that has the effect of reducing the applicable margin or the effective yield on the TLB (including any amendment that reduces the SOFR floor, to the extent such reduction increases the effective yield differential); and

(b) any refinancing of the TLB (in whole or in part) with replacement debt bearing a lower effective yield, where in each case the primary purpose of the transaction is to achieve a lower cost of borrowing for the Borrower.

The "primary purpose" qualifier is important. It ensures that the soft call is triggered only when VHG is engaging in a deliberate repricing strategy, not when a lower yield is an incidental consequence of a broader transaction (such as a refinancing undertaken for purposes of extending maturity or modifying covenants).

Excepted Transactions. The soft call premium should not apply to:

(i) mandatory prepayments, including prepayments from excess cash flow sweeps, asset sale proceeds, casualty and condemnation proceeds, and other mandatory prepayment events specified in the credit agreement;

(ii) voluntary prepayments of the TLB that are not made in connection with a repricing or refinancing transaction — for example, a prepayment from available cash on the Borrower's balance sheet for purposes of deleveraging;

(iii) repayment of the TLB in connection with a change of control (which would typically trigger the change of control mandatory prepayment provision in the credit agreement); and

(iv) repayment of the TLB following an acceleration of the loans upon the occurrence of an event of default.

These exceptions are standard in the leveraged loan market and reflect the principle that the soft call is intended to protect lenders against yield-driven refinancing activity, not against all forms of prepayment. Crescent Harbor is not expected to contest these exceptions.

Definition of "Repricing Transaction." We recommend including a clear definition of "repricing transaction" in the credit agreement, encompassing both (a) any amendment to the credit agreement that directly reduces the applicable margin or the effective yield on the TLB, and (b) any incurrence of replacement debt (whether under a new credit agreement or as an incremental facility under the existing credit agreement) at a lower effective yield, where in each case the primary purpose of the transaction is to achieve a lower cost of borrowing. This definition should be drafted with sufficient precision to avoid disputes about whether a particular transaction constitutes a "repricing" — for example, it should be clear that an amendment that modifies the SOFR floor without changing the applicable margin could constitute a repricing transaction if the net effect is to reduce the effective yield.

V. Interaction Between MFN and Repricing Protection Provisions

A. Overlap Period

A critical observation in structuring these provisions is that the recommended MFN sunset period (18 months) extends well beyond the recommended repricing protection period (6 months). This creates three distinct phases during which VHG is subject to different levels of constraint, each with its own strategic implications.

Phase 1: Months 1–6 (July 21, 2022 through January 21, 2023). During this period, both the MFN and the soft call are in effect simultaneously. The two provisions operate independently and address different types of transactions:

• If VHG were to incur incremental term loans at an effective yield exceeding the initial TLB yield by more than 50 basis points during this period, the MFN would be triggered and the initial TLB margin would be automatically increased. The soft call would not be implicated by this transaction because the initial TLB is not being repriced downward — it is being repriced upward.

• If VHG were to seek to reprice the initial TLB to a lower effective yield during this period (e.g., through an amendment reducing the applicable margin), the soft call premium of 1.00% ($7,000,000) would apply. The MFN would not be directly implicated by a downward repricing of the initial TLB, as the MFN only operates in connection with incremental term loan issuances, not in connection with amendments to the initial TLB.

Phase 2: Months 7–18 (January 22, 2023 through January 21, 2024). During this period, only the MFN remains in effect. The soft call will have expired, and VHG will be free to reprice the initial TLB to a lower yield without paying any premium. However, VHG will remain subject to the MFN with respect to any incremental term loans incurred during this period. This creates an asymmetric constraint: VHG can reduce the cost of the initial TLB (through repricing or refinancing) but cannot increase the cost of incremental facilities beyond the MFN threshold without triggering an upward adjustment to the initial TLB.

Phase 3: After Month 18 (after January 21, 2024). After the MFN sunset expires, neither provision constrains VHG. The company will have complete flexibility to reprice, refinance, or incur incremental term loans at any yield, subject only to the other terms and conditions of the credit agreement (such as the incremental facility basket limits and pro forma leverage tests).

B. Strategic Implications for VHG

The staggered sunset structure creates a clear and predictable timeline that should inform VHG's capital allocation and financing strategy over the next two years. We recommend presenting this framework to VHG's management team — specifically, Priya Narayanan (General Counsel) and Glenn Fischbach (Treasurer) — to ensure that the company's near-term and medium-term financing plans are structured to maximize flexibility within the constraints of these provisions.

Phase 1 Strategy (Closing through January 21, 2023). During Phase 1, VHG faces maximum constraint. Both the MFN and the soft call are in effect, limiting VHG's ability to (a) incur incremental term loans at elevated yields (MFN) and (b) reprice the initial TLB at reduced yields (soft call). For any near-term acquisition financing needs during this period, VHG should consider alternative funding sources that do not trigger either provision:

• Revolver Draws. The $400,000,000 Revolver is undrawn at closing and provides substantial near-term liquidity for bridge financing of acquisitions. Revolver draws do not trigger the MFN (which applies only to incremental term loans) or the soft call (which applies only to repricing transactions).

• Incremental Revolving Commitments. If the $400,000,000 Revolver proves insufficient, VHG can seek incremental revolving commitments under the credit agreement. As noted above, incremental revolving commitments should be carved out of the MFN.

• Net Incremental Proceeds. VHG is expected to retain approximately $60,500,000 in net incremental proceeds from the refinancing (after payoff of the Greystone TLB and transaction expenses). These funds are available for acquisitions and general corporate purposes without implicating either the MFN or the soft call.

Phase 2 Strategy (January 22, 2023 through January 21, 2024). During Phase 2, VHG has greater flexibility. The soft call has expired, and VHG can reprice the initial TLB if market conditions permit. However, the MFN remains in effect, and VHG should be mindful of incremental term loan pricing if it seeks to fund acquisitions through incremental facilities during this period. The 50 basis point threshold provides meaningful room — VHG could incur incremental term loans at up to Adjusted Term SOFR + 425 bps without triggering the step-up — but this headroom is not unlimited, and VHG should model the MFN impact as part of any acquisition financing analysis.

Phase 3 Strategy (After January 21, 2024). During Phase 3, VHG faces no constraints from these provisions. This period coincides with the outer end of VHG's stated 12-to-24-month acquisition timeline, meaning that the most significant acquisition financing activity may occur after the MFN sunset has expired. If VHG can defer larger acquisition financings to Phase 3, it will have maximum flexibility on pricing.

We recommend that Calderwood & Harkness advise VHG's management team on this phased approach in connection with the broader transaction closing process.

C. Interaction with Incremental Facility Basket

The interplay between the MFN and the incremental facility basket requires careful attention in the credit agreement drafting. The incremental facility provision will allow VHG to incur additional term loans and/or revolving commitments, subject to the following conditions:

Freebie Basket. An aggregate amount (expected to be $150,000,000 to $200,000,000) of incremental term loans and/or revolving commitments that may be incurred without satisfying a pro forma leverage test. The freebie basket provides certainty of availability — VHG can access it regardless of whether its leverage has increased since closing. The MFN applies to incremental term loans incurred under the freebie basket during the sunset period.

Ratio-Based Basket. An unlimited amount of incremental term loans and/or revolving commitments that may be incurred so long as VHG satisfies a pro forma Total Net Leverage Ratio test. The applicable leverage threshold is expected to be set at 4.5x (consistent with the springing financial covenant), though for secured debt, a lower threshold may be negotiated. Given VHG's pro forma leverage of 2.52x, the ratio-based basket provides substantial additional capacity. The MFN likewise applies to incremental term loans incurred under the ratio-based basket during the sunset period.

Carve-Out for Revolving Commitments. As noted in Section III.F, the MFN should apply only to incremental term loans — incremental revolving commitments should be explicitly carved out. This is standard and should not be contested.

Acquisition-Size Carve-Out. As discussed in Section III.F, we recommend negotiating a carve-out for incremental term loans incurred to finance acquisitions with aggregate consideration exceeding $100,000,000. This carve-out would allow VHG to price acquisition financing competitively without triggering the MFN, recognizing that the pricing dynamics of acquisition-related incremental facilities are driven by deal-specific factors (such as the credit quality of the target, the competitive landscape for the acquisition, and the timeline for closing) that may not align with the initial TLB pricing.

Some CLO lenders in the syndicate may resist this carve-out, viewing it as an erosion of their MFN protection. We should be prepared to negotiate the terms of the carve-out — for example, by imposing a cap on the aggregate amount of incremental term loans eligible for the exemption, or by limiting the exemption to acquisitions that satisfy specified criteria (such as a minimum EBITDA contribution from the acquired business).

Practical Headroom Under the 50 bps Threshold. It is worth emphasizing that the 50 basis point MFN threshold itself provides significant practical headroom for incremental issuances. Under the recommended terms, VHG could incur incremental term loans at an effective yield of up to Adjusted Term SOFR + 425 basis points without triggering any step-up to the initial TLB margin. A spread of 425 basis points is equal to the spread on VHG's existing Greystone TLB, suggesting that the market would likely clear incremental term loans at or within this band for a BB-/Ba3 rated hospitality borrower. Only if VHG sought to incur incremental facilities at a spread above 425 basis points — reflecting a meaningful deterioration in credit conditions or a particularly aggressive incremental facility structure — would the MFN be triggered.

VI. Anticipated Lender Pushback and Fallback Positions

A. MFN Sunset Period

We anticipate that Crescent Harbor (led by Ted Marchetti, Managing Director) and WGP (led by Harrison Whitfield III) will initially resist our recommended 18-month sunset and argue for their original 24-month proposal. The primary arguments we expect them to advance are as follows:

• CLO Ramp-Up Concerns. Crescent Harbor will likely argue that a 24-month sunset is necessary to protect the syndicate's CLO managers — particularly Ridgeline Capital Partners, LP and Ironbridge Loan Management LLC — whose ramp-up and warehouse periods may extend beyond 18 months. Crescent Harbor will frame this as a syndication risk issue: if the MFN sunset is too short, CLO managers may decline to participate or may demand pricing concessions.

• Spread Volatility. In the current market environment, Crescent Harbor may argue that the uncertainty surrounding Federal Reserve policy and the potential for credit spread widening justify a longer MFN window to protect lenders against yield dilution during a period of potential market dislocation.

Our Response. The market data is unambiguous: 9 of 15 comparable transactions (60%) used an 18-month sunset, making it the modal and median term. The 24-month sunset was used in only 3 of 15 comparable transactions (20%) and represents the lender-favorable end of the range. We should emphasize that the 18-month period provides ample protection during the typical CLO ramp-up window and is consistent with the terms that CLO managers have accepted in recent comparable transactions.

Fallback Position. If Crescent Harbor does not initially accept the 18-month sunset, we recommend offering a targeted concession rather than extending the sunset period. Specifically, we could propose an 18-month sunset with a carve-out for small incremental term loan incurrences — for example, incremental term loans in an aggregate principal amount of up to $50,000,000 would be exempt from MFN protection, regardless of yield. This carve-out would give VHG flexibility for modest incremental issuances without exposing the syndicate to meaningful yield dilution. This approach preserves the 18-month sunset date while providing a practical accommodation that may address Crescent Harbor's concerns.

Hard Floor. We strongly recommend that VHG not accept an MFN sunset period exceeding 18 months. An 18-month sunset is the market standard for this credit profile and transaction type, and agreeing to 24 months would position VHG at the aggressive end of the market range without compensating benefits. If Crescent Harbor insists on more than 18 months, we should demand compensating concessions in other areas of the credit agreement — for example, a wider MFN threshold, a larger freebie basket, or more borrower-favorable treatment of the yield calculation methodology.

B. MFN Threshold

Crescent Harbor's initial proposal of a 25 basis point MFN threshold was very tight and would severely limit VHG's flexibility to incur incremental term loans at competitive pricing. At a 25 basis point threshold, VHG could incur incremental term loans at a maximum effective yield of Adjusted Term SOFR + 400 basis points before triggering the step-up — a spread that is already below the VHG's existing Greystone TLB spread of 425 basis points and that may not be achievable for incremental facilities with different structural characteristics or different investor bases.

At 50 basis points, VHG retains meaningful room to price incremental facilities competitively. The syndicate lenders receive assurance that they will not be significantly out-of-market relative to new-money term loan lenders — the maximum spread differential between the initial TLB and any incremental term loans is limited to 50 basis points, ensuring that initial lenders are not substantially disadvantaged.

Fallback Position. If Crescent Harbor insists on a threshold narrower than 50 basis points, we could consider a 37.5 basis point intermediate position as a potential compromise. However, a 37.5 basis point threshold is unusual in the market — the overwhelming majority of transactions use either 25 or 50 basis points — and an unusual threshold may create confusion or complexity in the credit agreement drafting. We strongly prefer the 50 basis point standard and should resist deviating from it unless compensating concessions are offered.

Hard Floor. We recommend that VHG not accept an MFN threshold below 50 basis points without obtaining meaningful compensating concessions elsewhere in the transaction — for example, a shorter MFN sunset (e.g., 15 or 16 months instead of 18 months), a larger freebie basket (e.g., $200,000,000 instead of $150,000,000), or a broader acquisition-size carve-out. If Crescent Harbor insists on 25 basis points and 24 months, VHG should view this as a significant departure from market terms and should escalate the discussion to the principal level (Priya Narayanan and Glenn Fischbach engaging directly with Ted Marchetti).

C. Repricing Protection Period

Crescent Harbor's initial proposal of a 12-month soft call period was above the market median. We expect that Crescent Harbor will concede to our 6-month counter-proposal relatively quickly, given the strength of the market data (11 of 15 comparable transactions used a 6-month period). The 12-month period was likely included as a negotiating anchor rather than a firmly held position.

If Crescent Harbor resists the 6-month period, we can emphasize the following points:

• Rising-Rate Environment. In the current tightening cycle (the Federal Reserve has raised rates twice in 2022 and is expected to continue raising rates throughout the year), the probability that VHG would seek to reprice the TLB at a lower effective yield within 6 months of closing is relatively low. If anything, rising base rates and widening credit spreads are expected to increase the all-in cost of leveraged loans in the near term, making a repricing unlikely during the soft call window regardless of its duration. This substantially reduces the practical significance of the provision and should make Crescent Harbor more willing to accept the shorter period.

• OID Recovery. As detailed in Section IV.D above, the 1.00% soft call premium ($7,000,000) more than compensates lenders for the unrecovered portion of their OID even in an early repricing scenario. The 6-month period provides ample time for lenders to recoup a significant portion of their OID through accrual, and the premium provides a substantial additional buffer.

• Market Standard. The 6-month soft call is the dominant market term, used in 73% of comparable transactions. Crescent Harbor's own loan syndication desk will be aware of this, and insisting on a 12-month period could raise questions from potential syndicate participants about why the terms deviate from market convention.

Hard Floor. We strongly recommend that VHG not accept a soft call period exceeding 6 months. A 12-month soft call would unnecessarily lock VHG into the current pricing through January 2023, by which time market conditions may have shifted in ways that create repric

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein and may not be disclosed, copied, or distributed to any other person or entity without the prior written consent of Calderwood & Harkness LLP.
MEMORANDUM
From: Sophie Tremblay, Associate, Banking & Finance, Calderwood & Harkness LLP
To: Ian Blackwood, Partner, Banking & Finance, Calderwood & Harkness LLP
Date: May 10, 2022
Re: Verimark Hospitality Group Inc. — $700,000,000 Term Loan B Refinancing: MFN Sunset and Repricing Protection Negotiation Strategy
Engagement: 1016-00009
CC: Stephanie Okafor (Billing Partner); Daniel Obi (Working Associate)
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I. Executive Summary
The purpose of this memorandum is to set forth Calderwood & Harkness's recommended negotiation strategy with respect to two key borrower-protective provisions in the proposed $700,000,000 senior secured Term Loan B refinancing by Verimark Hospitality Group Inc. ("VHG" or the "Borrower"): (i) the "most favored nation" (MFN) sunset provision and (ii) the repricing protection (soft call) provision. These two provisions are among the most commercially significant open terms in the transaction, and their resolution will directly affect VHG's cost of capital, financing flexibility, and ability to execute on its stated acquisition pipeline in the near and medium term.
Transaction Context. VHG is refinancing its existing $625,000,000 Term Loan B facility (originally closed on February 14, 2020, with Greystone Federal Credit Corp. as administrative agent, priced at LIBOR + 425 basis points) with a new $700,000,000 Term Loan B to be arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor") at Adjusted Term SOFR + 375 basis points. The refinancing achieves a 50 basis point reduction in the applicable margin, translating to approximately $3,500,000 in annual interest expense savings for VHG. The incremental $75,000,000 in proceeds (representing the difference between the $700,000,000 new facility and the approximately $627,916,667 payoff amount on the existing facility) will be available to fund VHG's acquisition pipeline and for general corporate purposes.
Current State of Negotiations. Crescent Harbor's initial term sheet, received on April 22, 2022, proposed a 24-month MFN sunset with a 25 basis point threshold and a 12-month soft call at a 1.00% premium. Our revised term sheet on behalf of VHG, delivered on May 6, 2022, countered with a 12-month MFN sunset, a 75 basis point threshold, and a 6-month soft call at the same 1.00% premium level. Both proposals represent positions at opposite ends of the market spectrum, and the parties are now engaged in substantive negotiations to find a commercially reasonable middle ground.
Recommended Settlement Position. Based on our analysis of market precedent, VHG's strategic objectives, and the likely positions of Crescent Harbor and anticipated syndicate participants, this memorandum recommends settling on the following terms:
•  MFN Sunset Period: 18 months from the closing date (i.e., from July 21, 2022 through January 21, 2024);
•  MFN Threshold: 50 basis points;
•  Soft Call Period: 6 months from the closing date (i.e., from July 21, 2022 through January 21, 2023); and
•  Soft Call Premium: 1.00% of the principal amount repriced or refinanced (market standard; not contested).
These positions are squarely aligned with current market norms for BB-/Ba3 rated hospitality-sector Term Loan B facilities and should be achievable in negotiations with Crescent Harbor and its counsel, Whitfield Gage & Partridge LLP ("WGP"). The recommended terms balance VHG's need for flexibility with the legitimate yield-protection expectations of syndicate lenders, thereby supporting a successful syndication process.
This memorandum should be read in connection with the parallel negotiation of the commitment letter (targeted for execution on May 27, 2022), the first draft credit agreement circulated by WGP on May 16, 2022, and our ongoing communications with VHG's management team and financial advisor, Meridian Strauss Advisory LLC.
II. Background on the Transaction and VHG's Capital Structure
A. Transaction Overview
The key terms of the proposed refinancing transaction are summarized below:
Borrower. Verimark Hospitality Group Inc., a corporation organized and existing under the laws of the State of Delaware, publicly traded on the New York Stock Exchange under the ticker symbol "VMRK." VHG's principal executive offices are located at 8200 West Palmetto Park Road, Suite 1500, Boca Raton, Florida 33433. VHG operates a diversified portfolio of hotel and resort properties across the United States and is one of the largest publicly traded hospitality companies in the upper-upscale and luxury segments.
Facility. $700,000,000 Senior Secured Term Loan B (the "TLB" or the "Facility").
Administrative Agent / Lead Arranger / Bookrunner. Crescent Harbor Bank, N.A., a national banking association headquartered in Charlotte, North Carolina. Crescent Harbor also serves as administrative agent under VHG's existing $400,000,000 senior secured revolving credit facility, giving it an established relationship with the Borrower and familiarity with VHG's credit profile and collateral package.
Agent's Counsel. Whitfield Gage & Partridge LLP, New York office. Our primary contacts at WGP are Harrison Whitfield III, Partner, and Megan Yeung, Associate. WGP is responsible for drafting the credit agreement and related loan documentation on behalf of the administrative agent.
Financial Advisor to VHG. Meridian Strauss Advisory LLC ("Meridian Strauss"). Elise Cavanaugh, Managing Director, is the lead advisor responsible for advising VHG on the refinancing structure, pricing, and syndication strategy. Meridian Strauss has been instrumental in identifying the spread savings opportunity and structuring the incremental proceeds to support VHG's acquisition pipeline.
Pricing. Adjusted Term SOFR + 375 basis points. The Facility includes a SOFR floor of 0.50% (50 basis points), ensuring a minimum reference rate regardless of prevailing SOFR levels. The original issue discount ("OID") is 1.00%, resulting in net proceeds to VHG of $693,000,000 on a $700,000,000 funded principal amount (i.e., an OID of $7,000,000).
Maturity. Seven-year tenor from the closing date, resulting in a final maturity date of July 21, 2029 (based on an assumed closing date of July 21, 2022).
Amortization. 1.00% per annum of the original principal amount ($7,000,000 per annum), payable in equal quarterly installments of $1,750,000. The remaining balance at maturity (the "balloon") will be approximately $651,000,000, assuming no voluntary or mandatory prepayments are made during the term.
Sign and Close. A simultaneous sign-and-close is anticipated, with both the execution of the credit agreement and the funding of the TLB occurring on the closing date. This structure simplifies the transaction mechanics and avoids the need for delayed-draw provisions or "certain funds" conditions.
B. VHG's Existing Capital Structure
Understanding VHG's current capital structure is essential to evaluating the MFN and repricing protection provisions, as these provisions directly affect VHG's ability to incur incremental debt and to adjust the cost of existing debt over time.
Existing $625,000,000 Term Loan B. VHG's current TLB facility was closed on February 14, 2020, with Greystone Federal Credit Corp. ("Greystone") serving as administrative agent. The facility was priced at LIBOR + 425 basis points and was originally syndicated to a broad group of institutional lenders. As of the anticipated closing date of the refinancing, the outstanding principal balance on the Greystone TLB will be approximately $621,875,000, reflecting $3,125,000 in scheduled amortization payments made since the February 2020 origination (representing 1.00% per annum of the original $625,000,000 principal amount). The total payoff amount for the Greystone TLB is estimated at approximately $627,916,667, comprised of (i) $621,875,000 in outstanding principal, (ii) approximately $2,916,667 in accrued and unpaid interest through the anticipated payoff date, and (iii) a $3,125,000 prepayment premium calculated at 0.50% of the outstanding principal balance. The refinancing of this facility is the primary purpose of the new TLB, and the 50 basis point reduction in the applicable margin (from 425 bps to 375 bps) represents significant annual interest expense savings for VHG.
$400,000,000 Senior Secured Revolving Credit Facility. VHG maintains a $400,000,000 senior secured revolving credit facility (the "Revolver") with Crescent Harbor serving as administrative agent. The Revolver is expected to be undrawn at the anticipated closing date of the TLB refinancing. Crescent Harbor's dual role as agent under both the Revolver and the new TLB creates institutional alignment and simplifies intercreditor considerations. The Revolver shares the same collateral package as the TLB on a pari passu basis.
$245,000,000 Senior Unsecured Notes Due 2028. VHG has $245,000,000 in aggregate principal amount of senior unsecured notes outstanding, with Atlantic Standard Trust Company serving as indenture trustee. These notes mature in 2028, approximately one year prior to the maturity of the proposed new TLB. The notes are structurally and contractually subordinated to the TLB and Revolver with respect to the collateral package.
Credit Ratings. VHG's corporate credit is rated BB- by the Kellaway Ratings Group ("KRG") and Ba3 by Pinnacle Credit Services ("PCS"). These ratings place VHG squarely in the non-investment-grade / leveraged finance category but at the higher end of the speculative-grade spectrum. The BB-/Ba3 rating is an important reference point for our market precedent analysis, as it determines the relevant comparison set of transactions.
FY2021 Financial Performance. For the fiscal year ended December 31, 2021, VHG reported revenue of approximately $1.42 billion and EBITDA of approximately $318 million. Adjusted EBITDA, after giving effect to certain non-recurring charges, stock-based compensation add-backs, and other customary adjustments, was approximately $341 million. The Adjusted EBITDA figure is the relevant metric for purposes of calculating leverage ratios under the credit agreement and for assessing VHG's capacity to incur incremental indebtedness.
Hotel Portfolio. VHG's portfolio consists of 74 properties located across 18 states. The aggregate appraised value of the portfolio is approximately $3.1 billion. Of these 74 properties, 42 are owned by Verimark Resort Properties LLC, a wholly-owned subsidiary of VHG, and are subject to first-priority mortgage liens securing the TLB and Revolver. The aggregate appraised value of the 42 mortgaged properties is approximately $2.18 billion, providing substantial collateral coverage relative to the $700,000,000 TLB.
C. Pro Forma Leverage
The pro forma capital structure at closing will be as follows:
•  Total Funded Debt: $945,000,000 (comprised of the $700,000,000 new TLB and the $245,000,000 senior unsecured notes)
•  Unrestricted Cash: $87,000,000 (estimated at closing after giving effect to the use of proceeds, including the payoff of the Greystone TLB, transaction fees and expenses, and retention of net incremental proceeds)
•  Pro Forma Net Debt: $858,000,000 ($945,000,000 total funded debt less $87,000,000 unrestricted cash)
•  Pro Forma Total Net Leverage Ratio: $858,000,000 ÷ $341,000,000 (LTM Adjusted EBITDA) = 2.52x
The credit agreement is expected to include a springing financial covenant in the form of a maximum Total Net Leverage Ratio of 4.5x, tested only when Revolver utilization exceeds a specified threshold (typically 35% of total commitments). VHG's pro forma leverage of 2.52x provides significant headroom relative to the 4.5x covenant — approximately 1.98 turns of EBITDA, or approximately $675,000,000 in additional debt capacity before the covenant would be breached (on a static basis, not accounting for EBITDA growth or other adjustments).
This substantial leverage headroom is directly relevant to the MFN analysis. VHG's low leverage relative to the covenant threshold means that VHG has ample capacity to incur incremental term loans under both the "freebie" basket and the ratio-based basket in the credit agreement. To the extent VHG exercises this capacity during the MFN sunset period, the MFN threshold will determine whether the pricing on the initial TLB is adjusted upward. This reinforces the importance of negotiating a 50 basis point threshold — a threshold that provides VHG with meaningful room to incur incremental debt at competitive rates without triggering an involuntary increase in the cost of the initial TLB.
III. The "Most Favored Nation" (MFN) Provision
A. Description and Mechanics
The MFN provision is a yield-protection mechanism that operates for the benefit of the lenders under the initial TLB. In essence, the MFN provides that if the Borrower incurs incremental term loans at an effective yield that exceeds the effective yield on the initial TLB by more than a specified threshold (the "MFN Threshold"), the applicable margin on the initial TLB is automatically increased so that it is within the MFN Threshold of the effective yield on the incremental term loans. The MFN provision is typically subject to a sunset — that is, it ceases to apply after a specified period following the closing date (the "MFN Sunset Period"), after which the Borrower may incur incremental term loans at any yield without triggering an adjustment to the initial TLB margin.
The MFN provision addresses a legitimate concern of initial TLB lenders: that the Borrower may, shortly after closing, incur additional term loans at a higher yield, effectively subordinating the initial lenders' return expectations relative to the new money lenders. By requiring that the initial TLB margin be adjusted upward to remain competitive with new incremental issuances, the MFN protects the initial lenders' relative yield position during the period in which they are most vulnerable — typically the syndication and initial trading period.
The three key variables in an MFN provision are as follows:
MFN Threshold. The MFN Threshold is the permitted yield differential between the initial TLB and any incremental term loans. Only if the effective yield on the incremental term loans exceeds the initial TLB yield by more than the MFN Threshold is the step-up triggered. Crescent Harbor's initial proposal set the MFN Threshold at 25 basis points — a very tight threshold that would give VHG extremely limited room to price incremental facilities above the initial TLB spread. Our counter-proposal on behalf of VHG proposed a 75 basis point threshold, which would provide substantially more flexibility. As discussed in Section III.D below, we recommend settling at 50 basis points, which is at the market median and provides an appropriate balance between lender protection and borrower flexibility.
MFN Sunset Period. The MFN Sunset Period defines the temporal window during which the MFN protection applies. After the sunset, incremental term loans may be incurred at any yield without triggering an adjustment to the initial TLB margin. Crescent Harbor initially proposed a 24-month sunset; our counter-proposal sought a 12-month sunset. We recommend settling at 18 months (from July 21, 2022 through January 21, 2024), consistent with the market median.
Yield Definition. The definition of "effective yield" is a critical drafting point that determines which components of the incremental term loan pricing are included in the comparison with the initial TLB. The effective yield definition should include the applicable margin, OID or upfront fees (amortized over the shorter of the expected life of the loan and 4 years, which is the market-standard assumed life for OID amortization purposes), and the benefit of any SOFR floor to the extent the incremental facility has a higher floor than the initial TLB's 0.50% floor and such higher floor is "in the money" at the time of incurrence. The effective yield definition should exclude arrangement fees, commitment fees, administrative agent fees, consent fees, amendment fees, and other fees that are not shared ratably among all lenders in the relevant tranche. This distinction is important because including non-ratable fees would distort the yield comparison and could inadvertently trigger the MFN based on fees that do not reflect the true cost of borrowing to VHG.
B. VHG's Negotiation Objectives
VHG's principal objectives with respect to the MFN provision are as follows:
First, VHG seeks to preserve maximum flexibility to incur incremental term loans at competitive pricing in connection with future acquisitions. VHG's acquisition pipeline is a stated use of the incremental proceeds from the refinancing, and the company's management team has indicated that it expects to pursue one or more acquisitions in the next 12 to 24 months. The MFN provision, if too restrictive, could constrain VHG's ability to price incremental acquisition financing competitively, either by forcing VHG to accept a lower spread on the incremental facility (reducing its attractiveness to new-money lenders) or by triggering an automatic increase in the initial TLB margin (increasing VHG's overall cost of capital).
Second, VHG seeks to minimize the period during which its cost of capital on the initial TLB could be involuntarily increased. The MFN sunset directly addresses this concern: a shorter sunset means a shorter period of vulnerability. After the sunset expires, VHG has complete freedom to price incremental facilities as the market dictates without any impact on the initial TLB.
Third, VHG recognizes the need to balance its flexibility objectives against the legitimate expectations of syndicate lenders and the practical requirements of a successful syndication. An MFN threshold that is too wide, or a sunset that is too short, could signal to potential syndicate participants that the Borrower does not intend to provide meaningful yield protection, potentially reducing demand for the Facility or requiring pricing concessions elsewhere. VHG therefore seeks to land on terms that are defensible by reference to market precedent and that provide sufficient protection to support syndication without unnecessarily restricting VHG's future financing flexibility.
A critical consideration in the MFN negotiation is its interaction with the incremental facility basket in the credit agreement. The credit agreement is expected to include two types of incremental capacity: (i) a "freebie" incremental basket (expected to be in the range of $150,000,000 to $200,000,000), which permits VHG to incur additional term loans or revolving commitments without satisfying a pro forma leverage test, and (ii) a ratio-based incremental basket, which permits incurrence of additional term loans or revolving commitments so long as VHG satisfies a pro forma Total Net Leverage Ratio test (expected to be set at 4.5x, consistent with the springing financial covenant). The MFN provision applies to incremental term loans incurred under both baskets during the sunset period. This means that VHG's incremental borrowing capacity — which is substantial given the 2.52x pro forma leverage and the 4.5x covenant — is effectively constrained by the MFN during the sunset period, further underscoring the importance of negotiating both a reasonable threshold and a reasonable sunset duration.
C. Market Precedent Analysis
To inform our recommended position, we have analyzed 15 comparable BB-/Ba3 rated leveraged Term Loan B facilities in the hospitality, lodging, and real estate sectors that closed between Q1 2021 and Q1 2022. This comparison set was developed in consultation with Meridian Strauss and reflects transactions with similar credit profiles, industry dynamics, and structural characteristics. A full summary of these transactions, including borrower names, facility sizes, pricing, MFN terms, and repricing protection terms, is set forth in Appendix A (to be provided under separate cover).
The results of our precedent analysis with respect to MFN terms are as follows:
MFN Sunset Period. The MFN sunset periods in the comparable transactions ranged from a low of 6 months to a high of 24 months, with a median of 18 months. Of the 15 transactions, 9 (60%) had 18-month sunsets, 3 (20%) had 12-month sunsets, and 3 (20%) had 24-month sunsets. The strong clustering around the 18-month mark reflects a well-established market convention that balances lender protection (covering the initial syndication and trading period, as well as the typical CLO ramp-up window) with borrower flexibility (providing a definitive and foreseeable expiration date).
MFN Threshold. The MFN thresholds ranged from 25 basis points to 75 basis points, with a median of 50 basis points. Of the 15 transactions, 10 (67%) used a 50 basis point threshold, 3 (20%) used 25 basis points, and 2 (13%) used 75 basis points. The dominance of the 50 basis point threshold reflects a market consensus that 50 basis points provides an appropriate level of protection — tight enough to prevent significant yield disadvantage for initial lenders, but wide enough to give borrowers meaningful room to price incremental facilities in a dynamic market.
We note that the broader leveraged finance market (not limited to the hospitality and real estate sectors) shows a similar clustering around the 18-month / 50 basis point combination, though sponsor-backed transactions tend to achieve shorter sunsets and wider thresholds, reflecting the greater negotiating leverage of private equity sponsors. VHG, as a publicly traded corporation without a controlling sponsor, does not benefit from this dynamic, but its strong credit profile and low leverage provide compensating negotiating strength.
Key Observation. Crescent Harbor's initial proposal of a 24-month sunset with a 25 basis point threshold was aggressive relative to market norms — positioned at or beyond the lender-favorable end of the range. Conversely, our counter-proposal of a 12-month sunset with a 75 basis point threshold was equally aggressive in the borrower-favorable direction. The recommended settlement position of 18 months / 50 basis points is squarely at the market median on both dimensions and should be readily defensible in negotiations. We expect that WGP, as experienced leveraged finance counsel, will recognize these terms as market-standard and advise Crescent Harbor accordingly.
D. Recommended Position and Rationale
MFN Sunset Period: 18 Months
We recommend an MFN sunset period of 18 months from the closing date, expiring on January 21, 2024 (assuming a July 21, 2022 closing date).
The 18-month sunset is consistent with the market median observed in our comparable transactions analysis. It provides Crescent Harbor and the syndicate lenders with meaningful protection during the period that matters most to them: the initial syndication hold period (typically 60 to 90 days) and the first 12 to 18 months of secondary market trading, during which lenders are most sensitive to yield dilution from incremental issuances.
The 18-month sunset also aligns with the typical CLO ramp-up period. This is particularly relevant given that Ridgeline Capital Partners, LP and Ironbridge Loan Management LLC — both CLO managers — are expected to be significant participants in the syndicate. CLO managers typically warehouse loans during a ramp-up period of 12 to 18 months before closing their CLO vehicles. During this ramp-up period, CLO managers are sensitive to changes in the yield profile of their warehouse assets, as such changes can affect the economics of the CLO structure. By providing MFN protection through the end of the typical ramp-up window, the 18-month sunset addresses this concern directly.
At the same time, the 18-month sunset gives VHG a clear and definitive expiration date. After January 21, 2024, VHG will have complete flexibility to incur incremental term loans at any yield without any impact on the initial TLB margin. This is important for VHG's medium-term planning, as it allows the company to structure its acquisition financing strategy around the sunset date with confidence.
MFN Threshold: 50 Basis Points
We recommend an MFN threshold of 50 basis points.
The 50 basis point threshold provides meaningful headroom for VHG to price incremental term loans competitively. Under this threshold, VHG could incur incremental term loans at an effective yield of up to Adjusted Term SOFR + 425 basis points (i.e., 375 bps initial margin + 50 bps threshold) without triggering an automatic increase in the initial TLB margin. This means that, even during the MFN sunset period, VHG could price incremental facilities at a spread equal to or below the spread on the existing Greystone TLB (which was priced at LIBOR + 425 bps) without any adverse effect on the initial TLB.
The 50 basis point threshold also creates a natural conceptual symmetry with the overall refinancing transaction: VHG is achieving a 50 basis point spread savings in the refinancing (from 425 bps to 375 bps), and the MFN threshold preserves VHG's ability to incur incremental debt at up to 50 basis points above the new spread before any step-up is triggered. This symmetry may be useful as a rhetorical point in negotiations, framing the threshold as a return to the prior pricing level rather than an expansion beyond it.
Furthermore, the 50 basis point threshold is at the market median in our comparable transactions analysis, with 10 of 15 (67%) comparable deals using this precise threshold. This strong market precedent makes the 50 basis point position highly defensible and difficult for Crescent Harbor to resist on a principled basis.
Post-Sunset Freedom.  After January 21, 2024, VHG may incur incremental term loans under the credit agreement at any effective yield — whether higher or lower than the initial TLB yield — without triggering any adjustment to the initial TLB margin. This complete post-sunset freedom is a standard feature of MFN provisions and is not expected to be contested.
E. Yield Calculation Methodology
The definition of "effective yield" is a critical drafting point that will be negotiated in the context of the credit agreement itself. We recommend the following approach:
Included in Effective Yield. The effective yield calculation should include:
(i) the applicable margin (i.e., the spread over Adjusted Term SOFR);
(ii) any original issue discount ("OID") or upfront fees payable to lenders, in each case amortized over the shorter of (x) the expected weighted average life of the applicable term loans and (y) four years (the four-year assumed life is market convention and prevents distortion from very long-dated facilities where OID amortization over the full term would produce a negligible per-annum yield contribution);
(iii) the benefit of any SOFR floor, calculated as the excess (if any) of the SOFR floor applicable to the incremental term loans over the SOFR floor applicable to the initial TLB (0.50%), but only to the extent such excess is "in the money" at the time of incurrence (i.e., only to the extent the applicable SOFR rate at the time of incurrence is below the incremental facility's SOFR floor); and
(iv) the 10 basis point SOFR credit spread adjustment applicable to 1-month tenor borrowings, which should be included in the yield calculation for both the initial TLB and any incremental term loans to ensure consistency. Because the credit spread adjustment applies equally to both sides of the comparison, its inclusion is neutral but avoids potential disputes about whether it constitutes part of the "margin" or is a separate component.
Excluded from Effective Yield. The effective yield calculation should exclude:
(i) arrangement fees payable to the lead arranger or bookrunner in connection with the incremental term loans (these fees compensate the arranger for syndication risk and effort and are not shared with all lenders);
(ii) administrative agent fees;
(iii) commitment fees (applicable to undrawn revolving commitments, not term loans, but included here for the avoidance of doubt);
(iv) consent fees, amendment fees, and waiver fees paid to lenders in connection with modifications to the credit agreement; and
(v) any other fees that are not shared ratably among all lenders in the relevant tranche.
The rationale for these exclusions is straightforward: the MFN is intended to protect initial lenders against yield dilution — i.e., a situation in which new-money lenders receive a higher return on the same credit risk. Fees that are specific to the syndication process or that compensate the administrative agent for services do not affect the yield available to rank-and-file lenders and should therefore be excluded from the comparison.
SOFR Credit Spread Adjustment. We note that the treatment of the 10 basis point SOFR credit spread adjustment (applicable to 1-month SOFR borrowings) requires specific attention. As the market continues to transition from LIBOR to SOFR, there is ongoing debate about whether the credit spread adjustment should be treated as part of the "margin" for purposes of yield calculations, or as a separate component of the all-in rate. We recommend including the credit spread adjustment in the yield calculation for both the initial TLB and any incremental term loans. This ensures a consistent apples-to-apples comparison and avoids potential disputes. Because the credit spread adjustment is expected to apply equally to both tranches, its inclusion does not change the relative yield comparison but eliminates a potential source of ambiguity.
F. Carve-Outs and Exceptions
We recommend negotiating the following carve-outs and exceptions to the MFN provision:
Incremental Revolving Commitments. The MFN should not apply to incremental revolving commitments incurred under the credit agreement. Revolving credit facilities are structurally different from term loans — they are undrawn contingent commitments, not funded debt — and it is standard market practice to exclude them from MFN protection. Crescent Harbor is not expected to resist this carve-out.
Acquisition-Related Incremental Term Loans. We recommend seeking a carve-out for incremental term loans incurred to finance permitted acquisitions where the aggregate consideration exceeds a specified size threshold (the threshold to be negotiated, but we suggest $100,000,000 as a starting point). This carve-out recognizes that acquisition financing often requires pricing concessions to attract lenders on an expedited timeline, and that constraining the Borrower's ability to price acquisition financing competitively would undermine one of the stated purposes of the incremental facility. This carve-out is increasingly common in the market, though it remains a borrower-favorable provision that some CLO lenders may resist. We should be prepared to offer a cap on the aggregate amount of incremental term loans eligible for this carve-out (e.g., no more than $250,000,000 in aggregate) as a compromise if necessary.
Full Refinancing of the TLB. The MFN should not apply to any refinancing of the TLB in its entirety. If VHG refinances the entire $700,000,000 facility with a new term loan, the MFN protection becomes moot — there are no "initial TLB lenders" remaining to protect. This is a standard carve-out and is not expected to be controversial.
Fungible Incremental Term Loans. We should consider seeking an exemption for incremental term loans that are issued as part of the same tranche as the initial TLB (i.e., fungible with the initial TLB, carrying the same CUSIP number and trading as a single facility). The theory behind this exemption is that, if the incremental term loans are fungible, the higher yield would apply to the entire tranche (including the initial TLB), meaning that initial lenders would benefit from the higher pricing rather than being diluted by it. This is a more aggressive borrower-favorable position that Crescent Harbor may resist, particularly if the fungibility feature is structured in a way that only requires the OID on the incremental tranche to be higher (with the applicable margin remaining the same). We should raise this point in negotiations but be prepared to concede it if necessary in exchange for firmness on the sunset period and threshold.
IV. Repricing Protection (Soft Call) Provision
A. Description and Mechanics
The repricing protection provision — commonly referred to as the "soft call" premium — requires the Borrower to pay a premium to lenders if it reprices or refinances the TLB at a lower effective yield within a specified period after closing. The purpose of the soft call is to protect the lenders' initial investment economics, particularly the OID, by discouraging the Borrower from using the leveraged loan market's structural features (amendment mechanics or refinancing) to reduce its borrowing cost shortly after closing.
Unlike a traditional prepayment premium (which applies to all voluntary prepayments regardless of purpose), the soft call applies only to repricing transactions — that is, amendments that reduce the applicable margin or refinancing transactions whose primary purpose is to achieve a lower effective yield. This distinction is important because it ensures that the Borrower retains full flexibility to make voluntary prepayments (from operating cash flow, asset sales, or other sources) without incurring a premium, so long as the prepayment is not part of a broader repricing strategy.
The key variables in a soft call provision are:
Soft Call Period. The window during which the premium applies. Crescent Harbor initially proposed a 12-month period; our counter-proposal sought 6 months. We recommend settling at 6 months (from July 21, 2022 through January 21, 2023), which is at the market median.
Soft Call Premium. The premium payable on the repriced or refinanced principal amount, expressed as a percentage of par. Both sides have proposed 1.00%, which is effectively universal in the leveraged loan market and is not a point of contention in these negotiations.
Triggers. The soft call is triggered by a repricing or refinancing that has the primary purpose of reducing the effective yield on the TLB. It does not apply to prepayments arising from asset sales, change of control events, mandatory prepayments (such as excess cash flow sweeps), or other voluntary prepayments that are not undertaken primarily for the purpose of achieving a lower cost of borrowing.
B. VHG's Negotiation Objectives
VHG's principal objective with respect to the soft call provision is to secure the shortest possible soft call period, thereby preserving maximum flexibility to capture further rate savings if the leveraged loan market tightens in the months following closing. While the current market environment (characterized by Federal Reserve tightening and rising base rates) suggests that a near-term repricing is unlikely, VHG's management has expressed a preference for maintaining optionality. If credit spreads in the BB-/Ba3 hospitality sector were to compress in late 2022 or early 2023 — for example, due to a recovery in investor demand for leveraged loan product or a reduction in new-issue supply — VHG would want the ability to reprice the TLB promptly.
VHG is comfortable with the 1.00% premium level, which is market standard and not a point of negotiation. The focus of VHG's negotiation strategy is exclusively on the duration of the soft call period.
The dollar exposure is material but manageable. If VHG were to reprice the full $700,000,000 within the soft call window, the premium would be $7,000,000. This is a significant sum, but it would only be triggered if VHG determined that the present value of the rate savings from a repricing exceeded the $7,000,000 premium — in other words, VHG would only incur the premium if it made economic sense to do so. The soft call premium thus functions as a "break-even" hurdle: VHG would need to achieve rate savings with a net present value exceeding $7,000,000 to justify a repricing within the soft call period.
C. Market Precedent Analysis
Our analysis of the same 15 comparable TLB transactions yields the following results with respect to repricing protection terms:
Soft Call Period. The soft call periods ranged from 6 months to 12 months, with a median of 6 months. Of the 15 transactions, 11 (73%) had 6-month soft call periods, and 4 (27%) had 12-month periods. The strong clustering around the 6-month mark reflects a market consensus that 6 months provides sufficient protection for lenders to recoup their initial economics (principally the OID) without unduly constraining the Borrower's flexibility.
Soft Call Premium. All 15 transactions used a 1.00% premium on the repriced or refinanced principal amount. The 1.00% premium is effectively universal in the leveraged loan market and has been the standard for many years. There were no instances in our comparison set of a premium above or below 1.00%.
Observation. Crescent Harbor's initial proposal of a 12-month soft call period was above the market median — only 4 of 15 comparable transactions used a 12-month period. Our 6-month counter-proposal is squarely at the market median, with 11 of 15 comparable transactions using a 6-month period. We therefore expect that Crescent Harbor will concede to the 6-month position relatively quickly, particularly given the strength of the market data.
Market Dynamics. It is worth noting the current interest rate environment. As of May 2022, the Federal Reserve has embarked on a tightening cycle, having raised the federal funds rate by 25 basis points in March 2022 and by 50 basis points in May 2022, with further rate increases widely anticipated. In a rising-rate environment, the probability that VHG would seek to reprice the TLB at a lower effective yield within 6 months of closing is relatively low — if anything, the market expects spreads to widen, not tighten, as the rate cycle progresses. This observation should make Crescent Harbor and the syndicate lenders more willing to accept a shorter soft call period, as the practical likelihood of a repricing during the soft call window is diminished.
D. Recommended Position and Rationale
Soft Call Period: 6 Months
We recommend a soft call period of 6 months from the closing date, expiring on January 21, 2023 (assuming a July 21, 2022 closing date).
The 6-month period is at the market median, with 73% of comparable transactions using this duration. It provides lenders with sufficient protection to recoup their initial economics — principally the OID of $7,000,000 — without imposing unnecessary constraints on VHG's flexibility.
The economics support this position. The $7,000,000 OID, amortized on a straight-line basis over a 6-month period, yields approximately $1,167,000 per month. If VHG were to reprice the TLB at, for example, month 4 of the soft call period, lenders would have recovered approximately $4,667,000 of the $7,000,000 OID through the passage of time (i.e., through the higher effective yield they received during the first four months). The remaining $2,333,000 of unrecovered OID would be more than covered by the 1.00% soft call premium of $7,000,000. In other words, even in a worst-case scenario for lenders (a repricing early in the soft call window), the combination of accrued OID benefit and the 1.00% premium provides full economic protection for the initial investment.
Lenders' primary concern with respect to the soft call is protecting their upfront economics — the OID, arrangement fees, and the initial spread — over the period in which they are most vulnerable to a "bait and switch" repricing. A 6-month window addresses this concern directly. Beyond 6 months, lenders will have had sufficient time to realize the yield they bargained for, and the marginal benefit of extending the soft call period diminishes rapidly.
Soft Call Premium: 1.00%
We recommend a soft call premium of 1.00% of the principal amount repriced or refinanced. This is market standard, has been proposed by both sides, and is not a point of negotiation. The premium, applied to the full $700,000,000 facility, would be $7,000,000.
Post-Expiration Freedom.  After January 21, 2023, VHG may prepay, reprice, or refinance the TLB at any time without payment of any premium. This is standard and is not expected to be contested.
E. Scope and Exceptions
The scope of the soft call provision must be carefully defined to ensure that it captures only true repricing transactions while preserving VHG's flexibility for all other types of prepayment activity. We recommend the following approach:
Covered Transactions (Repricing Transactions). The soft call premium should apply to:
(a) any amendment to the credit agreement that has the effect of reducing the applicable margin or the effective yield on the TLB (including any amendment that reduces the SOFR floor, to the extent such reduction increases the effective yield differential); and
(b) any refinancing of the TLB (in whole or in part) with replacement debt bearing a lower effective yield, where in each case the primary purpose of the transaction is to achieve a lower cost of borrowing for the Borrower.
The "primary purpose" qualifier is important. It ensures that the soft call is triggered only when VHG is engaging in a deliberate repricing strategy, not when a lower yield is an incidental consequence of a broader transaction (such as a refinancing undertaken for purposes of extending maturity or modifying covenants).
Excepted Transactions. The soft call premium should not apply to:
(i) mandatory prepayments, including prepayments from excess cash flow sweeps, asset sale proceeds, casualty and condemnation proceeds, and other mandatory prepayment events specified in the credit agreement;
(ii) voluntary prepayments of the TLB that are not made in connection with a repricing or refinancing transaction — for example, a prepayment from available cash on the Borrower's balance sheet for purposes of deleveraging;
(iii) repayment of the TLB in connection with a change of control (which would typically trigger the change of control mandatory prepayment provision in the credit agreement); and
(iv) repayment of the TLB following an acceleration of the loans upon the occurrence of an event of default.
These exceptions are standard in the leveraged loan market and reflect the principle that the soft call is intended to protect lenders against yield-driven refinancing activity, not against all forms of prepayment. Crescent Harbor is not expected to contest these exceptions.
Definition of "Repricing Transaction." We recommend including a clear definition of "repricing transaction" in the credit agreement, encompassing both (a) any amendment to the credit agreement that directly reduces the applicable margin or the effective yield on the TLB, and (b) any incurrence of replacement debt (whether under a new credit agreement or as an incremental facility under the existing credit agreement) at a lower effective yield, where in each case the primary purpose of the transaction is to achieve a lower cost of borrowing. This definition should be drafted with sufficient precision to avoid disputes about whether a particular transaction constitutes a "repricing" — for example, it should be clear that an amendment that modifies the SOFR floor without changing the applicable margin could constitute a repricing transaction if the net effect is to reduce the effective yield.
V. Interaction Between MFN and Repricing Protection Provisions
A. Overlap Period
A critical observation in structuring these provisions is that the recommended MFN sunset period (18 months) extends well beyond the recommended repricing protection period (6 months). This creates three distinct phases during which VHG is subject to different levels of constraint, each with its own strategic implications.
Phase 1: Months 1–6 (July 21, 2022 through January 21, 2023). During this period, both the MFN and the soft call are in effect simultaneously. The two provisions operate independently and address different types of transactions:
•  If VHG were to incur incremental term loans at an effective yield exceeding the initial TLB yield by more than 50 basis points during this period, the MFN would be triggered and the initial TLB margin would be automatically increased. The soft call would not be implicated by this transaction because the initial TLB is not being repriced downward — it is being repriced upward.
•  If VHG were to seek to reprice the initial TLB to a lower effective yield during this period (e.g., through an amendment reducing the applicable margin), the soft call premium of 1.00% ($7,000,000) would apply. The MFN would not be directly implicated by a downward repricing of the initial TLB, as the MFN only operates in connection with incremental term loan issuances, not in connection with amendments to the initial TLB.
Phase 2: Months 7–18 (January 22, 2023 through January 21, 2024). During this period, only the MFN remains in effect. The soft call will have expired, and VHG will be free to reprice the initial TLB to a lower yield without paying any premium. However, VHG will remain subject to the MFN with respect to any incremental term loans incurred during this period. This creates an asymmetric constraint: VHG can reduce the cost of the initial TLB (through repricing or refinancing) but cannot increase the cost of incremental facilities beyond the MFN threshold without triggering an upward adjustment to the initial TLB.
Phase 3: After Month 18 (after January 21, 2024). After the MFN sunset expires, neither provision constrains VHG. The company will have complete flexibility to reprice, refinance, or incur incremental term loans at any yield, subject only to the other terms and conditions of the credit agreement (such as the incremental facility basket limits and pro forma leverage tests).
B. Strategic Implications for VHG
The staggered sunset structure creates a clear and predictable timeline that should inform VHG's capital allocation and financing strategy over the next two years. We recommend presenting this framework to VHG's management team — specifically, Priya Narayanan (General Counsel) and Glenn Fischbach (Treasurer) — to ensure that the company's near-term and medium-term financing plans are structured to maximize flexibility within the constraints of these provisions.
Phase 1 Strategy (Closing through January 21, 2023). During Phase 1, VHG faces maximum constraint. Both the MFN and the soft call are in effect, limiting VHG's ability to (a) incur incremental term loans at elevated yields (MFN) and (b) reprice the initial TLB at reduced yields (soft call). For any near-term acquisition financing needs during this period, VHG should consider alternative funding sources that do not trigger either provision:
•  Revolver Draws. The $400,000,000 Revolver is undrawn at closing and provides substantial near-term liquidity for bridge financing of acquisitions. Revolver draws do not trigger the MFN (which applies only to incremental term loans) or the soft call (which applies only to repricing transactions).
•  Incremental Revolving Commitments. If the $400,000,000 Revolver proves insufficient, VHG can seek incremental revolving commitments under the credit agreement. As noted above, incremental revolving commitments should be carved out of the MFN.
•  Net Incremental Proceeds. VHG is expected to retain approximately $60,500,000 in net incremental proceeds from the refinancing (after payoff of the Greystone TLB and transaction expenses). These funds are available for acquisitions and general corporate purposes without implicating either the MFN or the soft call.
Phase 2 Strategy (January 22, 2023 through January 21, 2024). During Phase 2, VHG has greater flexibility. The soft call has expired, and VHG can reprice the initial TLB if market conditions permit. However, the MFN remains in effect, and VHG should be mindful of incremental term loan pricing if it seeks to fund acquisitions through incremental facilities during this period. The 50 basis point threshold provides meaningful room — VHG could incur incremental term loans at up to Adjusted Term SOFR + 425 bps without triggering the step-up — but this headroom is not unlimited, and VHG should model the MFN impact as part of any acquisition financing analysis.
Phase 3 Strategy (After January 21, 2024). During Phase 3, VHG faces no constraints from these provisions. This period coincides with the outer end of VHG's stated 12-to-24-month acquisition timeline, meaning that the most significant acquisition financing activity may occur after the MFN sunset has expired. If VHG can defer larger acquisition financings to Phase 3, it will have maximum flexibility on pricing.
We recommend that Calderwood & Harkness advise VHG's management team on this phased approach in connection with the broader transaction closing process.
C. Interaction with Incremental Facility Basket
The interplay between the MFN and the incremental facility basket requires careful attention in the credit agreement drafting. The incremental facility provision will allow VHG to incur additional term loans and/or revolving commitments, subject to the following conditions:
Freebie Basket. An aggregate amount (expected to be $150,000,000 to $200,000,000) of incremental term loans and/or revolving commitments that may be incurred without satisfying a pro forma leverage test. The freebie basket provides certainty of availability — VHG can access it regardless of whether its leverage has increased since closing. The MFN applies to incremental term loans incurred under the freebie basket during the sunset period.
Ratio-Based Basket. An unlimited amount of incremental term loans and/or revolving commitments that may be incurred so long as VHG satisfies a pro forma Total Net Leverage Ratio test. The applicable leverage threshold is expected to be set at 4.5x (consistent with the springing financial covenant), though for secured debt, a lower threshold may be negotiated. Given VHG's pro forma leverage of 2.52x, the ratio-based basket provides substantial additional capacity. The MFN likewise applies to incremental term loans incurred under the ratio-based basket during the sunset period.
Carve-Out for Revolving Commitments. As noted in Section III.F, the MFN should apply only to incremental term loans — incremental revolving commitments should be explicitly carved out. This is standard and should not be contested.
Acquisition-Size Carve-Out. As discussed in Section III.F, we recommend negotiating a carve-out for incremental term loans incurred to finance acquisitions with aggregate consideration exceeding $100,000,000. This carve-out would allow VHG to price acquisition financing competitively without triggering the MFN, recognizing that the pricing dynamics of acquisition-related incremental facilities are driven by deal-specific factors (such as the credit quality of the target, the competitive landscape for the acquisition, and the timeline for closing) that may not align with the initial TLB pricing.
Some CLO lenders in the syndicate may resist this carve-out, viewing it as an erosion of their MFN protection. We should be prepared to negotiate the terms of the carve-out — for example, by imposing a cap on the aggregate amount of incremental term loans eligible for the exemption, or by limiting the exemption to acquisitions that satisfy specified criteria (such as a minimum EBITDA contribution from the acquired business).
Practical Headroom Under the 50 bps Threshold. It is worth emphasizing that the 50 basis point MFN threshold itself provides significant practical headroom for incremental issuances. Under the recommended terms, VHG could incur incremental term loans at an effective yield of up to Adjusted Term SOFR + 425 basis points without triggering any step-up to the initial TLB margin. A spread of 425 basis points is equal to the spread on VHG's existing Greystone TLB, suggesting that the market would likely clear incremental term loans at or within this band for a BB-/Ba3 rated hospitality borrower. Only if VHG sought to incur incremental facilities at a spread above 425 basis points — reflecting a meaningful deterioration in credit conditions or a particularly aggressive incremental facility structure — would the MFN be triggered.
VI. Anticipated Lender Pushback and Fallback Positions
A. MFN Sunset Period
We anticipate that Crescent Harbor (led by Ted Marchetti, Managing Director) and WGP (led by Harrison Whitfield III) will initially resist our recommended 18-month sunset and argue for their original 24-month proposal. The primary arguments we expect them to advance are as follows:
•  CLO Ramp-Up Concerns. Crescent Harbor will likely argue that a 24-month sunset is necessary to protect the syndicate's CLO managers — particularly Ridgeline Capital Partners, LP and Ironbridge Loan Management LLC — whose ramp-up and warehouse periods may extend beyond 18 months. Crescent Harbor will frame this as a syndication risk issue: if the MFN sunset is too short, CLO managers may decline to participate or may demand pricing concessions.
•  Spread Volatility. In the current market environment, Crescent Harbor may argue that the uncertainty surrounding Federal Reserve policy and the potential for credit spread widening justify a longer MFN window to protect lenders against yield dilution during a period of potential market dislocation.
Our Response. The market data is unambiguous: 9 of 15 comparable transactions (60%) used an 18-month sunset, making it the modal and median term. The 24-month sunset was used in only 3 of 15 comparable transactions (20%) and represents the lender-favorable end of the range. We should emphasize that the 18-month period provides ample protection during the typical CLO ramp-up window and is consistent with the terms that CLO managers have accepted in recent comparable transactions.
Fallback Position. If Crescent Harbor does not initially accept the 18-month sunset, we recommend offering a targeted concession rather than extending the sunset period. Specifically, we could propose an 18-month sunset with a carve-out for small incremental term loan incurrences — for example, incremental term loans in an aggregate principal amount of up to $50,000,000 would be exempt from MFN protection, regardless of yield. This carve-out would give VHG flexibility for modest incremental issuances without exposing the syndicate to meaningful yield dilution. This approach preserves the 18-month sunset date while providing a practical accommodation that may address Crescent Harbor's concerns.
Hard Floor. We strongly recommend that VHG not accept an MFN sunset period exceeding 18 months. An 18-month sunset is the market standard for this credit profile and transaction type, and agreeing to 24 months would position VHG at the aggressive end of the market range without compensating benefits. If Crescent Harbor insists on more than 18 months, we should demand compensating concessions in other areas of the credit agreement — for example, a wider MFN threshold, a larger freebie basket, or more borrower-favorable treatment of the yield calculation methodology.
B. MFN Threshold
Crescent Harbor's initial proposal of a 25 basis point MFN threshold was very tight and would severely limit VHG's flexibility to incur incremental term loans at competitive pricing. At a 25 basis point threshold, VHG could incur incremental term loans at a maximum effective yield of Adjusted Term SOFR + 400 basis points before triggering the step-up — a spread that is already below the VHG's existing Greystone TLB spread of 425 basis points and that may not be achievable for incremental facilities with different structural characteristics or different investor bases.
At 50 basis points, VHG retains meaningful room to price incremental facilities competitively. The syndicate lenders receive assurance that they will not be significantly out-of-market relative to new-money term loan lenders — the maximum spread differential between the initial TLB and any incremental term loans is limited to 50 basis points, ensuring that initial lenders are not substantially disadvantaged.
Fallback Position. If Crescent Harbor insists on a threshold narrower than 50 basis points, we could consider a 37.5 basis point intermediate position as a potential compromise. However, a 37.5 basis point threshold is unusual in the market — the overwhelming majority of transactions use either 25 or 50 basis points — and an unusual threshold may create confusion or complexity in the credit agreement drafting. We strongly prefer the 50 basis point standard and should resist deviating from it unless compensating concessions are offered.
Hard Floor. We recommend that VHG not accept an MFN threshold below 50 basis points without obtaining meaningful compensating concessions elsewhere in the transaction — for example, a shorter MFN sunset (e.g., 15 or 16 months instead of 18 months), a larger freebie basket (e.g., $200,000,000 instead of $150,000,000), or a broader acquisition-size carve-out. If Crescent Harbor insists on 25 basis points and 24 months, VHG should view this as a significant departure from market terms and should escalate the discussion to the principal level (Priya Narayanan and Glenn Fischbach engaging directly with Ted Marchetti).
C. Repricing Protection Period
Crescent Harbor's initial proposal of a 12-month soft call period was above the market median. We expect that Crescent Harbor will concede to our 6-month counter-proposal relatively quickly, given the strength of the market data (11 of 15 comparable transactions used a 6-month period). The 12-month period was likely included as a negotiating anchor rather than a firmly held position.
If Crescent Harbor resists the 6-month period, we can emphasize the following points:
•  Rising-Rate Environment. In the current tightening cycle (the Federal Reserve has raised rates twice in 2022 and is expected to continue raising rates throughout the year), the probability that VHG would seek to reprice the TLB at a lower effective yield within 6 months of closing is relatively low. If anything, rising base rates and widening credit spreads are expected to increase the all-in cost of leveraged loans in the near term, making a repricing unlikely during the soft call window regardless of its duration. This substantially reduces the practical significance of the provision and should make Crescent Harbor more willing to accept the shorter period.
•  OID Recovery. As detailed in Section IV.D above, the 1.00% soft call premium ($7,000,000) more than compensates lenders for the unrecovered portion of their OID even in an early repricing scenario. The 6-month period provides ample time for lenders to recoup a significant portion of their OID through accrual, and the premium provides a substantial additional buffer.
•  Market Standard. The 6-month soft call is the dominant market term, used in 73% of comparable transactions. Crescent Harbor's own loan syndication desk will be aware of this, and insisting on a 12-month period could raise questions from potential syndicate participants about why the terms deviate from market convention.
Hard Floor. We strongly recommend that VHG not accept a soft call period exceeding 6 months. A 12-month soft call would unnecessarily lock VHG into the current pricing through January 2023, by which time market conditions may have shifted in ways that create repric

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