MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Ian Blackwood, Partner, Banking & Finance, Calderwood & Harkness LLP
From: Sophie Tremblay, Lead Associate, Banking & Finance, Calderwood & Harkness LLP
Date: May 19, 2022
Re: Verimark Hospitality Group Inc. — $700,000,000 Term Loan B Refinancing — Repricing Protection / Soft Call Analysis
Engagement No.: 1016-00009
Client: Verimark Hospitality Group Inc. ("VHG")
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I. Executive Summary
The purpose of this memorandum is to analyze the repricing protection provision (commonly referred to as a "soft call") proposed in connection with Verimark Hospitality Group Inc.'s ("VHG") $700,000,000 senior secured Term Loan B refinancing (the "New TLB"), with Crescent Harbor Bank, N.A. acting as Administrative Agent and Lead Arranger. This analysis is being prepared at the direction of Ian Blackwood in advance of our anticipated receipt of Whitfield Gage & Partridge LLP's ("WGP") initial markup of the draft Credit Agreement and in anticipation of the negotiation sessions expected to take place in the week of May 23, 2022.
As proposed in the commitment letter dated April 28, 2022 and reflected in our initial draft of the Credit Agreement circulated to WGP on May 16, 2022, the soft call provision would require VHG to pay a prepayment premium equal to 1.00% of the aggregate principal amount of the Term Loan B prepaid if VHG reprices, refinances, or voluntarily prepays the Term Loan B in connection with a "Repricing Transaction" (as defined therein) that results in a lower effective yield within 6 months of the closing date. The anticipated closing date is July 21, 2022, and accordingly the repricing protection period would extend from July 21, 2022 through and including January 21, 2023. On a full prepayment of the $700,000,000 facility within the soft call window, the premium payable would be $7,000,000.
This memorandum addresses the following topics:
(a) the mechanics of the repricing protection provision, including the structure, trigger events, and effective yield calculation methodology;
(b) the definition and scope of "Repricing Transaction" as proposed, including applicable carve-outs and exceptions;
(c) market comparison data drawn from recent hospitality-sector Term Loan B transactions, providing context for VHG's negotiating position;
(d) the interaction of the repricing protection provision with the most favored nation ("MFN") provision included in the Credit Agreement;
(e) the interaction of the repricing protection provision with the transition from the LIBOR-based benchmark in the existing Greystone Federal Credit Corp. facility to the Adjusted Term SOFR benchmark in the New TLB; and
(f) specific recommendations for VHG's negotiating position with respect to the soft call language.
Overall Assessment. Based on the analysis set forth herein, the proposed 6-month duration and 1.00% premium are within current market norms for BB-/Ba3 rated hospitality borrowers and represent a reasonable outcome for VHG. This is particularly the case in light of the meaningful 50 basis point spread reduction being achieved relative to the existing Greystone facility (from LIBOR + 425 bps to Adjusted Term SOFR + 375 bps), which translates to approximately $3,500,000 in estimated annual interest savings. The maximum soft call exposure of $7,000,000 is a manageable cost relative to the overall economics of the transaction, and given VHG management's stated intentions regarding its near-term capital structure, we do not anticipate that the repricing protection will be triggered during the 6-month window. We recommend that VHG accept the 6-month soft call period without expending significant negotiating capital to shorten it, and instead focus its negotiating efforts on ensuring that the standard carve-outs and exceptions are properly reflected in the final Credit Agreement language.
II. Background
A. Transaction Overview
VHG is refinancing its existing $625,000,000 Term Loan B (CUSIP 92347LAA0) originally issued on February 14, 2020, with Greystone Federal Credit Corp. ("Greystone") serving as administrative agent, with a new $700,000,000 Term Loan B (CUSIP 92347LAB8) to be arranged by Crescent Harbor Bank, N.A. ("Crescent Harbor" or the "Administrative Agent"). The existing Greystone facility has a remaining outstanding principal balance of approximately $606,250,000 as of March 31, 2022 (reflecting quarterly amortization payments made since the February 2020 closing). The existing facility will be repaid in full at the closing of the New TLB, and VHG's revolving credit facility will be amended and restated concurrently with the refinancing.
The New TLB is priced at Adjusted Term SOFR plus an applicable margin of 375 basis points, with a SOFR floor of 0.50%. This compares favorably to the LIBOR + 425 basis point pricing on the existing Greystone facility, achieving an estimated 50 basis point reduction in the applicable margin. After accounting for the SOFR credit spread adjustment (discussed in greater detail in Section VI below), the effective reduction in the all-in borrowing cost is slightly less than 50 basis points, but the savings remain substantial. On a $700,000,000 facility, the estimated annual interest savings attributable to the margin reduction are approximately $3,500,000 per annum (calculated as $700,000,000 × 0.50%).
The New TLB is being issued at an original issue discount ("OID") of 1.00%, resulting in net funding proceeds of $693,000,000. The $7,000,000 OID represents upfront compensation to lenders and is reflective of current market clearing levels for BB-/Ba3 rated hospitality credits in the institutional loan market.
The key terms of the New TLB are as follows:
• Maturity Date: July 21, 2029 (7-year tenor from the anticipated closing date)
• Amortization: 1.00% per annum of the original principal amount, payable in equal quarterly installments of $1,750,000, commencing on the last business day of the first full fiscal quarter following the closing date
• Balloon Payment at Maturity: Approximately $651,000,000 (subject to adjustments for any voluntary or mandatory prepayments made prior to maturity)
• Security: First-priority lien on substantially all assets of VHG and its material domestic subsidiaries, consistent with the existing Greystone facility security package
• Guarantors: All material domestic subsidiaries of VHG (consistent with the existing Greystone facility)
The incremental $75,000,000 in gross proceeds ($700,000,000 new facility less $625,000,000 original facility principal, noting that the actual payoff amount will be approximately $606,250,000 plus accrued interest and breakage costs) will be used to fund VHG's near-term acquisition pipeline and for general corporate purposes. VHG management has identified several potential acquisitions in the select-service segment that are expected to close in the second half of 2022 and the first quarter of 2023, and the incremental proceeds provide liquidity for these purposes without drawing on VHG's revolving credit facility.
B. VHG Credit Profile
Verimark Hospitality Group Inc. is a publicly traded company listed on the New York Stock Exchange under the ticker symbol VMRK. VHG is incorporated in the State of Delaware and headquartered in Boca Raton, Florida. The company is one of the largest privately-branded owner-operators of full-service and select-service hotels in the United States, with a portfolio of 74 properties spanning 18 states, with a concentration in major metropolitan areas and resort destinations along the Eastern Seaboard and the Gulf Coast. The portfolio has been appraised at approximately $3.1 billion as of the most recent valuation completed in March 2022 by Hallmark Valuation Associates.
VHG's financial performance has rebounded strongly from the COVID-19 pandemic trough, with revenue per available room ("RevPAR") exceeding 2019 levels in the fourth quarter of fiscal year 2021. Key financial metrics for the most recently completed fiscal year are as follows:
• FY2021 Revenue: $1.42 billion
• FY2021 EBITDA: $318 million
• FY2021 Adjusted EBITDA: $341 million (adjusted for non-recurring items including $14 million of COVID-related remediation expenses and $9 million of acquisition-related costs)
• FY2021 Free Cash Flow: $198 million
VHG's credit ratings from the two principal rating agencies that cover the company are as follows:
• Kellaway Ratings Group: BB- (stable outlook, affirmed April 8, 2022)
• Pinnacle Credit Services: Ba3 (stable outlook, affirmed April 12, 2022)
Both agencies cited VHG's improved operating performance, manageable leverage profile, and solid asset coverage as supportive of the current ratings. Kellaway Ratings Group noted in its April 2022 report that a ratings upgrade to BB could occur if VHG sustained Total Net Leverage below 2.5x for two consecutive quarters, which is noteworthy in the context of the current transaction's pro forma leverage metrics.
On a pro forma basis at closing of the New TLB, VHG's key credit metrics are projected to be:
• Pro Forma Total Debt: $1,345 million ($700M New TLB + $0M RCF drawn + $245M senior unsecured notes + $400M undrawn RCF commitment)
• Pro Forma Net Debt: $858 million ($1,345M less $87M cash on the balance sheet at closing, less $400M undrawn RCF)
• Pro Forma Net Leverage: 2.52x ($858M net debt ÷ $341M LTM Adjusted EBITDA)
• Maximum Total Net Leverage Covenant: 4.5x (applicable to the revolving credit facility only; the Term Loan B is covenant-lite)
• Pro Forma Interest Coverage: 5.7x ($341M Adjusted EBITDA ÷ $60M estimated annual interest expense)
VHG's 2.52x pro forma net leverage is well within the 4.5x maximum total net leverage covenant applicable to the revolving credit facility and provides substantial headroom for the acquisition pipeline discussed above. The company's strong asset base (3.1 billion portfolio valuation against $1,345 million total debt) provides significant downside protection for Term Loan B lenders and supports the competitiveness of the proposed pricing.
The total post-refinancing debt structure of VHG will consist of:
(i) $700,000,000 New Term Loan B (Crescent Harbor Bank, N.A. as Administrative Agent);
(ii) $400,000,000 Revolving Credit Facility (undrawn at closing; Crescent Harbor Bank, N.A. as Administrative Agent under the same Credit Agreement);
(iii) $245,000,000 6.375% Senior Unsecured Notes due 2028 (Atlantic Standard Trust Company as indenture trustee; issued under indenture dated September 15, 2020).
C. Relevant Parties
The principal parties involved in the New TLB refinancing and their respective representatives are identified below for reference:
Borrower:
• Verimark Hospitality Group Inc.
• Renata Haines, Chief Financial Officer
• Priya Narayanan, General Counsel
• Glenn Fischbach, Treasurer
Borrower's Counsel:
• Calderwood & Harkness LLP
• Ian Blackwood, Partner, Banking & Finance
• Stephanie Okafor, Counsel, Banking & Finance
• Sophie Tremblay, Lead Associate, Banking & Finance
• Daniel Obi, Associate, Banking & Finance
Administrative Agent / Lead Arranger:
• Crescent Harbor Bank, N.A.
• Theodore ("Ted") Marchetti, Managing Director, Leveraged Finance
• Anika Holm, Director, Loan Syndications
Agent's / Lender's Counsel:
• Whitfield Gage & Partridge LLP ("WGP")
• Harrison Whitfield III, Partner, Leveraged Finance
• Megan Yeung, Counsel, Leveraged Finance
Financial Advisor to VHG:
• Meridian Strauss Advisory LLC
• Elise Cavanaugh, Managing Director
Key Institutional Lenders in Syndication:
• Ridgeline Capital Partners (anticipated allocation: approximately $150,000,000)
• Ironbridge Loan Management (anticipated allocation: approximately $100,000,000)
• Beacon Atlantic Credit Fund III (anticipated allocation: approximately $75,000,000)
• Remaining syndication to be placed with a mix of CLOs, mutual funds, and other institutional investors
III. Mechanics of the Repricing Protection Provision
A. Basic Structure
The repricing protection (soft call) provision, as reflected in Section 2.05(a)(iv) of the draft Credit Agreement circulated on May 16, 2022, establishes a time-limited premium payable by VHG in connection with certain downward repricing events. The core mechanics of the provision are as follows:
Protection Period. The soft call provision applies for a period of 6 months following the closing date, commencing on July 21, 2022 (the anticipated closing date) and running through and including January 21, 2023 (the "Repricing Protection Period"). The period is calculated on a calendar-day basis, with the final day being inclusive.
Trigger. During the Repricing Protection Period, if VHG (a) voluntarily prepays all or a portion of the outstanding Term Loan B in connection with a "Repricing Transaction" (as defined below), (b) refinances all or a portion of the outstanding Term Loan B in connection with a Repricing Transaction, or (c) effects an amendment to the Credit Agreement that constitutes a Repricing Transaction, VHG shall be required to pay a premium to the affected lenders.
Premium Amount. The premium is equal to 1.00% of the aggregate principal amount of the Term Loan B so prepaid, refinanced, or subject to the repricing amendment (the "Soft Call Premium"). The premium is payable concurrently with the prepayment, refinancing, or effectiveness of the amendment, as applicable.
Dollar Exposure. The maximum Soft Call Premium exposure for VHG, assuming a full prepayment of the $700,000,000 Term Loan B within the Repricing Protection Period, is $7,000,000 (calculated as $700,000,000 × 1.00%). On a per-lender basis, the premium is distributed pro rata among the lenders whose Term Loan B commitments or holdings are affected by the Repricing Transaction.
Expiration. After January 21, 2023, the Term Loan B may be voluntarily prepaid, repriced, or refinanced at par without any premium or penalty. There is no step-down in the premium amount during the 6-month window; the full 1.00% premium applies throughout the entire Repricing Protection Period.
B. Definition of "Repricing Transaction"
The definition of "Repricing Transaction" is the central operative concept in the soft call provision and determines the scope of prepayment, refinancing, and amendment activity that triggers the premium. As drafted in Section 1.01 of the Credit Agreement, a "Repricing Transaction" is defined as follows:
"Repricing Transaction" means (a) any prepayment or repayment of Term Loans (or any portion thereof) substantially concurrently with the incurrence by the Borrower or any Subsidiary of new or replacement term loan indebtedness (whether incurred under this Agreement as an Incremental Term Loan Facility or under a new or replacement credit agreement or other debt instrument) bearing interest at a lower Effective Yield than the Effective Yield applicable to the initial Term Loans, or (b) any amendment or modification of this Agreement the primary purpose of which is to reduce the Applicable Margin or the Effective Yield applicable to the Term Loans.
Several important elements of this definition merit analysis:
Substantially Concurrent Incurrence. The definition requires that the prepayment or repayment occur "substantially concurrently" with the incurrence of lower-yield replacement indebtedness. This temporal nexus requirement is critical because it limits the soft call trigger to genuine repricing events — where VHG is replacing existing term loan debt with cheaper term loan debt — as distinguished from ordinary voluntary deleveraging. The phrase "substantially concurrently" is generally understood in the leveraged lending market to mean within a few business days of each other and forming part of a single integrated transaction, though the term is not defined with mathematical precision in the Credit Agreement.
Lower Effective Yield. The replacement indebtedness must bear interest at a lower "Effective Yield" (as defined and discussed in Section III.C below) than the Effective Yield applicable to the initial Term Loan B. If the replacement indebtedness has the same or higher Effective Yield, the transaction does not constitute a Repricing Transaction and no premium is payable.
Amendment-Based Repricing. Clause (b) of the definition captures amendments to the Credit Agreement whose primary purpose is to reduce the applicable margin or the Effective Yield on the Term Loans. This prevents VHG from circumventing the soft call by negotiating a margin reduction through an amendment rather than through a prepay-and-refi structure. The use of the phrase "primary purpose" introduces a purposive test, which provides some flexibility — an amendment that incidentally affects the applicable margin but whose primary purpose is something else (e.g., a covenant modification that has a secondary impact on the pricing grid) should not trigger the premium.
Key Exclusions. The definition of Repricing Transaction is subject to several important carve-outs, which are set forth in the proviso to the definition. As currently drafted, the following transactions are excluded from the definition of Repricing Transaction and do not trigger the Soft Call Premium:
(i) Mandatory Prepayments. Any prepayment of Term Loans required under Section 2.05(b) of the Credit Agreement, including excess cash flow sweeps, asset sale proceeds sweeps, and debt incurrence sweeps. These mandatory prepayments are excluded regardless of whether they are funded from sources that could theoretically involve a repricing.
(ii) Equity-Funded Prepayments. Any voluntary prepayment of Term Loans funded substantially from the net cash proceeds of equity issuances by VHG or any direct or indirect parent of VHG. This carve-out protects VHG's ability to delever using equity without incurring the soft call premium.
(iii) Change of Control Prepayments. Any prepayment of Term Loans made in connection with a "Change of Control" (as defined in the Credit Agreement). A change of control typically triggers mandatory prepayment or offer-to-purchase obligations under the Credit Agreement, and the exclusion ensures that VHG is not penalized for complying with these obligations.
(iv) Asset Sale Prepayments. Any prepayment of Term Loans funded with the net cash proceeds of asset dispositions, so long as the prepayment is required under the mandatory prepayment provisions of the Credit Agreement. This carve-out is related to exclusion (i) but specifically addresses asset sale proceeds.
(v) Transformative Acquisitions. Any prepayment made in connection with a transaction that constitutes a "Transformative Acquisition" (defined as an acquisition with a total consideration in excess of 50% of the total consolidated assets of VHG at the time of the acquisition). This carve-out recognizes that a transformative acquisition may necessitate a comprehensive refinancing of the capital structure, and it would be commercially unreasonable to impose a soft call premium in such circumstances.
It is important to note that the definition does not cover voluntary prepayments that are not made in connection with a repricing event. That is, if VHG elects to make a voluntary prepayment of Term Loans from cash on the balance sheet or from operating cash flow, without concurrently incurring replacement indebtedness at a lower yield, no Soft Call Premium is payable. This is a critical distinction that preserves VHG's ability to delever without penalty.
C. Effective Yield Calculation
The concept of "Effective Yield" is used both in the definition of Repricing Transaction and in the MFN provision (discussed in Section V below). The definition in the draft Credit Agreement provides that "Effective Yield" includes the following components:
(a) the applicable margin (i.e., the spread over the reference rate);
(b) any interest rate floor (for the initial Term Loan B, the SOFR floor of 0.50%);
(c) any original issue discount or upfront fees paid to lenders in connection with the issuance of the term loans, annualized over an assumed 4-year average life (consistent with market convention for leveraged term loans); and
(d) any similar fees or discounts that have the effect of increasing the all-in yield to lenders.
The definition specifically excludes the following from the Effective Yield calculation:
(a) arrangement fees, structuring fees, commitment fees, and similar fees payable solely to the administrative agent, lead arranger, or bookrunner (and not shared with the broader lender group);
(b) any ticking fee payable during the commitment period prior to funding; and
(c) any amendment or consent fees payable in connection with amendments or waivers.
Effective Yield on the Initial Term Loan B. Applying this definition to the initial Term Loan B, the Effective Yield is calculated as follows:
Note that the all-in Effective Yield will fluctuate with changes in Term SOFR, but the spread component (400 bps including annualized OID) represents the fixed element that is relevant for repricing comparisons. The SOFR floor of 0.50% is currently out of the money given that 1-month Term SOFR is trading at approximately 1.14% as of the date of this memorandum, but the floor provides downside protection to lenders in a declining rate environment and is factored into the Effective Yield calculation for repricing comparison purposes by including it as a component that benefits lenders.
For purposes of determining whether a replacement facility constitutes a Repricing Transaction, the comparison should be made on an apples-to-apples basis: the Effective Yield of the initial Term Loan B (including all components set forth above) versus the Effective Yield of the proposed replacement indebtedness (calculated using the same methodology). If the replacement Effective Yield is lower, the transaction constitutes a Repricing Transaction and triggers the premium.
D. Interaction with Mandatory Prepayments
As noted above, the Soft Call Premium does not apply to mandatory prepayments required under Section 2.05(b) of the Credit Agreement. The mandatory prepayment provisions of the Credit Agreement include the following triggers:
(i) Excess Cash Flow Sweep. VHG is required to prepay the Term Loan B with a percentage of its annual Excess Cash Flow (as defined in the Credit Agreement), with the applicable percentage stepping down based on the Total Net Leverage Ratio (75% at or above 3.5x; 50% between 2.5x and 3.5x; 25% between 2.0x and 2.5x; 0% below 2.0x). At VHG's current pro forma leverage of 2.52x, the applicable sweep percentage would be 50%.
(ii) Asset Sale Proceeds Sweep. VHG is required to prepay the Term Loan B with 100% of the net cash proceeds of asset dispositions (subject to a reinvestment right within 365 days and a de minimis basket of $25,000,000 per fiscal year).
(iii) Debt Incurrence Sweep. VHG is required to prepay the Term Loan B with 100% of the net cash proceeds of certain non-permitted debt incurrences.
The carve-out for mandatory prepayments is standard and protects VHG from the commercially unreasonable outcome of incurring a Soft Call Premium on prepayments that VHG is contractually obligated to make under the terms of the Credit Agreement itself. This carve-out should not be subject to negotiation, and we would resist any attempt by WGP to narrow or condition this exclusion.
IV. Market Comparison — Hospitality-Sector TLB Transactions
A. Methodology
To benchmark the proposed repricing protection terms against prevailing market practice, we reviewed a sample of recent leveraged Term Loan B transactions in the hospitality and lodging sector executed between January 2021 and May 2022. Our review encompassed both new-money and refinancing transactions and included issuances in the broadly syndicated loan market that were distributed to institutional investors (CLOs, mutual funds, hedge funds, and insurance companies).
Data sources for this analysis included:
• LSTA Primary Market Reports and Weekly Market Snapshots (Q1 2021 through Q2 2022)
• Leveraged loan databases maintained by LCD (Cascade Solutions) and Refinitiv LPC
• Publicly available credit agreements filed as exhibits to SEC Form 8-K and Form 10-Q filings
• Calderwood & Harkness LLP's internal database of completed leveraged finance transactions
• Discussions with Meridian Strauss Advisory LLC (Elise Cavanaugh) regarding current market intelligence
Our sample was limited to borrowers with credit ratings in the BB-/Ba3 to B+/B1 range, which brackets VHG's BB-/Ba3 rating and provides the most relevant comparison set. We identified eight comparable transactions meeting these criteria, which are summarized in the table below.
B. Comparable Transaction Summary Table
Notes: "S" denotes Adjusted Term SOFR; "L" denotes LIBOR. Transactions prior to Q4 2021 generally used LIBOR as the reference rate, while transactions from Q4 2021 onward have increasingly adopted SOFR. Applicable margin reflects the initial pricing grid spread. OID reflects the discount at issuance. Source: LSTA market reports, SEC filings, LCD, Calderwood & Harkness internal database.
Key observations from the comparable transaction data:
Soft Call Duration Range. A 6-month soft call duration is the most common term observed in the sample, appearing in five of the eight transactions reviewed. The remaining three transactions had a 12-month soft call duration. Notably, all three of the 12-month soft call transactions closed in the first half of 2021, when the post-COVID leveraged loan market was still recovering and lenders had greater bargaining power. The more recent transactions (second half of 2021 and 2022) uniformly feature 6-month durations, reflecting the shift in market power toward borrowers as the leveraged loan market has tightened and investor demand for paper has increased.
Soft Call Premium Range. The 1.00% premium is overwhelmingly the market standard, appearing in every transaction in our sample without exception. We did not observe any deviation from the 1.00% convention in any of the hospitality-sector transactions reviewed, nor are we aware of any deviation in the broader leveraged loan market for institutional term loan facilities. The 1.00% premium has become essentially a fixed market term that is not subject to meaningful negotiation.
Applicable Margin Range. Applicable margins in the sample ranged from 325 to 450 basis points over the reference rate, with BB-/Ba3 rated borrowers clustering in the 350 to 400 basis point range and B+/B1 rated borrowers generally pricing at 400 to 450 basis points. VHG's proposed margin of Adjusted Term SOFR + 375 basis points falls squarely in the middle of the BB-/Ba3 range and is consistent with the pricing achieved by Pinnacle Lodging Group (S + 350), Heritage Resort Holdings (L + 375), Grandview Select Hotels Corp. (L + 350), and Ridgewater Hospitality Corp. (S + 375).
OID Range. Original issue discounts ranged from 0.50% to 2.00% across the sample. BB-/Ba3 rated borrowers generally achieved OID in the 0.50% to 1.00% range, while B+/B1 rated borrowers paid higher OID in the 1.50% to 2.00% range. VHG's 1.00% OID is at the upper end of the BB-/Ba3 range but is consistent with the OID observed for Heritage Resort Holdings and Ridgewater Hospitality Corp.
SOFR/LIBOR Floor Range. Interest rate floors in the sample ranged from 0.50% to 0.75%. BB-/Ba3 rated borrowers generally achieved floors at the lower end of this range (0.50%), while B+/B1 rated borrowers were more commonly subject to 0.75% floors. VHG's SOFR floor of 0.50% is at the favorable end of the observed range and reflects VHG's strong credit profile.
C. Observed Trends
Several broader market trends are relevant to the analysis of VHG's repricing protection terms:
Shortening of Soft Call Durations. Since mid-2021, as the broadly syndicated loan market has experienced periods of strong technical demand and tightening spreads, soft call durations have generally shortened from 12 months to 6 months for stronger credits. This trend reflects improved borrower bargaining power driven by the following factors: (i) robust CLO issuance creating demand for leveraged loan assets, (ii) a favorable macroeconomic environment supporting credit fundamentals, and (iii) increased competition among arrangers for leveraged finance mandates. For BB-/Ba3 rated borrowers with strong fundamentals like VHG, a 6-month soft call has become the de facto market standard.
Hospitality Sector Recovery. In the hospitality sector specifically, the strong post-COVID revenue recovery has materially improved borrower credit profiles and negotiating positions. RevPAR across the U.S. lodging industry exceeded 2019 levels in Q4 2021 for the first time since the pandemic, and occupancy rates have continued to improve through Q1 2022. This recovery has allowed hospitality borrowers to negotiate more favorable terms than were available during the 2020-2021 period, including shorter soft call windows, tighter applicable margins, and lower OID.
1.00% Premium as Fixed Convention. The 1.00% Soft Call Premium has remained the universal market standard with virtually no variation across sectors, credit tiers, or transaction types. This convention has been in place for approximately a decade in the broadly syndicated loan market and has become so deeply embedded in market practice that any attempt to negotiate a lower premium (or a higher premium) would be viewed as highly unusual and would likely be rejected by both arrangers and institutional investors.
Elimination of Soft Calls for Crossover Credits. It is worth noting that some recent transactions involving investment-grade crossover credits (i.e., borrowers rated BBB-/Baa3 or higher) have eliminated soft calls entirely, reflecting the stronger bargaining position of these borrowers and the less covenant-intensive nature of investment-grade lending. However, this trend is limited to the investment-grade and near-investment-grade segment and has not extended to BB-/Ba3 or lower-rated issuers. For VHG's rating category, a soft call remains a standard and expected feature of institutional term loan facilities.
D. Benchmark Against VHG
VHG's proposed 6-month soft call at a 1.00% premium is consistent with the market median for BB-/Ba3 hospitality borrowers based on our review of comparable transactions. In the context of the broader market data presented above, VHG's repricing protection terms are squarely in line with what similarly situated borrowers have accepted in recent transactions.
Several VHG-specific factors further support the conclusion that the proposed terms are appropriate and competitive:
• VHG's relatively conservative pro forma leverage (2.52x vs. 4.5x covenant) is stronger than several of the comparable borrowers in our sample, which generally had pro forma leverage in the 3.0x–4.0x range.
• VHG's strong asset base ($3.1 billion portfolio valuation) provides significant asset coverage and reduces lender downside risk, which has been reflected in the favorable pricing achieved (375 bps applicable margin, 0.50% SOFR floor, 1.00% OID).
• The 50 basis point spread improvement being achieved relative to the existing Greystone facility reflects VHG's improved credit profile and market conditions, and the 6-month soft call is a reasonable quid pro quo for this pricing improvement.
• The key institutional lenders in the syndication (Ridgeline Capital Partners, Ironbridge Loan Management, and Beacon Atlantic Credit Fund III) are sophisticated CLO and credit fund managers that expect and price in a 6-month soft call as a standard feature; a shorter soft call period could negatively impact syndication execution.
Recommendation. The 6-month soft call duration is acceptable and consistent with market norms. Pushing for a shorter period (e.g., 3 months) may theoretically be possible given VHG's strong credit profile, but we believe this would create unnecessary friction in the syndication process and could lead to resistance from Crescent Harbor's syndication desk (Anika Holm) and from the institutional lender group. We do not recommend expending negotiating capital on this point unless VHG management has identified specific near-term repricing plans that would be materially affected by the 6-month window. Based on our discussions with Renata Haines and Glenn Fischbach, no such plans have been indicated.
V. Interaction with the Most Favored Nation (MFN) Provision
A. Overview of MFN Provision
In addition to the repricing protection provision, the Credit Agreement includes a most favored nation ("MFN") clause applicable to incremental term loan facilities incurred after closing. The MFN provision is found in Section 2.14(d) of the draft Credit Agreement and operates as follows:
Applicability Period. The MFN clause applies to any incremental term loan facility incurred within 18 months of the closing date — that is, from July 21, 2022 through and including January 21, 2024 (the "MFN Sunset Date"). Incremental term loans incurred after the MFN Sunset Date are not subject to the MFN provision.
MFN Threshold. If an incremental term loan facility is incurred during the MFN applicability period at an Effective Yield that exceeds the Effective Yield on the initial Term Loan B by more than 50 basis points (the "MFN Threshold"), the applicable margin on the initial Term Loan B is automatically ratcheted up to a level that brings the Effective Yield on the initial Term Loan B to within 50 basis points of the Effective Yield on the incremental term loan facility.
Purpose. The MFN provision protects the initial Term Loan B lenders by ensuring that they receive an Effective Yield that is not materially below the yield on new incremental term loans incurred by VHG. Without the MFN, VHG could theoretically incur incremental term loans at a significantly higher yield, which would effectively subordinate the initial Term Loan B lenders in terms of yield compensation while sharing the same collateral pool and benefiting from the same credit support.
MFN Exceptions. Consistent with market practice, the MFN provision includes customary exceptions for incremental term loan facilities incurred (a) in connection with a Permitted Acquisition with a total consideration in excess of $100,000,000, (b) with a maturity date no earlier than the maturity date of the initial Term Loan B, and (c) that are denominated in a currency other than U.S. dollars. These exceptions are not expected to be significant issues in the current negotiation.
B. Overlap Period
The repricing protection period (July 21, 2022 through January 21, 2023) falls entirely within the MFN applicability period (July 21, 2022 through January 21, 2024). This creates a 6-month overlap period during which both provisions are simultaneously active. Understanding the interaction between these two provisions is important for advising VHG on its flexibility during this period.
The critical distinction between the two provisions is directional:
• The repricing protection addresses downward yield adjustments — it protects lenders from having the yield on their existing Term Loan B reduced through a repricing, refinancing, or amendment during the first 6 months.
• The MFN provision addresses upward yield on new incremental term loans — it protects initial Term Loan B lenders from being yield-disadvantaged relative to new incremental term loans incurred during the first 18 months.
Because the two provisions address opposite scenarios (downward repricing vs. upward incremental pricing), they do not conflict with each other. A single transaction cannot simultaneously trigger both provisions, as a Repricing Transaction by definition involves a lower Effective Yield (triggering the soft call premium), while the MFN is triggered by a higher Effective Yield on incremental debt.
C. Scenario Analysis: Incurrence of Incremental Term Loans During Soft Call Period
To illustrate the interaction between the two provisions, we analyze two hypothetical scenarios during the overlap period:
Scenario 1: VHG Incurs Incremental Term Loans at a Higher Yield During the First 6 Months.
Assume VHG incurs a $150,000,000 incremental term loan facility in September 2022 (within both the repricing protection period and the MFN period) at an Effective Yield of Adjusted Term SOFR + 475 bps (75 bps above the initial Term Loan B Effective Yield of approximately Adjusted Term SOFR + 400 bps, inclusive of annualized OID). In this scenario:
• The MFN provision would be triggered because the incremental term loan Effective Yield exceeds the initial Term Loan B Effective Yield by 75 bps, which is more than the 50 bps MFN Threshold.
• The applicable margin on the initial Term Loan B would be ratcheted up from 375 bps to 400 bps (a 25 bps increase), bringing the initial Term Loan B Effective Yield (approximately Adjusted Term SOFR + 425 bps, inclusive of annualized OID) to within 50 bps of the incremental term loan Effective Yield (Adjusted Term SOFR + 475 bps).
• No Soft Call Premium would be payable because the initial Term Loan B yield is increasing, not decreasing. The repricing protection provision is not triggered.
Scenario 2: VHG Amends the Credit Agreement to Reduce the Applicable Margin During the First 6 Months.
Assume VHG negotiates an amendment to the Credit Agreement in October 2022 (within the repricing protection period) that reduces the applicable margin on the initial Term Loan B from 375 bps to 325 bps. In this scenario:
• The repricing protection provision would be triggered because the amendment constitutes a "Repricing Transaction" — its primary purpose is to reduce the Effective Yield on the Term Loan B.
• VHG would be required to pay the Soft Call Premium of 1.00% on the full outstanding principal amount of the Term Loan B subject to the amendment (i.e., $7,000,000 on the full $700,000,000 facility if the amendment applies to all lenders).
• The MFN provision would not be implicated because no incremental term loans are being incurred.
These scenarios confirm that the two provisions operate independently and do not create conflicting obligations.
D. Post–Soft Call / Pre–MFN Sunset Period
Between January 21, 2023 (expiration of the repricing protection period) and January 21, 2024 (the MFN Sunset Date), a 12-month window exists during which VHG could reprice the initial Term Loan B without paying any Soft Call Premium, while the MFN provision would remain operative for any incremental term loan issuances.
This 12-month window has significant practical implications for VHG's acquisition pipeline planning. If VHG seeks to fund acquisitions with incremental term loan capacity during this period, the MFN provision will govern the yield parameters for the incremental facility and may result in an upward adjustment to the initial Term Loan B margin if the incremental facility is priced more than 50 bps above the initial Term Loan B Effective Yield. VHG's treasury team (Glenn Fischbach) should be advised of this dynamic when evaluating acquisition financing alternatives, as it may influence the decision between incremental term loan financing and alternative funding sources (such as draws on the revolving credit facility or the incurrence of additional senior unsecured notes).
Conversely, if market conditions improve and VHG has an opportunity to reprice the Term Loan B downward after January 21, 2023, VHG will be able to do so without any penalty, which provides meaningful flexibility in a declining spread environment.
VI. Interaction with the SOFR Transition
The transition from the LIBOR-based benchmark in the existing Greystone facility to the Adjusted Term SOFR benchmark in the New TLB introduces certain technical considerations for the repricing protection provision. These considerations relate primarily to the consistency of Effective Yield comparisons and the treatment of benchmark transition events.
Benchmark Structure. The existing Greystone Term Loan B uses LIBOR (specifically, 1-month, 3-month, or 6-month USD LIBOR, at VHG's election) as the reference rate, with an applicable margin of 425 basis points and no LIBOR floor. The New TLB uses Adjusted Term SOFR as the reference rate, which is defined as CME Term SOFR (the forward-looking term rate published by CME Group based on SOFR futures) plus a credit spread adjustment ("CSA") intended to approximate the historical difference between LIBOR and SOFR. The applicable CSA values are as follows:
For simplicity, the Credit Agreement rounds these values to 0.10%, 0.15%, and 0.25%, respectively, for the 1-month, 3-month, and 6-month tenors. These CSA values are derived from the ISDA fixed spread adjustments recommended by the Alternative Reference Rates Committee ("ARRC") and the Financial Stability Board.
Consistency of Yield Comparisons. For purposes of the repricing protection provision, it is essential that Effective Yield comparisons be made on a consistent basis. Because the New TLB is priced using Adjusted Term SOFR (i.e., Term SOFR plus the CSA), any replacement indebtedness used to evaluate whether a Repricing Transaction has occurred must be evaluated using the same benchmark methodology. If replacement indebtedness is priced using a different SOFR variant — for example, Daily Simple SOFR (the overnight SOFR compounded in arrears without the term structure or CSA) — the Effective Yield comparison could produce misleading results because the base rates differ structurally.
Risk of Benchmark Manipulation. An issue we have flagged for further discussion is the potential for a borrower to argue that a switch from Term SOFR to an alternative SOFR variant (e.g., Daily Simple SOFR or SOFR Compounded in Arrears) constitutes a change in the benchmark rate rather than a repricing, thereby falling outside the definition of "Repricing Transaction." This argument, while technically creative, should be addressed in the drafting of the Credit Agreement. We recommend that the definition of "Repricing Transaction" be drafted to capture any amendment or refinancing that reduces the all-in yield to lenders regardless of the specific SOFR variant used as the reference rate. The inclusion of the phrase "Effective Yield" — which encompasses the all-in cost to the borrower including the applicable margin, floor, and annualized OID — should provide adequate protection against this form of manipulation, but explicit drafting language would eliminate any ambiguity.
Recommendation. We recommend confirming that the "Repricing Transaction" definition expressly provides that the determination of whether a lower Effective Yield has been achieved shall be made without regard to any change in the specific form of the reference rate (whether from Term SOFR to Daily Simple SOFR, from SOFR to an alternative benchmark, or otherwise), so long as the resulting all-in cost to the borrower is lower than the all-in cost of the initial Term Loan B.
Benchmark Replacement Fallback. The Credit Agreement includes hardwired benchmark replacement fallback language consistent with ARRC recommendations. This fallback language provides for an automatic transition from Term SOFR to Daily Simple SOFR (or such other benchmark as may be selected by the Administrative Agent in consultation with the borrower) upon the occurrence of a benchmark transition event (e.g., the permanent cessation of Term SOFR). If this fallback is invoked by its own terms — rather than at the borrower's election for the purpose of reducing the all-in yield — it should not constitute a Repricing Transaction. The current drafting is consistent with this result, as the fallback provision is triggered by external market events rather than by a voluntary borrower action aimed at reducing the yield. We recommend confirming this interpretation with WGP to avoid any future dispute.
VII. Economic Impact Analysis for VHG
A. Cost of the Soft Call Premium in Context
The maximum Soft Call Premium exposure of $7,000,000 should be evaluated in the context of the overall economics of the refinancing transaction and VHG's financial profile:
Relative to Annual Interest Savings. The estimated annual interest savings from the 50 basis point margin reduction achieved in the refinancing are approximately $3,500,000 per annum ($700,000,000 × 0.50%). The $7,000,000 Soft Call Premium therefore represents approximately 2.0 years of interest savings. Put differently, VHG would need to retain the lower margin for approximately 2 years to fully recoup the cost of the Soft Call Premium if it were triggered.
Relative to Facility Size. The $7,000,000 premium represents 1.00% of the $700,000,000 facility size and 1.01% of the net funding amount of $693,000,000 (after deducting the $7,000,000 OID).
Relative to OID. The $7,000,000 Soft Call Premium equals the dollar amount of the $7,000,000 OID paid to lenders at closing. This is a useful reference point for client discussions, as it effectively means that triggering the soft call within the first 6 months would cost VHG the equivalent of a second OID payment.