comfort-letter-request.docx

1021-00002 · Verimark Hospitality Group · Correspondence

comfort-letter-request.docx DOCUMENT Capital Markets

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CALDERWOOD & HARKNESS LLP One Liberty Plaza, 45th Floor New York, NY 10006 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com

June 10, 2024

Via Email and Facsimile

Kenneth W. Sturgis Engagement Partner Palladian & Howe LLP 200 South Biscayne Boulevard, Suite 2600 Miami, FL 33131

Re: Request for Comfort Letter in Connection with the Offering of $500,000,000 Aggregate Principal Amount of 8.250% Senior Notes due 2031 by Verimark Hospitality Group Inc.

Dear Mr. Sturgis:

1. Introduction and Identification of Transaction

Calderwood & Harkness LLP serves as issuer's counsel to Verimark Hospitality Group Inc., a Delaware corporation ("VHG" or the "Company"), in connection with the Company's proposed private placement (the "Offering") under Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), of $500,000,000 aggregate principal amount of 8.250% Senior Notes due 2031 (the "Notes"). The Notes will be senior unsecured obligations of the Company and will be guaranteed by the Guarantors (as defined below).

The Notes will be offered by Kensington Barrow & Co., acting as lead left bookrunner and representative of the initial purchasers (in such capacity, the "Representative"), Ridgeline Capital Markets LLC, acting as joint bookrunner, and Stonebridge Marvelo Securities Inc., acting as co-manager (collectively, the "Initial Purchasers"), pursuant to a Purchase Agreement expected to be dated as of June 18, 2024 (the "Purchase Agreement") among VHG, the Guarantors party thereto, and Kensington Barrow & Co., acting as Representative of the Initial Purchasers. The Purchase Agreement will set forth the terms and conditions upon which the Initial Purchasers will purchase the Notes from the Company for resale to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to persons outside the United States in compliance with Regulation S under the Securities Act.

In connection with the Offering, the Company has prepared and distributed to prospective investors a Preliminary Offering Memorandum dated June 3, 2024 (the "Preliminary Offering Memorandum"), and expects to prepare and distribute a Final Offering Memorandum on or about the date of pricing of the Notes (the "Final Offering Memorandum" and, together with the Preliminary Offering Memorandum, collectively, the "Offering Memorandum"). The Offering Memorandum contains, among other information, certain audited and unaudited financial statements and financial data of the Company, as more fully described below.

We understand that Palladian & Howe LLP ("Palladian & Howe" or "you") serves as the Company's independent registered public accounting firm and that Palladian & Howe has audited the consolidated financial statements of VHG and its subsidiaries for the fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021, as included in the Offering Memorandum.

The closing of the Offering is anticipated to occur on June 25, 2024, on a T+5 settlement basis (the "Closing Date").

2. Purpose of the Request

Pursuant to the terms and conditions of the Purchase Agreement, the obligation of the Initial Purchasers to consummate the purchase of the Notes at closing is conditioned upon, among other things, the delivery by Palladian & Howe of a comfort letter (the "Comfort Letter") in customary form addressed to the Initial Purchasers. Specifically, Section 6(e) of the Purchase Agreement (as currently drafted) provides that it shall be a condition precedent to the obligations of the Initial Purchasers under the Purchase Agreement that Palladian & Howe shall have delivered a letter, dated as of the date of the Purchase Agreement and addressed to the Initial Purchasers, in form and substance satisfactory to the Representative and its counsel, containing statements and information of the type ordinarily included in accountants' comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Offering Memorandum.

Accordingly, we respectfully request that Palladian & Howe deliver the Comfort Letter addressed to each of the following parties:

(a) Kensington Barrow & Co., as Representative of the Initial Purchasers;

(b) Ridgeline Capital Markets LLC; and

with copies to be provided simultaneously to:

(d) Calderwood & Harkness LLP (issuer's counsel), One Liberty Plaza, 45th Floor, New York, NY 10006, Attention: Claire Dempsey; and

(e) Whitfield, Crane & Aldrich LLP (initial purchasers' counsel), 51 West 52nd Street, New York, NY 10019, Attention: Nathaniel R. Bosch.

We request that the Comfort Letter be delivered at or prior to the Closing Date on June 25, 2024. In addition, as further described in Section 6 below, we request that a bringdown comfort letter (the "Bringdown Letter") be delivered at closing on the Closing Date. The Purchase Agreement contemplates both the initial Comfort Letter and the Bringdown Letter as separate conditions to closing.

We request that the Comfort Letter be prepared in accordance with the applicable professional standards governing the issuance of comfort letters by independent accountants, including AU-C Section 920 (Letters for Underwriters and Certain Other Requesting Parties), as adopted and incorporated by the American Institute of Certified Public Accountants ("AICPA"), which superseded and replaced the guidance formerly set forth in Statement on Auditing Standards No. 72 (Letters for Underwriters and Certain Other Requesting Parties) and Statement on Auditing Standards No. 86 (Amendment to SAS No. 72). We understand that the form and content of the Comfort Letter will necessarily be determined by Palladian & Howe in its professional judgment in accordance with these standards, and we appreciate your willingness to work with us and with counsel to the Initial Purchasers to ensure that the Comfort Letter is responsive to the closing conditions set forth in the Purchase Agreement.

3. Financial Statements and Periods to Be Covered

We request that the Comfort Letter cover the following audited and unaudited financial statements of VHG included or incorporated by reference in the Offering Memorandum:

Audited Financial Statements. The Comfort Letter should address the audited consolidated financial statements of VHG and its subsidiaries for each of the three fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021, together with the related consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of changes in stockholders' equity, and consolidated statements of cash flows for each such fiscal year, and the notes thereto, in each case as included in the Offering Memorandum (collectively, the "Audited Financial Statements"). The Comfort Letter should include:

(a) A statement that Palladian & Howe has audited the Audited Financial Statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the "PCAOB") and that such audits were performed in accordance with PCAOB standards;

(b) A reference to Palladian & Howe's reports of independent registered public accounting firm dated March 1, 2024 (with respect to the fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021), as included in the Offering Memorandum, and a statement that such reports are included therein;

(c) A statement that Palladian & Howe is independent with respect to VHG and its subsidiaries within the meaning of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Securities and Exchange Commission (the "SEC") and the PCAOB, including Rule 2-01 of Regulation S-X and the independence rules and standards of the PCAOB; and

(d) A statement that, as of the date of the Comfort Letter, nothing has come to the attention of Palladian & Howe that would cause it to believe that any material modifications should be made to the Audited Financial Statements for them to be in conformity with U.S. generally accepted accounting principles ("GAAP").

Unaudited Interim Financial Statements. The Comfort Letter should also address the unaudited condensed consolidated financial statements of VHG and its subsidiaries for the three-month period ended March 31, 2024, and the comparable three-month period ended March 31, 2023, together with the related unaudited condensed consolidated balance sheets, unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of comprehensive income (loss), unaudited condensed consolidated statements of changes in stockholders' equity, and unaudited condensed consolidated statements of cash flows, and the notes thereto, in each case as included in the Offering Memorandum (collectively, the "Interim Financial Statements"). The Comfort Letter should include:

(a) A statement that Palladian & Howe has performed a review of the Interim Financial Statements in accordance with the standards established by the PCAOB for reviews of interim financial information (including PCAOB Auditing Standard No. 4105, formerly AU-C Section 930), and that the Interim Financial Statements comply as to form in all material respects with the applicable accounting requirements;

(b) A statement that, based on such review, nothing has come to the attention of Palladian & Howe that caused it to believe that any material modifications should be made to the Interim Financial Statements for them to be in conformity with GAAP; and

(c) A confirmation that the Interim Financial Statements have been prepared on a basis consistent with the Audited Financial Statements, except as may be described in the notes thereto.

4. Financial Data and Other Numbers to Be Covered

We request that the Comfort Letter address the specific financial data, metrics, statistics, and other numerical information set forth in the Offering Memorandum, verifying such data by tracing it to, or confirming its agreement with, the underlying accounting records of the Company, the Audited Financial Statements, the Interim Financial Statements, or other specified sources, as applicable. Without limiting the foregoing, we specifically request that the Comfort Letter address the following items:

Selected Historical Financial Data. The selected historical consolidated financial data for the fiscal years ended December 31, 2021, December 31, 2022, and December 31, 2023, and for the three-month periods ended March 31, 2024 and March 31, 2023, as set forth in the section of the Offering Memorandum entitled "Selected Historical Financial Data," should be covered by the Comfort Letter. Such data should be traced to and confirmed as being in agreement with the corresponding amounts in the Audited Financial Statements or the Interim Financial Statements, as applicable, or, where such data is not directly presented in such financial statements, to the underlying accounting records of the Company.

LTM Revenue and LTM Adjusted EBITDA. The Offering Memorandum sets forth the Company's total revenue for the twelve-month period ended March 31, 2024 (sometimes referred to as "LTM Revenue"), in the amount of $1,820,000,000, and the Company's Adjusted EBITDA for the twelve-month period ended March 31, 2024 (sometimes referred to as "LTM Adjusted EBITDA"), in the amount of $412,000,000. We request that the Comfort Letter confirm that such LTM Revenue and LTM Adjusted EBITDA amounts have been accurately computed on the basis of the underlying audited and reviewed financial data and that the arithmetic accuracy of the calculations has been verified. To the extent that Adjusted EBITDA is a non-GAAP financial measure, we request that the Comfort Letter confirm that the adjustments used in the computation of Adjusted EBITDA are in agreement with the amounts set forth in the reconciliation included in the Offering Memorandum and that such adjustments can be traced to the Company's accounting records, the Audited Financial Statements, or the Interim Financial Statements.

Pro Forma Financial Data. The Offering Memorandum contains certain pro forma financial data giving effect to the Offering and the application of the net proceeds therefrom, including the following:

(a) Pro forma total debt of $500,000,000;

(b) Pro forma net leverage ratio of approximately 1.21x;

(d) Pro forma fixed charge coverage ratio of approximately 8.83x.

We request that the Comfort Letter confirm that, to the extent such pro forma financial data is derived from or based upon the historical financial statements or accounting records of the Company, the underlying historical financial data has been accurately extracted and that the arithmetic accuracy of the pro forma computations has been verified. We understand that Palladian & Howe may not be in a position to provide assurance on the assumptions underlying the pro forma adjustments, but we request that the Comfort Letter confirm that the pro forma adjustments are arithmetically correct and are applied on a basis consistent with the historical financial statements.

Capitalization Table. The capitalization table as set forth in the section of the Offering Memorandum entitled "Capitalization" should be covered by the Comfort Letter. We request that Palladian & Howe confirm that the historical amounts reflected in the capitalization table are in agreement with the corresponding amounts in the Audited Financial Statements or the Interim Financial Statements, as applicable, or, where not directly presented therein, with the underlying accounting records of the Company. We further request confirmation that the "as adjusted" amounts in the capitalization table have been computed on the basis described in the Offering Memorandum and that the arithmetic accuracy of such computations has been verified.

Existing Credit Facility Data. The Offering Memorandum contains information regarding the Company's existing senior secured credit facility (the "Existing Credit Facility"), including the following:

(a) Outstanding principal balance of $467,342,819.16 as of April 1, 2024, consisting of Term Loan A in the principal amount of $280,142,819.16 and Term Loan B in the principal amount of $187,200,000.00; and

(b) Estimated accrued and unpaid interest on the Existing Credit Facility of $4,207,180.84 through the anticipated Closing Date.

We request that the Comfort Letter confirm that the outstanding principal balance of the Existing Credit Facility and its component term loans, as set forth in the Offering Memorandum, are in agreement with the Company's accounting records or other documentation made available to Palladian & Howe. With respect to the estimated accrued interest amount, we request that the Comfort Letter confirm the arithmetic accuracy of the interest calculation to the extent the calculation methodology has been provided to Palladian & Howe by the Company.

Use of Proceeds Table. The Offering Memorandum contains a section entitled "Use of Proceeds" that sets forth the anticipated application of the net proceeds of the Offering. We request that the Comfort Letter address the following specific items set forth in the use of proceeds table:

(a) Total estimated net proceeds from the Offering: $483,750,000;

(b) Application of net proceeds as follows:

(i) Repayment of Existing Credit Facility — principal: $467,342,819.16;

(ii) Repayment of Existing Credit Facility — accrued interest: $4,207,180.84;

(iii) Prepayment premium on the Existing Credit Facility: $2,336,714.10;

(iv) Transaction fees and expenses (estimated): $6,863,285.90; and

(v) General corporate purposes: $3,000,000.00;

We request confirmation that the amounts set forth in the use of proceeds table are arithmetically correct and that the individual line items sum to the total estimated net proceeds amount. To the extent any of the foregoing amounts are derived from the Company's accounting records, we request that the Comfort Letter confirm agreement with such records.

Annual and Semi-Annual Interest Expense. The Offering Memorandum states that the annual interest expense on the Notes will be $41,250,000 (calculated as $500,000,000 multiplied by 8.250%) and that semi-annual interest payments will be $20,625,000. We request that the Comfort Letter confirm the arithmetic accuracy of these calculations.

Operational and Portfolio Data. The Offering Memorandum includes certain operational data regarding the Company's portfolio of properties, including the following:

(a) The Company operates 47 full-service hotels and 12 resort properties;

(b) The Company's portfolio comprises approximately 18,400 rooms; and

To the extent such data appears in the Offering Memorandum and can be traced to the Company's accounting records, internal reports, or other documentation made available to Palladian & Howe, we request that the Comfort Letter confirm agreement of such data with such records or documentation. We understand that certain of these items may constitute operating data that falls outside the scope of Palladian & Howe's audit or review procedures, and we are prepared to discuss the appropriate scope of coverage for such items.

Other Numerical Data. In addition to the specific items enumerated above, we request that the Comfort Letter address any other numerical data, financial statistics, or financial information contained in the Offering Memorandum that is derived from or based upon the accounting records of the Company or that can otherwise be traced to the Audited Financial Statements, the Interim Financial Statements, or the Company's books and records. We will work with Palladian & Howe to identify specific page and line references in the Offering Memorandum for all items to be covered, and we anticipate providing a marked copy of the Offering Memorandum indicating the specific items for which comfort is requested.

5. Negative Assurance (Subsequent Changes)

We request that the Comfort Letter include a "negative assurance" or "subsequent changes" section covering the period from March 31, 2024 (the date of the most recent Interim Financial Statements included in the Offering Memorandum) through a date not more than five (5) business days prior to the date of the Comfort Letter (the "Cutoff Date"). Specifically, we request that the Comfort Letter include statements to the effect that, as of the Cutoff Date, nothing has come to the attention of Palladian & Howe as a result of the procedures described therein that caused it to believe that:

(a) There has been any decrease in total revenue, Adjusted EBITDA, or net income of the Company and its consolidated subsidiaries from the amounts reported for the comparable period in the Interim Financial Statements or, in the case of twelve-month comparisons, from the amounts reported for the comparable trailing twelve-month period;

(b) There has been any increase in total debt (including both current and long-term indebtedness) or total liabilities of the Company and its consolidated subsidiaries from the amounts reported as of March 31, 2024 in the Interim Financial Statements; or

(c) There has been any decrease in total stockholders' equity of the Company from the amount reported as of March 31, 2024 in the Interim Financial Statements.

We understand and acknowledge that such negative assurance will be based upon limited procedures as described in the Comfort Letter, which may include, among other things: (i) reading the minutes of meetings of the Board of Directors and committees thereof of VHG and its significant subsidiaries for the period subsequent to March 31, 2024 through the Cutoff Date; (ii) making inquiries of certain officers and other employees of the Company who have responsibility for financial and accounting matters regarding whether there have been any changes in the Company's financial condition or results of operations during the subsequent period; (iii) reading such unaudited interim financial information and internal financial reports as the Company may have prepared for the period subsequent to March 31, 2024; and (iv) performing such other procedures as Palladian & Howe may deem necessary or appropriate under the applicable professional standards.

We further understand that the Comfort Letter will include customary language to the effect that the procedures performed by Palladian & Howe with respect to the subsequent changes section do not constitute an audit conducted in accordance with PCAOB standards, that such procedures are substantially less in scope than an audit, and that such procedures would not necessarily reveal matters of significance with respect to the comments and conclusions set forth therein. The Comfort Letter may also include a statement that, had Palladian & Howe performed additional procedures or had it made an audit of the interim financial information, matters might have come to its attention that would have been reported to the addressees.

6. Bringdown Comfort Letter

We further request that Palladian & Howe deliver at closing on the Closing Date (June 25, 2024) a bringdown comfort letter (the "Bringdown Letter") updating the initial Comfort Letter to a cutoff date not more than five (5) business days prior to the Closing Date (the "Bringdown Cutoff Date"). The Bringdown Letter should confirm that the conclusions stated in the initial Comfort Letter remain accurate and have not changed as of the Bringdown Cutoff Date, or, alternatively, should identify and describe any changes that have occurred.

The Bringdown Letter should be in substantially the same form as the initial Comfort Letter, updated through the Bringdown Cutoff Date, and should cover the same financial statements, financial data, and subsequent changes information addressed in the initial Comfort Letter. In particular, the negative assurance regarding subsequent changes should be updated to cover the period from March 31, 2024 through the Bringdown Cutoff Date.

The Bringdown Letter should be addressed to the same parties as the initial Comfort Letter—namely, Kensington Barrow & Co. (as Representative of the Initial Purchasers), Ridgeline Capital Markets LLC, and Stonebridge Marvelo Securities Inc.—with copies to Calderwood & Harkness LLP and Whitfield, Crane & Aldrich LLP.

Delivery of the Bringdown Letter at or prior to the Closing Date is a separate condition to closing under the Purchase Agreement.

7. Timing and Delivery Instructions

We respectfully request that the initial Comfort Letter be dated and delivered on or about the date of pricing of the Notes (which is currently anticipated to be on or about June 17, 2024) or, if pricing occurs after the close of business on such date, on the date of execution and delivery of the Purchase Agreement (June 18, 2024). We will promptly inform you of the exact date of pricing once it has been confirmed by the Representative.

The Bringdown Letter should be dated and delivered on the Closing Date, June 25, 2024, or such other date as the Closing Date may be postponed to in accordance with the Purchase Agreement.

We request that executed originals of the Comfort Letter and the Bringdown Letter be delivered to each of the following parties at the addresses set forth below:

(a) Kensington Barrow & Co. 399 Park Avenue, 22nd Floor New York, NY 10022

Attention: Jonathan M. Firth, Managing Director, Leveraged Finance

(b) Ridgeline Capital Markets LLC 200 Vesey Street, 35th Floor New York, NY 10281

Attention: Sarah L. Greenwald, Director, High Yield Capital Markets

Attention: Brian D. Calloway, Vice President

(d) Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, NY 10006

Attention: Claire Dempsey

(e) Whitfield, Crane & Aldrich LLP 51 West 52nd Street New York, NY 10019

Attention: Nathaniel R. Bosch

In addition to the delivery of executed originals, we request that advance copies of the executed Comfort Letter and the Bringdown Letter be transmitted by email (in PDF format) to each of the addressees and copy parties listed above promptly upon execution.

8. Request for Draft Review

In order to facilitate a smooth and timely closing process, we respectfully request that Palladian & Howe provide a draft of the Comfort Letter to Calderwood & Harkness LLP and Whitfield, Crane & Aldrich LLP for review no later than three (3) business days prior to the anticipated date of delivery of the Comfort Letter. Based on the currently anticipated pricing date, we would appreciate receiving a draft of the Comfort Letter no later than June 12, 2024.

We are available to arrange a conference call at your earliest convenience to discuss the scope and form of the Comfort Letter, to address any questions you may have regarding specific financial data items or the procedures to be applied, and to coordinate any additional information or documentation that you may require from the Company. Please do not hesitate to contact me directly to schedule such a call.

We also note that Whitfield, Crane & Aldrich LLP, as counsel to the Initial Purchasers, may provide separate or supplemental comments on the draft Comfort Letter. We anticipate that any such comments will be directed to you with a copy to us, and we are prepared to facilitate discussions among all parties to ensure that any questions or requests from initial purchasers' counsel are addressed efficiently.

9. Enclosures

Enclosed with this letter for your reference please find copies of the following documents:

(a) The Preliminary Offering Memorandum dated June 3, 2024; and

(b) The most recent draft of the Purchase Agreement (dated June 7, 2024), with the relevant provisions regarding the comfort letter closing condition highlighted for your convenience (see Sections 6(e) and 6(f) thereof).

Please note that the Final Offering Memorandum is expected to be prepared and finalized on or about June 18, 2024, in connection with the pricing of the Notes. We will provide you with a copy of the Final Offering Memorandum promptly upon its finalization. To the extent any changes are made to the financial information or numerical data in the Final Offering Memorandum as compared to the Preliminary Offering Memorandum, we will promptly bring such changes to your attention so that the scope of the Comfort Letter may be adjusted accordingly.

10. Closing

We appreciate your prompt attention to this request and your willingness to work cooperatively with us and with the other parties to the Offering to ensure timely delivery of the Comfort Letter and the Bringdown Letter. If you have any questions regarding this request, the scope of the comfort procedures, or any of the financial data described herein, please do not hesitate to contact me directly.

Claire Dempsey Direct Telephone: (212) 558-4277

Email: cdempsey@calderwoodharkness.com

We look forward to your response and to working with you on this matter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Claire Dempsey Lead Associate, Capital Markets

Enclosures (as described above)

cc:

David K. Moretti, General Counsel & Secretary Verimark Hospitality Group Inc. 2400 Brickell Bay Drive, Suite 3100 Miami, FL 33129

Patricia R. Henning, Chief Financial Officer Verimark Hospitality Group Inc. 2400 Brickell Bay Drive, Suite 3100 Miami, FL 33129

Theodore Langston, Calderwood & Harkness LLP

Nathaniel R. Bosch, Whitfield, Crane & Aldrich LLP

Jonathan M. Firth, Kensington Barrow & Co.

CALDERWOOD & HARKNESS LLP One Liberty Plaza, 45th Floor New York, NY 10006 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
June 10, 2024
Via Email and Facsimile
Kenneth W. Sturgis Engagement Partner Palladian & Howe LLP 200 South Biscayne Boulevard, Suite 2600 Miami, FL 33131
Re: Request for Comfort Letter in Connection with the Offering of $500,000,000 Aggregate Principal Amount of 8.250% Senior Notes due 2031 by Verimark Hospitality Group Inc.
Dear Mr. Sturgis:
1. Introduction and Identification of Transaction
Calderwood & Harkness LLP serves as issuer's counsel to Verimark Hospitality Group Inc., a Delaware corporation ("VHG" or the "Company"), in connection with the Company's proposed private placement (the "Offering") under Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), of $500,000,000 aggregate principal amount of 8.250% Senior Notes due 2031 (the "Notes"). The Notes will be senior unsecured obligations of the Company and will be guaranteed by the Guarantors (as defined below).
The Notes will be offered by Kensington Barrow & Co., acting as lead left bookrunner and representative of the initial purchasers (in such capacity, the "Representative"), Ridgeline Capital Markets LLC, acting as joint bookrunner, and Stonebridge Marvelo Securities Inc., acting as co-manager (collectively, the "Initial Purchasers"), pursuant to a Purchase Agreement expected to be dated as of June 18, 2024 (the "Purchase Agreement") among VHG, the Guarantors party thereto, and Kensington Barrow & Co., acting as Representative of the Initial Purchasers. The Purchase Agreement will set forth the terms and conditions upon which the Initial Purchasers will purchase the Notes from the Company for resale to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to persons outside the United States in compliance with Regulation S under the Securities Act.
In connection with the Offering, the Company has prepared and distributed to prospective investors a Preliminary Offering Memorandum dated June 3, 2024 (the "Preliminary Offering Memorandum"), and expects to prepare and distribute a Final Offering Memorandum on or about the date of pricing of the Notes (the "Final Offering Memorandum" and, together with the Preliminary Offering Memorandum, collectively, the "Offering Memorandum"). The Offering Memorandum contains, among other information, certain audited and unaudited financial statements and financial data of the Company, as more fully described below.
We understand that Palladian & Howe LLP ("Palladian & Howe" or "you") serves as the Company's independent registered public accounting firm and that Palladian & Howe has audited the consolidated financial statements of VHG and its subsidiaries for the fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021, as included in the Offering Memorandum.
The closing of the Offering is anticipated to occur on June 25, 2024, on a T+5 settlement basis (the "Closing Date").
2. Purpose of the Request
Pursuant to the terms and conditions of the Purchase Agreement, the obligation of the Initial Purchasers to consummate the purchase of the Notes at closing is conditioned upon, among other things, the delivery by Palladian & Howe of a comfort letter (the "Comfort Letter") in customary form addressed to the Initial Purchasers. Specifically, Section 6(e) of the Purchase Agreement (as currently drafted) provides that it shall be a condition precedent to the obligations of the Initial Purchasers under the Purchase Agreement that Palladian & Howe shall have delivered a letter, dated as of the date of the Purchase Agreement and addressed to the Initial Purchasers, in form and substance satisfactory to the Representative and its counsel, containing statements and information of the type ordinarily included in accountants' comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Offering Memorandum.
Accordingly, we respectfully request that Palladian & Howe deliver the Comfort Letter addressed to each of the following parties:
(a) Kensington Barrow & Co., as Representative of the Initial Purchasers;
(b) Ridgeline Capital Markets LLC; and
(c) Stonebridge Marvelo Securities Inc.,
with copies to be provided simultaneously to:
(d) Calderwood & Harkness LLP (issuer's counsel), One Liberty Plaza, 45th Floor, New York, NY 10006, Attention: Claire Dempsey; and
(e) Whitfield, Crane & Aldrich LLP (initial purchasers' counsel), 51 West 52nd Street, New York, NY 10019, Attention: Nathaniel R. Bosch.
We request that the Comfort Letter be delivered at or prior to the Closing Date on June 25, 2024. In addition, as further described in Section 6 below, we request that a bringdown comfort letter (the "Bringdown Letter") be delivered at closing on the Closing Date. The Purchase Agreement contemplates both the initial Comfort Letter and the Bringdown Letter as separate conditions to closing.
We request that the Comfort Letter be prepared in accordance with the applicable professional standards governing the issuance of comfort letters by independent accountants, including AU-C Section 920 (Letters for Underwriters and Certain Other Requesting Parties), as adopted and incorporated by the American Institute of Certified Public Accountants ("AICPA"), which superseded and replaced the guidance formerly set forth in Statement on Auditing Standards No. 72 (Letters for Underwriters and Certain Other Requesting Parties) and Statement on Auditing Standards No. 86 (Amendment to SAS No. 72). We understand that the form and content of the Comfort Letter will necessarily be determined by Palladian & Howe in its professional judgment in accordance with these standards, and we appreciate your willingness to work with us and with counsel to the Initial Purchasers to ensure that the Comfort Letter is responsive to the closing conditions set forth in the Purchase Agreement.
3. Financial Statements and Periods to Be Covered
We request that the Comfort Letter cover the following audited and unaudited financial statements of VHG included or incorporated by reference in the Offering Memorandum:
Audited Financial Statements. The Comfort Letter should address the audited consolidated financial statements of VHG and its subsidiaries for each of the three fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021, together with the related consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of changes in stockholders' equity, and consolidated statements of cash flows for each such fiscal year, and the notes thereto, in each case as included in the Offering Memorandum (collectively, the "Audited Financial Statements"). The Comfort Letter should include:
(a) A statement that Palladian & Howe has audited the Audited Financial Statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the "PCAOB") and that such audits were performed in accordance with PCAOB standards;
(b) A reference to Palladian & Howe's reports of independent registered public accounting firm dated March 1, 2024 (with respect to the fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021), as included in the Offering Memorandum, and a statement that such reports are included therein;
(c) A statement that Palladian & Howe is independent with respect to VHG and its subsidiaries within the meaning of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Securities and Exchange Commission (the "SEC") and the PCAOB, including Rule 2-01 of Regulation S-X and the independence rules and standards of the PCAOB; and
(d) A statement that, as of the date of the Comfort Letter, nothing has come to the attention of Palladian & Howe that would cause it to believe that any material modifications should be made to the Audited Financial Statements for them to be in conformity with U.S. generally accepted accounting principles ("GAAP").
Unaudited Interim Financial Statements. The Comfort Letter should also address the unaudited condensed consolidated financial statements of VHG and its subsidiaries for the three-month period ended March 31, 2024, and the comparable three-month period ended March 31, 2023, together with the related unaudited condensed consolidated balance sheets, unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of comprehensive income (loss), unaudited condensed consolidated statements of changes in stockholders' equity, and unaudited condensed consolidated statements of cash flows, and the notes thereto, in each case as included in the Offering Memorandum (collectively, the "Interim Financial Statements"). The Comfort Letter should include:
(a) A statement that Palladian & Howe has performed a review of the Interim Financial Statements in accordance with the standards established by the PCAOB for reviews of interim financial information (including PCAOB Auditing Standard No. 4105, formerly AU-C Section 930), and that the Interim Financial Statements comply as to form in all material respects with the applicable accounting requirements;
(b) A statement that, based on such review, nothing has come to the attention of Palladian & Howe that caused it to believe that any material modifications should be made to the Interim Financial Statements for them to be in conformity with GAAP; and
(c) A confirmation that the Interim Financial Statements have been prepared on a basis consistent with the Audited Financial Statements, except as may be described in the notes thereto.
4. Financial Data and Other Numbers to Be Covered
We request that the Comfort Letter address the specific financial data, metrics, statistics, and other numerical information set forth in the Offering Memorandum, verifying such data by tracing it to, or confirming its agreement with, the underlying accounting records of the Company, the Audited Financial Statements, the Interim Financial Statements, or other specified sources, as applicable. Without limiting the foregoing, we specifically request that the Comfort Letter address the following items:
Selected Historical Financial Data. The selected historical consolidated financial data for the fiscal years ended December 31, 2021, December 31, 2022, and December 31, 2023, and for the three-month periods ended March 31, 2024 and March 31, 2023, as set forth in the section of the Offering Memorandum entitled "Selected Historical Financial Data," should be covered by the Comfort Letter. Such data should be traced to and confirmed as being in agreement with the corresponding amounts in the Audited Financial Statements or the Interim Financial Statements, as applicable, or, where such data is not directly presented in such financial statements, to the underlying accounting records of the Company.
LTM Revenue and LTM Adjusted EBITDA. The Offering Memorandum sets forth the Company's total revenue for the twelve-month period ended March 31, 2024 (sometimes referred to as "LTM Revenue"), in the amount of $1,820,000,000, and the Company's Adjusted EBITDA for the twelve-month period ended March 31, 2024 (sometimes referred to as "LTM Adjusted EBITDA"), in the amount of $412,000,000. We request that the Comfort Letter confirm that such LTM Revenue and LTM Adjusted EBITDA amounts have been accurately computed on the basis of the underlying audited and reviewed financial data and that the arithmetic accuracy of the calculations has been verified. To the extent that Adjusted EBITDA is a non-GAAP financial measure, we request that the Comfort Letter confirm that the adjustments used in the computation of Adjusted EBITDA are in agreement with the amounts set forth in the reconciliation included in the Offering Memorandum and that such adjustments can be traced to the Company's accounting records, the Audited Financial Statements, or the Interim Financial Statements.
Pro Forma Financial Data. The Offering Memorandum contains certain pro forma financial data giving effect to the Offering and the application of the net proceeds therefrom, including the following:
(a) Pro forma total debt of $500,000,000;
(b) Pro forma net leverage ratio of approximately 1.21x;
(c) Pro forma interest coverage ratio of approximately 9.99x; and
(d) Pro forma fixed charge coverage ratio of approximately 8.83x.
We request that the Comfort Letter confirm that, to the extent such pro forma financial data is derived from or based upon the historical financial statements or accounting records of the Company, the underlying historical financial data has been accurately extracted and that the arithmetic accuracy of the pro forma computations has been verified. We understand that Palladian & Howe may not be in a position to provide assurance on the assumptions underlying the pro forma adjustments, but we request that the Comfort Letter confirm that the pro forma adjustments are arithmetically correct and are applied on a basis consistent with the historical financial statements.
Capitalization Table. The capitalization table as set forth in the section of the Offering Memorandum entitled "Capitalization" should be covered by the Comfort Letter. We request that Palladian & Howe confirm that the historical amounts reflected in the capitalization table are in agreement with the corresponding amounts in the Audited Financial Statements or the Interim Financial Statements, as applicable, or, where not directly presented therein, with the underlying accounting records of the Company. We further request confirmation that the "as adjusted" amounts in the capitalization table have been computed on the basis described in the Offering Memorandum and that the arithmetic accuracy of such computations has been verified.
Existing Credit Facility Data. The Offering Memorandum contains information regarding the Company's existing senior secured credit facility (the "Existing Credit Facility"), including the following:
(a) Outstanding principal balance of $467,342,819.16 as of April 1, 2024, consisting of Term Loan A in the principal amount of $280,142,819.16 and Term Loan B in the principal amount of $187,200,000.00; and
(b) Estimated accrued and unpaid interest on the Existing Credit Facility of $4,207,180.84 through the anticipated Closing Date.
We request that the Comfort Letter confirm that the outstanding principal balance of the Existing Credit Facility and its component term loans, as set forth in the Offering Memorandum, are in agreement with the Company's accounting records or other documentation made available to Palladian & Howe. With respect to the estimated accrued interest amount, we request that the Comfort Letter confirm the arithmetic accuracy of the interest calculation to the extent the calculation methodology has been provided to Palladian & Howe by the Company.
Use of Proceeds Table. The Offering Memorandum contains a section entitled "Use of Proceeds" that sets forth the anticipated application of the net proceeds of the Offering. We request that the Comfort Letter address the following specific items set forth in the use of proceeds table:
(a) Total estimated net proceeds from the Offering: $483,750,000;
(b) Application of net proceeds as follows:
(i) Repayment of Existing Credit Facility — principal: $467,342,819.16;
(ii) Repayment of Existing Credit Facility — accrued interest: $4,207,180.84;
(iii) Prepayment premium on the Existing Credit Facility: $2,336,714.10;
(iv) Transaction fees and expenses (estimated): $6,863,285.90; and
(v) General corporate purposes: $3,000,000.00;
We request confirmation that the amounts set forth in the use of proceeds table are arithmetically correct and that the individual line items sum to the total estimated net proceeds amount. To the extent any of the foregoing amounts are derived from the Company's accounting records, we request that the Comfort Letter confirm agreement with such records.
Annual and Semi-Annual Interest Expense. The Offering Memorandum states that the annual interest expense on the Notes will be $41,250,000 (calculated as $500,000,000 multiplied by 8.250%) and that semi-annual interest payments will be $20,625,000. We request that the Comfort Letter confirm the arithmetic accuracy of these calculations.
Operational and Portfolio Data. The Offering Memorandum includes certain operational data regarding the Company's portfolio of properties, including the following:
(a) The Company operates 47 full-service hotels and 12 resort properties;
(b) The Company's portfolio comprises approximately 18,400 rooms; and
(c) The Company's properties are located across 19 U.S. states and the U.S. Virgin Islands.
To the extent such data appears in the Offering Memorandum and can be traced to the Company's accounting records, internal reports, or other documentation made available to Palladian & Howe, we request that the Comfort Letter confirm agreement of such data with such records or documentation. We understand that certain of these items may constitute operating data that falls outside the scope of Palladian & Howe's audit or review procedures, and we are prepared to discuss the appropriate scope of coverage for such items.
Other Numerical Data. In addition to the specific items enumerated above, we request that the Comfort Letter address any other numerical data, financial statistics, or financial information contained in the Offering Memorandum that is derived from or based upon the accounting records of the Company or that can otherwise be traced to the Audited Financial Statements, the Interim Financial Statements, or the Company's books and records. We will work with Palladian & Howe to identify specific page and line references in the Offering Memorandum for all items to be covered, and we anticipate providing a marked copy of the Offering Memorandum indicating the specific items for which comfort is requested.
5. Negative Assurance (Subsequent Changes)
We request that the Comfort Letter include a "negative assurance" or "subsequent changes" section covering the period from March 31, 2024 (the date of the most recent Interim Financial Statements included in the Offering Memorandum) through a date not more than five (5) business days prior to the date of the Comfort Letter (the "Cutoff Date"). Specifically, we request that the Comfort Letter include statements to the effect that, as of the Cutoff Date, nothing has come to the attention of Palladian & Howe as a result of the procedures described therein that caused it to believe that:
(a) There has been any decrease in total revenue, Adjusted EBITDA, or net income of the Company and its consolidated subsidiaries from the amounts reported for the comparable period in the Interim Financial Statements or, in the case of twelve-month comparisons, from the amounts reported for the comparable trailing twelve-month period;
(b) There has been any increase in total debt (including both current and long-term indebtedness) or total liabilities of the Company and its consolidated subsidiaries from the amounts reported as of March 31, 2024 in the Interim Financial Statements; or
(c) There has been any decrease in total stockholders' equity of the Company from the amount reported as of March 31, 2024 in the Interim Financial Statements.
We understand and acknowledge that such negative assurance will be based upon limited procedures as described in the Comfort Letter, which may include, among other things: (i) reading the minutes of meetings of the Board of Directors and committees thereof of VHG and its significant subsidiaries for the period subsequent to March 31, 2024 through the Cutoff Date; (ii) making inquiries of certain officers and other employees of the Company who have responsibility for financial and accounting matters regarding whether there have been any changes in the Company's financial condition or results of operations during the subsequent period; (iii) reading such unaudited interim financial information and internal financial reports as the Company may have prepared for the period subsequent to March 31, 2024; and (iv) performing such other procedures as Palladian & Howe may deem necessary or appropriate under the applicable professional standards.
We further understand that the Comfort Letter will include customary language to the effect that the procedures performed by Palladian & Howe with respect to the subsequent changes section do not constitute an audit conducted in accordance with PCAOB standards, that such procedures are substantially less in scope than an audit, and that such procedures would not necessarily reveal matters of significance with respect to the comments and conclusions set forth therein. The Comfort Letter may also include a statement that, had Palladian & Howe performed additional procedures or had it made an audit of the interim financial information, matters might have come to its attention that would have been reported to the addressees.
6. Bringdown Comfort Letter
We further request that Palladian & Howe deliver at closing on the Closing Date (June 25, 2024) a bringdown comfort letter (the "Bringdown Letter") updating the initial Comfort Letter to a cutoff date not more than five (5) business days prior to the Closing Date (the "Bringdown Cutoff Date"). The Bringdown Letter should confirm that the conclusions stated in the initial Comfort Letter remain accurate and have not changed as of the Bringdown Cutoff Date, or, alternatively, should identify and describe any changes that have occurred.
The Bringdown Letter should be in substantially the same form as the initial Comfort Letter, updated through the Bringdown Cutoff Date, and should cover the same financial statements, financial data, and subsequent changes information addressed in the initial Comfort Letter. In particular, the negative assurance regarding subsequent changes should be updated to cover the period from March 31, 2024 through the Bringdown Cutoff Date.
The Bringdown Letter should be addressed to the same parties as the initial Comfort Letter—namely, Kensington Barrow & Co. (as Representative of the Initial Purchasers), Ridgeline Capital Markets LLC, and Stonebridge Marvelo Securities Inc.—with copies to Calderwood & Harkness LLP and Whitfield, Crane & Aldrich LLP.
Delivery of the Bringdown Letter at or prior to the Closing Date is a separate condition to closing under the Purchase Agreement.
7. Timing and Delivery Instructions
We respectfully request that the initial Comfort Letter be dated and delivered on or about the date of pricing of the Notes (which is currently anticipated to be on or about June 17, 2024) or, if pricing occurs after the close of business on such date, on the date of execution and delivery of the Purchase Agreement (June 18, 2024). We will promptly inform you of the exact date of pricing once it has been confirmed by the Representative.
The Bringdown Letter should be dated and delivered on the Closing Date, June 25, 2024, or such other date as the Closing Date may be postponed to in accordance with the Purchase Agreement.
We request that executed originals of the Comfort Letter and the Bringdown Letter be delivered to each of the following parties at the addresses set forth below:
(a) Kensington Barrow & Co. 399 Park Avenue, 22nd Floor New York, NY 10022
Attention: Jonathan M. Firth, Managing Director, Leveraged Finance
(b) Ridgeline Capital Markets LLC 200 Vesey Street, 35th Floor New York, NY 10281
Attention: Sarah L. Greenwald, Director, High Yield Capital Markets
(c) Stonebridge Marvelo Securities Inc. 600 Lexington Avenue, 18th Floor New York, NY 10022
Attention: Brian D. Calloway, Vice President
(d) Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, NY 10006
Attention: Claire Dempsey
(e) Whitfield, Crane & Aldrich LLP 51 West 52nd Street New York, NY 10019
Attention: Nathaniel R. Bosch
In addition to the delivery of executed originals, we request that advance copies of the executed Comfort Letter and the Bringdown Letter be transmitted by email (in PDF format) to each of the addressees and copy parties listed above promptly upon execution.
8. Request for Draft Review
In order to facilitate a smooth and timely closing process, we respectfully request that Palladian & Howe provide a draft of the Comfort Letter to Calderwood & Harkness LLP and Whitfield, Crane & Aldrich LLP for review no later than three (3) business days prior to the anticipated date of delivery of the Comfort Letter. Based on the currently anticipated pricing date, we would appreciate receiving a draft of the Comfort Letter no later than June 12, 2024.
We are available to arrange a conference call at your earliest convenience to discuss the scope and form of the Comfort Letter, to address any questions you may have regarding specific financial data items or the procedures to be applied, and to coordinate any additional information or documentation that you may require from the Company. Please do not hesitate to contact me directly to schedule such a call.
We also note that Whitfield, Crane & Aldrich LLP, as counsel to the Initial Purchasers, may provide separate or supplemental comments on the draft Comfort Letter. We anticipate that any such comments will be directed to you with a copy to us, and we are prepared to facilitate discussions among all parties to ensure that any questions or requests from initial purchasers' counsel are addressed efficiently.
9. Enclosures
Enclosed with this letter for your reference please find copies of the following documents:
(a) The Preliminary Offering Memorandum dated June 3, 2024; and
(b) The most recent draft of the Purchase Agreement (dated June 7, 2024), with the relevant provisions regarding the comfort letter closing condition highlighted for your convenience (see Sections 6(e) and 6(f) thereof).
Please note that the Final Offering Memorandum is expected to be prepared and finalized on or about June 18, 2024, in connection with the pricing of the Notes. We will provide you with a copy of the Final Offering Memorandum promptly upon its finalization. To the extent any changes are made to the financial information or numerical data in the Final Offering Memorandum as compared to the Preliminary Offering Memorandum, we will promptly bring such changes to your attention so that the scope of the Comfort Letter may be adjusted accordingly.
10. Closing
We appreciate your prompt attention to this request and your willingness to work cooperatively with us and with the other parties to the Offering to ensure timely delivery of the Comfort Letter and the Bringdown Letter. If you have any questions regarding this request, the scope of the comfort procedures, or any of the financial data described herein, please do not hesitate to contact me directly.
Claire Dempsey Direct Telephone: (212) 558-4277
Email: cdempsey@calderwoodharkness.com
We look forward to your response and to working with you on this matter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Claire Dempsey Lead Associate, Capital Markets
Enclosures (as described above)
cc:
David K. Moretti, General Counsel & Secretary Verimark Hospitality Group Inc. 2400 Brickell Bay Drive, Suite 3100 Miami, FL 33129
Patricia R. Henning, Chief Financial Officer Verimark Hospitality Group Inc. 2400 Brickell Bay Drive, Suite 3100 Miami, FL 33129
Theodore Langston, Calderwood & Harkness LLP
Nathaniel R. Bosch, Whitfield, Crane & Aldrich LLP
Jonathan M. Firth, Kensington Barrow & Co.

CALDERWOOD & HARKNESS LLP

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