PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Counselors at Law
One Liberty Plaza, 45th Floor New York, New York 10006 Telephone: (212) 756-4000 Facsimile: (212) 756-4001 www.calderwoodharkness.com
MEMORANDUM
April 22, 2024
TO:
Marcus J. Delano, Chief Executive Officer, Verimark Hospitality Group Inc.
Patricia R. Henning, Chief Financial Officer, Verimark Hospitality Group Inc.
David K. Moretti, General Counsel & Secretary, Verimark Hospitality Group Inc.
FROM:
Theodore Langston, Responsible Partner, Capital Markets
Claire Dempsey, Lead Associate, Capital Markets
RE:
Preliminary Transaction Overview — Proposed Offering of $500,000,000 Aggregate Principal Amount of 8.250% Senior Notes due 2031
CONFIDENTIALITY AND PRIVILEGE NOTICE
This memorandum and any attachments hereto are protected by the attorney-client privilege and the work product doctrine. The information contained herein is strictly confidential and is intended solely for the use of the addressees named above and their authorized internal advisors. Any unauthorized review, use, disclosure, distribution, or copying of this memorandum or any portion thereof is strictly prohibited. If you are not the intended recipient, please contact Calderwood & Harkness LLP immediately at (212) 756-4000 and destroy all copies of this communication.
This memorandum is provided for discussion purposes only and does not constitute a commitment by Verimark Hospitality Group Inc., Calderwood & Harkness LLP, any initial purchaser, or any other party to proceed with the transaction described herein on the terms set forth below or on any other terms. The terms and conditions described herein are preliminary in nature, remain subject to ongoing negotiation, and are conditioned upon, among other things, satisfactory completion of due diligence, negotiation and execution of definitive documentation, receipt of all necessary corporate authorizations and approvals, and prevailing market conditions at the time of pricing.
Distribution of this memorandum is limited exclusively to the addressees and their designated internal advisors. No portion of this memorandum may be shared with, or disclosed to, any third party — including, without limitation, any rating agency, prospective investor, lender, or financial intermediary — without the prior written consent of Calderwood & Harkness LLP.
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("C&H" or the "Firm") has been engaged by Verimark Hospitality Group Inc. ("VHG" or the "Company"), a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK" and headquartered at 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129, to serve as issuer's counsel in connection with a proposed private placement of senior unsecured notes. The engagement letter between C&H and the Company was executed on April 15, 2024.
The purpose of this memorandum is to provide VHG management — specifically the Chief Executive Officer, Chief Financial Officer, and General Counsel — with a comprehensive overview of the proposed transaction structure, the anticipated timeline for execution, the planned use of proceeds, the key commercial and legal terms of the offering, and the delineation of workstream responsibilities among the various transaction participants. It is our intention that this memorandum serve as a foundational reference document for VHG's senior leadership throughout the life cycle of this transaction, from the current preparatory phase through closing and post-closing activities.
The proposed transaction (the "Offering") consists of the issuance by VHG of $500,000,000 aggregate principal amount of 8.250% Senior Notes due 2031 (the "Notes") in a private placement exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(a)(2) thereof. The Notes will be offered for resale to qualified institutional buyers ("QIBs") in the United States in reliance on Rule 144A under the Securities Act and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act. The Notes will constitute senior unsecured obligations of VHG and will be guaranteed on a senior unsecured basis by each of VHG's existing material domestic subsidiaries.
The primary objective of the Offering is to refinance approximately $467,342,819.16 in outstanding principal under the Amended and Restated Credit Agreement dated March 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time, the "Existing Credit Facility"), among VHG as borrower, the lenders party thereto, and Greystone National Bank, N.A. ("Greystone") as administrative agent. In addition to the principal repayment, net proceeds will be applied to pay accrued and unpaid interest under the Existing Credit Facility through the closing date, the applicable prepayment premium, and all transaction fees and expenses, with the modest remainder available for general corporate purposes. The detailed application of proceeds is set forth in Section IV below.
The Offering is expected to close on or about June 25, 2024, subject to satisfactory completion of due diligence, negotiation and execution of definitive documentation, prevailing market conditions, receipt of all necessary corporate authorizations, and customary closing conditions. As discussed in greater detail herein, the current indicative terms — including the 8.250% coupon and the 98.500% issue price — are subject to adjustment based on market conditions at the time of pricing, which is targeted for June 17, 2024.
This memorandum is organized as follows: Section II provides a description of the issuer; Section III details the proposed transaction structure; Section IV addresses the use of proceeds; Section V describes the existing indebtedness being refinanced; Section VI presents pro forma capitalization and key financial metrics; Section VII summarizes anticipated indenture covenants; Section VIII describes the subsidiary guarantor structure; Section IX addresses registration rights; Section X identifies the transaction parties and their respective roles; Section XI sets forth the anticipated transaction timeline; Section XII delineates key workstreams and responsibilities; Section XIII identifies key risks and considerations; and the appendices contain an organizational chart, a sources and uses summary, and a preliminary document list.
II. DESCRIPTION OF THE ISSUER
Full Legal Name: Verimark Hospitality Group Inc.
Entity Type: Corporation organized and existing under the laws of the State of Delaware.
Employer Identification Number (EIN): 84-3291057
SEC Central Index Key (CIK): 0001847293
Principal Executive Offices: 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129; Telephone: (305) 555-8700
Delaware Registered Office: Crowne Albany Corporation, Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801
Florida Registered Agent: Ashgrove Services Inc., 1200 South Pine Island Road, Plantation, Florida 33324
Business Description. VHG is a leading owner and operator of full-service hotels and resort properties in the United States. As of the date of this memorandum, the Company's portfolio consists of 47 full-service hotels and 12 resort properties located across 19 U.S. states and the U.S. Virgin Islands, encompassing approximately 18,400 guest rooms. VHG's properties are diversified across major metropolitan markets, suburban locations, and premier resort destinations, and they operate under a mix of proprietary brands and third-party management agreements. The Company's revenue is derived principally from room revenue, food and beverage operations, meeting and event services, spa and recreation amenities, and ancillary hotel services.
Key Financial Metrics (Last Twelve Months as of March 31, 2024):
• Total Revenue: $1,820,000,000
• Adjusted EBITDA: $412,000,000
• Adjusted EBITDA Margin: approximately 22.6%
These financial metrics reflect the Company's strong operational recovery from the COVID-19 pandemic and the favorable macro trends in the lodging industry, including sustained demand from both leisure and business travel segments. The Company's LTM Adjusted EBITDA of $412 million represents a significant improvement from the pandemic-era trough and provides a robust earnings base to support the proposed refinancing.
Pre-Transaction Capitalization. As of the date of this memorandum, the Company's capitalization consists of the following principal components:
• Existing Credit Facility (Term Loan A): $280,142,819.16 outstanding principal
• Existing Credit Facility (Term Loan B): $187,200,000.00 outstanding principal
• Total Funded Debt: $467,342,819.16
• Revolving Credit Facility: $150,000,000 (undrawn)
• Total Equity Market Capitalization (approximate, at announcement): $620,000,000
COVID-19 Context. During the period from 2020 through 2021, VHG experienced severe revenue declines resulting from the global COVID-19 pandemic, which had a particularly acute impact on the hospitality and lodging sectors. In response to the unprecedented disruption, the Company drew heavily on its revolving credit facility and incurred $475 million in incremental term loan debt under the Existing Credit Facility to maintain operations, service fixed costs, and preserve its asset base through the downturn. While the Company has made meaningful progress in deleveraging since the pandemic, the remaining outstanding balance of approximately $467.3 million continues to bear variable-rate interest tied to SOFR, exposing VHG to ongoing interest rate risk. The Existing Credit Facility also matures on March 15, 2026, creating near-term refinancing risk. The proposed Offering is designed to address both of these concerns by enabling a transition from secured, variable-rate bank debt to unsecured, fixed-rate capital markets debt with a significantly extended maturity date of July 1, 2031.
III. PROPOSED TRANSACTION STRUCTURE
A. Offering Overview
The following summarizes the principal terms and structural features of the proposed Offering:
Issuer: Verimark Hospitality Group Inc.
Guarantors: All existing material domestic subsidiaries of VHG, as more fully described in Section VIII below.
Offering Type: Rule 144A / Regulation S private placement of senior unsecured notes (high yield).
Aggregate Principal Amount: $500,000,000.
Coupon Rate: 8.250% per annum, payable semi-annually in arrears in cash on January 1 and July 1 of each year, commencing January 1, 2025.
Maturity Date: July 1, 2031, being approximately seven (7) years from the anticipated date of issuance.
Anticipated Issue Price: 98.500% of par value, generating gross proceeds to the Issuer of $492,500,000.
Original Issue discount ("OID"): 1.500% of the aggregate principal amount, equaling $7,500,000 in total OID. Tax treatment of the OID is discussed in Section XII.B below and will be addressed in detail in a separate tax memorandum to be prepared by Sylvia Hartwell.
Anticipated Initial Purchasers' discount: 1.750% of the aggregate principal amount, equaling $8,750,000. This discount represents the compensation payable to the initial purchasers (Kensington Barrow & Co., Ridgeline Capital Markets LLC, and Stonebridge Marvelo Securities Inc.) for their underwriting, marketing, and distribution services.
Anticipated Net Proceeds to Issuer: $483,750,000, calculated as gross proceeds of $492,500,000 less the initial purchasers' discount of $8,750,000.
Ranking: The Notes will constitute senior unsecured obligations of VHG, ranking (i) pari passu in right of payment with all existing and future senior unsecured indebtedness of VHG, (ii) senior in right of payment to all existing and future subordinated indebtedness of VHG, (iii) effectively subordinated to all existing and future secured indebtedness of VHG to the extent of the value of the collateral securing such indebtedness, and (iv) structurally subordinated to all obligations of any non-guarantor subsidiaries of VHG. Following repayment of the Existing Credit Facility, VHG is not expected to have any material secured indebtedness outstanding.
Governing Law: The Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York.
Form and Denomination: The Notes will be issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. The Notes will be represented by one or more global notes in fully registered book-entry form deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee of DTC.
Exemption from Registration: The Notes will be offered and sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Resales of the Notes to QIBs will be made pursuant to Rule 144A under the Securities Act. Resales to non-U.S. persons outside the United States will be made in compliance with Regulation S under the Securities Act. No SEC registration statement or EDGAR filing will be required at the offering stage. The Company will, however, be obligated to file a registration statement covering the exchange offer notes within 180 days after closing, as discussed in Section IX below.
CUSIP / ISIN Numbers:
• 144A Notes: CUSIP 923847 AA 5; ISIN US923847AA52
• Regulation S Notes: CUSIP U92384 AA 8; ISIN USU92384AA83
B. Optional Redemption Schedule
The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after the dates and at the redemption prices (expressed as percentages of the principal amount thereof) set forth below, plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date:
The redemption price schedule is structured on a customary high yield "step-down" basis, beginning at one-half the coupon rate (104.125%) and declining ratably to par over the two-year period preceding the optional redemption at par date. Prior to July 1, 2027, the Notes are expected to include a customary "make-whole" optional redemption provision at the Treasury Rate plus a premium (typically 50 basis points), the specific terms of which will be negotiated in the context of the Indenture.
C. Equity Clawback
In addition to the optional redemption provisions described above, VHG will have the right, at any time prior to July 1, 2027, to redeem up to 40% of the original aggregate principal amount of the Notes (i.e., up to $200,000,000) at a redemption price equal to 108.250% of the principal amount thereof (the coupon rate), plus accrued and unpaid interest to, but excluding, the redemption date, with the net cash proceeds of one or more qualifying equity offerings. This equity clawback provision is a standard feature in high yield indentures and provides VHG with the flexibility to apply equity capital raised in the public markets to reduce its outstanding notes obligations at a price that compensates noteholders for the early retirement of a portion of their investment. A qualifying equity offering for this purpose will be defined in the Indenture to include a public offering of common equity of VHG for cash proceeds on a primary basis. Following any equity clawback redemption, at least 60% of the original aggregate principal amount of the Notes must remain outstanding.
D. Change of Control Put
The Indenture will include a customary change of control provision pursuant to which, upon the occurrence of a Change of Control Triggering Event (as defined in the Indenture), each holder of Notes will have the right to require VHG to repurchase all or any portion of such holder's Notes at a repurchase price equal to 101.000% of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding, the date of repurchase. A Change of Control Triggering Event will generally be defined to include (a) the acquisition by any person or group of more than 50% of the total voting power of VHG's outstanding voting stock, (b) a merger or consolidation of VHG with another entity in which VHG's stockholders hold less than 50% of the surviving entity's voting power, or (c) the sale of all or substantially all of VHG's assets. The precise definition and any exceptions or carve-outs will be negotiated in the Indenture.
E. CUSIP / ISIN
For reference, the assigned identifiers for the Notes are as follows:
• 144A Notes: CUSIP 923847 AA 5; ISIN US923847AA52
• Regulation S Notes: CUSIP U92384 AA 8; ISIN USU92384AA83
These identifiers have been reserved with CUSIP Global Services and will become active upon settlement of the Offering.
IV. USE OF PROCEEDS
The net proceeds of the Offering are expected to total approximately $483,750,000. The Company intends to apply such net proceeds as set forth in the table below:
As indicated above, the total anticipated uses of proceeds tie exactly to the anticipated net proceeds from the Offering of $483,750,000.00. The reconciliation between gross proceeds and net proceeds is straightforward: the Notes are expected to be issued at 98.500% of par, generating gross proceeds of $492,500,000, from which the initial purchasers' discount of 1.750% ($8,750,000) is deducted, yielding net proceeds to the Company of $483,750,000.
With respect to the transaction fees and expenses line item of $6,863,285.90, this amount represents the Company's current best estimate and encompasses the following anticipated cost components: (a) legal fees of issuer's counsel (C&H); (b) legal fees of initial purchasers' counsel (Whitfield, Crane & Aldrich LLP); (c) Indenture Trustee acceptance and annual fees (Fidelitas Trust Company, N.A.); (d) rating agency fees (Crestline Ratings Group and Broadmark Rating Services Inc.); (e) printing and document production costs (Meridian Document Services Inc.); (f) DTC eligibility and FAST agent fees; (g) miscellaneous filing, recording, and administrative costs; and (h) any other out-of-pocket expenses incurred in connection with the Offering. The actual fees and expenses may differ from the estimates set forth above, and any variance will be reflected in an adjustment to the "General corporate purposes" line item.
The Company's existing $150,000,000 revolving credit facility under the Existing Credit Facility is currently undrawn and is expected to remain in place and available for future borrowings following the closing of the Offering. The revolving facility will continue to provide VHG with an important source of ongoing liquidity for working capital, capital expenditures, and other general corporate purposes. C&H will review the Existing Credit Facility documentation to confirm that the repayment of the term loans and the issuance of the Notes do not trigger any adverse consequences with respect to the continued availability of the revolving commitment.
V. EXISTING DEBT BEING REFINANCED
The following provides a detailed description of the Existing Credit Facility that will be repaid in full from the proceeds of the Offering:
Facility Agreement: Amended and Restated Credit Agreement dated as of March 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time), among Verimark Hospitality Group Inc. (as borrower), the lenders party thereto (as lenders), and Greystone National Bank, N.A. (as administrative agent and collateral agent).
Greystone Loan Reference Number: GNB-SYN-2021-04417
Original Facility Structure:
• Term Loan A: $300,000,000
• Term Loan B: $200,000,000
• Revolving Credit Facility: $150,000,000
• Total Original Commitments: $650,000,000
Outstanding Principal (as of April 1, 2024):
• Term Loan A: $280,142,819.16
• Term Loan B: $187,200,000.00
• Total Outstanding Term Loan Principal: $467,342,819.16
• Revolving Credit Facility: $0 (undrawn; $150,000,000 available)
Interest Rate:
• Term Loan A: Adjusted Term SOFR + 375 basis points per annum
• Term Loan B: Adjusted Term SOFR + 425 basis points per annum
Maturity Date: March 15, 2026
Syndicate Lenders:
• Greystone National Bank, N.A. (Administrative Agent and Lead Arranger)
• Harborview Lending Group
• Cascade Federal Bank
• Meriden Commercial Finance LLC
Administrative Agent Contact: Thomas P. Quirk, Senior Vice President, Syndicated Lending Division, Greystone National Bank, N.A., 1 Financial Center, Boston, Massachusetts 02111; Telephone: (617) 555-2200; Email: tquirk@greystone.com.
Security Package: The obligations under the Existing Credit Facility are secured by a first-priority lien on substantially all of the assets of VHG and its subsidiaries, including, without limitation: (a) mortgages and deeds of trust encumbering fee-simple interests in hotel and resort properties owned by VHG Properties Inc.; (b) UCC-1 financing statements filed against VHG and each guarantor subsidiary in the applicable filing offices in Delaware, Florida, and other jurisdictions where personal property collateral is located; (c) pledges of the equity interests of each subsidiary guarantor; (d) assignments of leases, rents, and hotel management agreements; and (e) deposit account control agreements. Upon the full repayment of the outstanding term loan obligations and termination of the revolving credit commitment (or, alternatively, release of the collateral securing the revolving facility upon closing of the Notes), all liens and security interests granted under the Existing Credit Facility will be released in full. C&H will coordinate with Greystone to obtain UCC-3 termination statements, mortgage releases, and other lien discharge documentation in the post-closing period.
Prepayment Premium: The Existing Credit Facility requires payment of a prepayment premium equal to 0.50% of the outstanding principal amount being prepaid. Based on the current outstanding balance of $467,342,819.16, the prepayment premium amounts to $2,336,714.10.
Rationale for Refinancing. The proposed refinancing through the issuance of the Notes will achieve the following strategic objectives for the Company:
1. Elimination of Near-Term Maturity Risk. The Existing Credit Facility matures on March 15, 2026, less than two years from the date of this memorandum. Refinancing the outstanding term loans now, in advance of maturity, removes the refinancing risk associated with the 2026 maturity wall and provides the Company with certainty of funding well in advance of the deadline.
2. Transition from Floating-Rate to Fixed-Rate Debt. The Existing Credit Facility bears interest at floating rates tied to Adjusted Term SOFR, which has been subject to significant volatility and upward pressure over the past two years in response to the Federal Reserve's monetary tightening cycle. The blended all-in cost of the outstanding term loans currently exceeds 9.00% on an annualized basis, given the elevated SOFR environment. The Notes will bear a fixed coupon of 8.250%, providing the Company with interest rate certainty and the ability to plan its cash flows with greater precision over the seven-year term of the Notes.
3. Transition from Secured to Unsecured Debt. The Existing Credit Facility is secured by substantially all of VHG's assets. The Notes will be senior unsecured obligations. Upon repayment of the Existing Credit Facility and release of the associated liens, VHG will have an unencumbered asset base, which provides greater financial and operational flexibility and preserves secured debt capacity for future needs.
4. Extension of Maturity to July 1, 2031. The Notes will mature on July 1, 2031, providing a maturity extension of more than five years relative to the Existing Credit Facility. This extension aligns VHG's debt maturity profile with the long-lived nature of its real estate assets and the multi-year horizon over which the Company expects to continue generating strong operating cash flows.
VI. PRO FORMA CAPITALIZATION AND KEY FINANCIAL METRICS
The following sets forth the Company's pro forma capitalization and selected financial metrics on a pro forma basis giving effect to the Offering and the application of net proceeds as described in Section IV:
Pro Forma Total Funded Debt (Post-Offering): $500,000,000 (Notes only; the revolving credit facility is expected to remain undrawn).
Pro Forma Net Leverage Ratio: Approximately 1.21x, calculated as pro forma total funded debt of $500,000,000 divided by LTM Adjusted EBITDA of $412,000,000. This represents a modest increase from the Company's current total leverage ratio of approximately 1.13x ($467.3 million divided by $412 million), reflecting the fact that gross proceeds from the Offering exceed the amount required to repay the Existing Credit Facility; however, the incremental leverage is minimal and well within prudent parameters for a company of VHG's scale and earnings profile.
Pro Forma Annual Interest Expense: $41,250,000, calculated as $500,000,000 multiplied by the fixed coupon rate of 8.250%. This represents a reduction from the Company's current annualized interest expense under the Existing Credit Facility, which, based on the current blended SOFR rate environment, is estimated at approximately $43.5 million to $45.0 million. The fixed-rate nature of the Notes provides the added benefit of eliminating exposure to further increases in benchmark rates.
Pro Forma Semi-Annual Interest Payments: $20,625,000 each, payable on January 1 and July 1 of each year, commencing January 1, 2025.
Pro Forma Interest Coverage Ratio: Approximately 9.99x, calculated as LTM Adjusted EBITDA of $412,000,000 divided by pro forma annual interest expense of $41,250,000.
Pro Forma Fixed Charge Coverage Ratio: Approximately 8.83x, calculated as LTM Adjusted EBITDA less estimated annual maintenance capital expenditures of $48,000,000 (i.e., $364,000,000) divided by pro forma annual interest expense of $41,250,000.
Discussion of Credit Profile. The Company's pro forma credit profile is characterized by strong coverage ratios and moderate leverage, reflecting the significant deleveraging that VHG has achieved since the peak of its pandemic-era indebtedness. At a pro forma net leverage ratio of approximately 1.21x, VHG's leverage is well below the median for the U.S. lodging and hospitality high yield sector, which currently stands at approximately 3.5x to 4.5x total net leverage. Similarly, the pro forma interest coverage ratio of approximately 9.99x and the fixed charge coverage ratio of approximately 8.83x are well in excess of the incurrence covenant thresholds anticipated in the Indenture (discussed in Section VII below). We anticipate that the Company's credit profile will support favorable reception from the rating agencies and from the prospective investor base during the marketing phase.
VII. KEY INDENTURE COVENANTS (ANTICIPATED TERMS)
The Indenture governing the Notes will contain incurrence-based covenants, consistent with standard high yield market practice. Unlike maintenance covenants — which require compliance at all times and are tested at regular intervals — incurrence covenants are triggered only when the Company proposes to take a specified action, such as incurring additional indebtedness, making a restricted payment, or entering into a transaction with affiliates. The following summarizes the principal incurrence covenants that C&H anticipates will be included in the Indenture, subject to ongoing negotiation with initial purchasers' counsel:
Fixed Charge Coverage Ratio (Incurrence Test): The Company will not be permitted to incur additional indebtedness (other than indebtedness falling within the specified "permitted indebtedness" baskets) unless, on a pro forma basis after giving effect to the incurrence and the application of the net proceeds therefrom, the Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.00 to 1.00. Based on the Company's current LTM financial performance, VHG has substantial headroom under this test.
Restricted Payments Basket: The Indenture will include a limitation on restricted payments (which includes dividends, share repurchases, and certain investments) structured as a "builder basket." The Company will have an initial restricted payments capacity of $50,000,000, plus 50% of Consolidated Net Income (if positive) accrued on a cumulative basis from and after July 1, 2024 (the first day of the fiscal quarter in which the Notes are issued). Restricted payments in excess of this builder basket will be subject to the Fixed Charge Coverage Ratio incurrence test described above. The builder basket structure is standard in high yield indentures and provides the Company with meaningful flexibility to return capital to shareholders and make strategic investments as its earnings grow.
Permitted Indebtedness General Basket: $75,000,000. This "free and clear" basket permits the Company to incur additional indebtedness up to $75,000,000 in aggregate principal amount without satisfying the Fixed Charge Coverage Ratio incurrence test. This basket is in addition to other specific baskets that are customary in high yield indentures, such as baskets for credit facility indebtedness, capital lease obligations, purchase money indebtedness, and intercompany indebtedness.
Permitted Liens Basket: $50,000,000. The Indenture will restrict VHG's ability to create or permit liens on its assets, subject to customary exceptions and a general permitted liens basket of $50,000,000.
Asset Sale Proceeds Application Period: The Company will have 365 days from the receipt of net proceeds from any asset sale to apply or commit such net proceeds to a permitted use (i.e., reinvestment in assets useful in the Company's business or repayment of senior indebtedness). If, at the end of such 365-day period, the aggregate amount of unapplied excess asset sale proceeds exceeds a threshold to be agreed (typically $25,000,000 to $50,000,000), the Company will be required to make an offer to repurchase Notes at 100% of principal amount plus accrued interest.
Limitation on Affiliate Transactions: The Indenture will contain customary provisions restricting the Company from entering into transactions with affiliates unless such transactions are on terms no less favorable to the Company than would be obtainable in a comparable arm's-length transaction. Transactions exceeding specified dollar thresholds will require approval by a majority of the Company's independent directors or, at higher thresholds, a fairness opinion from a nationally recognized financial advisor.
Reporting Covenant: The Company will covenant to furnish to the Trustee and, upon request, to noteholders, the following periodic financial reports: (a) annual audited financial statements within 90 days after the end of each fiscal year and (b) quarterly unaudited financial statements within 45 days after the end of each of the first three fiscal quarters. Given that VHG is a public reporting company, compliance with this covenant is expected to be satisfied through VHG's regular SEC filings on Forms 10-K and 10-Q.
Covenant Analysis. C&H will prepare a separate, detailed covenant analysis memorandum during the week of May 6–10, 2024, which will benchmark the proposed Indenture terms against recent hospitality-sector high yield precedent transactions. This analysis will assist VHG management in evaluating the competitiveness of the proposed covenant package and identifying areas where the Company may seek more favorable terms or where the initial purchasers may request additional restrictions.
VIII. SUBSIDIARY GUARANTOR STRUCTURE
The Notes will be guaranteed on a senior unsecured basis by all existing material domestic subsidiaries of VHG. As of the date of this memorandum, VHG has five (5) material domestic subsidiaries, each of which will be required to execute a Guarantor Joinder Agreement and become bound by the guarantee provisions of the Indenture (anticipated to be set forth in Article 10 thereof). The following table identifies each guarantor:
Each guarantor's guarantee will constitute a senior unsecured obligation of such guarantor, ranking pari passu in right of payment with all existing and future senior unsecured indebtedness of such guarantor. The guarantee of each guarantor will be limited to the maximum amount that would not render the guarantee voidable under applicable fraudulent conveyance or fraudulent transfer laws — a customary "savings clause" provision designed to address potential challenges under the Uniform Fraudulent Transfer Act, the Uniform Voidable Transactions Act, or applicable provisions of the U.S. Bankruptcy Code (11 U.S.C. §§ 544, 548).
In addition, the Indenture will require that any future material domestic subsidiary of VHG that is formed or acquired after the closing date execute a supplemental indenture and guarantor joinder agreement to become a guarantor under the Indenture within a specified period (typically 30 days) following the formation or acquisition of such subsidiary.
C&H will conduct comprehensive entity diligence on each guarantor during the week of April 29, 2024, which will include a review of: (a) organizational documents (certificates of formation, certificates of incorporation, limited liability company agreements, bylaws, as applicable); (b) good standing certificates from the applicable secretary of state; (c) authority under the organizational documents to issue the guarantee; (d) any contractual or legal restrictions on the ability to guarantee; and (e) any required governmental or third-party consents.
An organizational chart depicting VHG's corporate structure and the five subsidiary guarantors is set forth in Appendix A to this memorandum.
IX. REGISTRATION RIGHTS
Concurrently with the closing of the Offering on the anticipated closing date of June 25, 2024, VHG, the Guarantors, and the Initial Purchasers will enter into a Registration Rights Agreement (the "Registration Rights Agreement") pursuant to which VHG will agree to undertake certain registration obligations for the benefit of the holders of the Notes.
Registration Statement Filing Deadline. VHG will be required to file a registration statement on Form S-4 (or such other appropriate form) with the Securities and Exchange Commission within 180 days after the closing date. Based on an anticipated closing date of June 25, 2024, this deadline falls on approximately January 4, 2025. The registration statement will register an exchange offer pursuant to which holders of the original 144A and Regulation S Notes may exchange their Notes for freely tradable registered notes having terms identical in all material respects to the original Notes (except for the elimination of transfer restrictions and the registration rights provisions).
Exchange Offer Effectiveness Deadline. VHG will be required to cause the exchange offer registration statement to be declared effective by the SEC and to consummate the exchange offer within 365 days after the closing date. Based on an anticipated closing date of June 25, 2024, this deadline falls on approximately July 8, 2025. Following the completion of the exchange offer, the freely tradable exchange notes will be listed on no exchange and will trade in the secondary market on a registered basis.
Shelf Registration Alternative. If the exchange offer cannot be completed (for example, because any holder of Notes is not eligible to participate in the exchange offer due to applicable SEC staff interpretive positions), VHG will be required to file and cause to become effective a shelf registration statement covering resales of the original Notes by such holders.
Additional Interest for Non-Compliance. In the event that VHG fails to satisfy the registration statement filing deadline, the exchange offer effectiveness deadline, or the shelf registration obligations described above, the interest rate on the affected Notes will increase as follows:
• 0.25% per annum for the first 90 days of non-compliance;
• 0.50% per annum thereafter;
• Maximum additional interest cap: 1.00% per annum.
The additional interest will accrue from and including the date on which the registration default occurs and will cease to accrue upon the date on which all registration defaults have been cured. C&H will draft the Registration Rights Agreement on customary terms and will work with Whitfield, Crane & Aldrich LLP (initial purchasers' counsel) to finalize the registration rights provisions in advance of closing.
X. TRANSACTION PARTIES AND THEIR ROLES
A. Initial Purchasers (Underwriters)
The following investment banks have been engaged to serve as initial purchasers for the Offering:
Kensington Barrow & Co. will serve as the lead left bookrunner and representative of the initial purchasers, and will be the Company's primary counterpart with respect to structuring advice, market feedback on pricing and terms, rating agency coordination, organization of the investor roadshow, book building, and allocation of the Notes among investors. Kensington Barrow will also serve as the Company's financial advisor in connection with the Offering. Ridgeline Capital Markets LLC will serve as joint bookrunner, supporting marketing and distribution efforts, and Stonebridge Marvelo Securities Inc. will serve as co-manager.
The initial purchasers will be represented by Whitfield, Crane & Aldrich LLP (see Section X.C below). The Purchase Agreement will be negotiated between C&H (on behalf of VHG) and Whitfield, Crane & Aldrich LLP (on behalf of the initial purchasers).
B. Trustee and Agents
Indenture Trustee, Registrar, Paying Agent, and Transfer Agent: Fidelitas Trust Company, N.A., 100 Wall Street, Suite 1500, New York, New York 10005; Contact: Rebecca A. Marsden, Vice President, Corporate Trust Administration; Telephone: (212) 555-9100; Email: rmarsden@fidelitastrust.com.
Fidelitas Trust Company, N.A. ("Fidelitas") will serve in multiple fiduciary and administrative capacities under the Indenture. As Indenture Trustee, Fidelitas will hold the Indenture for the benefit of the holders of the Notes and will be responsible for administering the provisions of the Indenture, including any enforcement actions that may become necessary following an event of default. As Registrar, Fidelitas will maintain the register of holders of the Notes. As Paying Agent, Fidelitas will process semi-annual interest payments and any principal payments (including upon maturity or redemption). As Transfer Agent, Fidelitas will facilitate transfers of the Notes in compliance with applicable transfer restrictions.
Escrow Agent: Fidelitas Trust Company, N.A. (acting in a separate capacity as escrow agent under the Escrow Agreement); Escrow Account No. 7841-0293-551. The escrow arrangement is designed to hold the net proceeds of the Offering from settlement until such time as all conditions precedent to the release of escrow funds (including execution of the payoff letter from Greystone and delivery of all closing deliverables) have been satisfied, at which point the escrowed funds will be released and applied in accordance with the funds flow memorandum.
C. Legal Counsel
C&H will serve as issuer's counsel with primary responsibility for the documentation workstream, tax analysis, and oversight of the legal aspects of the transaction. C&H's deal team is led by Theodore Langston (Responsible Partner), with day-to-day matter management by Claire Dempsey (Lead Associate), drafting support from Audrey Zhou (Working Associate), and specialized tax analysis by Sylvia Hartwell (Specialist Partner, Tax). Vivienne St. Claire will serve as the Billing Partner and will be available for matter management as needed. Whitfield, Crane & Aldrich LLP will represent the initial purchasers and will participate in the negotiation of the Purchase Agreement, review the Indenture and related transaction documents, and conduct their own due diligence review on behalf of their clients.
D. Independent Auditors
Firm: Palladian & Howe LLP
Engagement Partner: Kenneth W. Sturgis, CPA
Address: 200 South Biscayne Boulevard, Suite 2600, Miami, Florida 33131
Palladian & Howe LLP serves as VHG's independent registered public accounting firm and will be requested to provide a comfort letter to the initial purchasers in connection with the Offering. The comfort letter will cover specified financial information included in the Offering Memorandum, including verification of financial statements and selected financial data, and will be delivered in both "bring-down" and "final" form. A comfort letter request will be submitted to Palladian & Howe on or about June 10, 2024, and the final comfort letter is expected to be delivered at or prior to closing.
E. Rating Agencies
Crestline Ratings Group — A rating on the Notes will be sought from Crestline Ratings Group. The target rating level will be determined in consultation with Kensington Barrow & Co. based on the Company's credit profile and prevailing market standards. A rating agency presentation to Crestline is scheduled for May 14, 2024.
Broadmark Rating Services Inc. — A second rating on the Notes will be sought from Broadmark Rating Services Inc. The target rating level will be determined in consultation with Kensington Barrow & Co. A rating agency presentation to Broadmark is scheduled for May 15, 2024.
Ratings are expected to be received by May 28, 2024, in advance of the distribution of the Preliminary Offering Memorandum. The Company, in consultation with Kensington Barrow & Co. and C&H, will prepare rating agency presentations during the first half of May 2024. VHG management will lead the rating agency presentations, with C&H and Kensington Barrow attending in supporting roles.
F. Other Parties
Directors' and Officers' Insurance Carrier: Atlantic Indemnity Insurance Co.; Policy No. DOP-2024-881437. The Company's D&O insurance policy is relevant in the context of the Offering because VHG's directors and officers will be signing the Purchase Agreement and various closing certificates in connection with the issuance of the Notes. C&H will review the D&O policy to confirm adequate coverage for potential securities-related claims arising from the Offering.
Printing and EDGAR Filing Agent: Meridian Document Services Inc., 44 Wall Street, 12th Floor, New York, New York 10005. Meridian will be responsible for typesetting, printing, and distributing the Preliminary and Final Offering Memoranda, as well as assisting with any future EDGAR filings that may be required in connection with the Registration Rights Agreement (e.g., the Form S-4 registration statement for the exchange offer). Meridian will also produce the closing binder and related bound volumes.
XI. ANTICIPATED TIMELINE
The following table sets forth the anticipated timeline for the Offering from engagement through post-closing. All dates are subject to change based on the progress of documentation and due diligence, market conditions, rating agency timing, and other factors.
The timeline set forth above is indicative and is based on current assumptions regarding market conditions, documentation progress, and the availability of the various transaction parties. C&H will maintain a detailed project management calendar and will provide weekly status updates to VHG management throughout the transaction process. Any material deviations from the anticipated timeline will be communicated promptly.
XII. KEY WORKSTREAMS AND RESPONSIBILITIES
The Offering involves multiple parallel workstreams, each with designated lead parties. The following describes each workstream in detail, together with the principal tasks and responsibilities assigned to the parties involved.
A. Documentation Workstream (Calderwood & Harkness LLP — Lead)
C&H will serve as the lead documentation counsel for the Offering and will be responsible for the following principal tasks:
• Drafting and negotiation of the Indenture, including all exhibits thereto (Forms of 144A Global Note and Regulation S Global Note, form of Supplemental Indenture for future guarantor joinders, form of Officer's Certificate for authentication, and related schedules);
• Drafting and negotiation of the Purchase Agreement with initial purchasers' counsel (Whitfield, Crane & Aldrich LLP), including representations and warranties, conditions precedent to closing, indemnification provisions, and termination rights;
• Drafting of the Registration Rights Agreement, setting forth VHG's obligations with respect to the filing of the exchange offer registration statement and the consummation of the exchange offer;
• Drafting of the Escrow Agreement among VHG, the Initial Purchasers, and Fidelitas Trust Company, N.A. (as escrow agent);
• Preparation of the following sections of the Offering Memorandum: Description of Notes, Description of Other Indebtedness, Certain U.S. Federal Income Tax Considerations (in coordination with Sylvia Hartwell), Plan of Distribution, Legal Matters, and Notice to Investors;
• Drafting of Guarantor Joinder Agreements for each of the five subsidiary guarantors;
• Preparation of the payoff letter (initial draft, for review and execution by Greystone), the lien release and termination request letter, and the formal notice of termination of the Existing Credit Agreement;
• Preparation of all closing deliverables, including: Officer's Certificate (VHG and each Guarantor), Secretary's Certificate (VHG and each Guarantor, with attachments consisting of organizational documents, authorizing resolutions, and incumbency certificates), legal opinion of issuer's counsel (addressed to the initial purchasers and the Trustee), tax opinion of issuer's counsel, 10b-5 negative assurance letter (addressed to the initial purchasers), and DTC Letter of Representations;
• Preparation and distribution of the funds flow memorandum, setting forth the detailed wire instructions and timing for all closing-date funds transfers;
• Maintenance of a comprehensive closing checklist, tracking all deliverables and responsible parties; and
• Assembly, indexing, and distribution of the closing binder following completion of all closing and post-closing activities.
B. Tax Workstream (Calderwood & Harkness LLP — Sylvia Hartwell)
Sylvia Hartwell, Specialist Partner in C&H's Tax Practice Group, will lead the tax workstream for the Offering, which will encompass the following principal activities:
• Analysis of the original issue discount ("OID") arising from the issuance of the Notes at 98.500% of par, resulting in $7,500,000 of OID (1.500% of the $500,000,000 aggregate principal amount). The tax memorandum will address the accrual and deductibility of OID over the term of the Notes under the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury Regulations promulgated thereunder.
• Analysis of the deductibility of interest expense on the Notes under Section 163(j) of the Code, which limits the deduction for business interest expense to the sum of (a) business interest income, (b) 30% of adjusted taxable income, and (c) floor plan financing interest. The analysis will model VHG's projected Section 163(j) limitation based on the Company's historical and projected financial performance.
• Analysis of whether the Notes constitute "applicable high yield discount obligations" ("AHYDO") under Section 163(e)(5) of the Code, which imposes deferral and disallowance of OID deductions for certain high yield obligations that meet specified statutory criteria relating to maturity, yield, and significant OID. The preliminary expectation, based on an initial review of the proposed terms, is that the Notes will not constitute AHYDO; however, this conclusion will be confirmed in the formal tax memorandum.
• Drafting of the "Certain U.S. Federal Income Tax Considerations" section of the Offering Memorandum, which will summarize the material U.S. federal income tax consequences of the purchase, ownership, and disposition of the Notes to U.S. holders and non-U.S. holders.
• Delivery of a tax opinion at closing, addressed to VHG, confirming the tax treatment of the Notes and the related OID.
The tax structure memorandum is targeted for delivery on May 1, 2024.
C. Entity Diligence and Corporate Governance Workstream (C&H and VHG)