Extended Stay's $8B Buyout Triggers Record Bankruptcy Protection Filing

Vacation News » Vacation & Leisure Real Estate Edition | By Alex Finkelstein | June 15, 2009 5:35 PM ET

(NEW YORK, NY) -- In April 2007,  David Lichtenstein's Lakewood, NJ-based Lightstone Group LLC borrowed $7.4 billion to buy the 680-hotel chain Extended Stay Inc. from New York City-based Blackstone Group LP.

Analysts at the time doubted the deal was a good one for debt-loaded Lightstone. Today they were proven right. 

Lightstone filed for Chapter 11 bankruptcy court protection in the court's Southern District in Manhattan.

Extended Stay listed $7.1 billion in assets and $7.6 billion in debts at the end of last year. The company has about 10,000 employees in 44 states and Canada.

The Wall Street Journal called it one of the largest bankruptcy filings by a U.S. commercial real-estate company.

The banking consortium that did the deal includes Bank Of America and its Merrill Lynch unit, Wells Fargo & Co.s Wachovia and Bear Stearns Cos., whose stake was taken over by the Federal Reserve after Bear collapsed in March 2008. BlackRock Inc. has been representing the Fed in the restructuring talks.

The WSJ reports the deal was highly leveraged, making Extended Stay especially vulnerable to a market downturn.
The hotel chain has $4.1 billion in a senior first mortgage debt that was mostly sold to investors as commercial-mortgage-backed securities, or CMBS.

Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes,  ranked one through 10 in seniority. Most of the holders of junior mezzanine debt bought at a discount, some around 60 cents on the dollar, but others as low as 10 to 15 cents, according to debt holders.

The paper reports the surprise bankruptcy filing today also triggered a new set of lawsuits.

In early June of this year, investors who bought debt that helped finance the 2007 Extended Stay deal, are suing banks that provided much of the financing. The lawsuits accuse the banks of scheming to seize the properties and wipe out the mezzanine investors. 

The hotel chain was served a notice of default in May. Both the senior and mezzanine loans matured on Friday, June 12, with extension options.

Wachovia, the servicer of the mezzanine and first mortgage debt as well as being a lender, declared a default in late May after Extended Stay failed to pay a $3.5 million late phone bill, according to the people familiar with the matter.   

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