• Blackstone making Extended Stay in sector

An investment group including Blackstone Group, Paulson & Co and Centerbridge Partners has taken Extended Stay out of bankruptcy more than a year after it filed for Chapter 11 protection in June 2009.

The $3.925bn deal comes in a week of activity for Blackstone, which is reported to have acquired the junior debt on 14 hotels owned by Columbia Sussex Corp and is thought likely to seize the properties. The two deals indicate that the rise in transactions activity in the sector may be driven by debt restructuring rather than clear distress acquisitions.

The Extended Stay deal marks a return for the company to Blackstone, which sold the group in early 2007 for $8bn to a group led by David Lichtenstein, founder and CEO of real estate investing company The Lightstone Group, at a reported 92.5% leverage at the peak of the boom. The deal had a debt-to-earnings ratio of 13 times.

Extended Stay filed for bankruptcy protection with $7.6bn in liabilities, with around $4.1bn relating to a 2007 loan from Wachovia Bank, which precipitated the group's move towards bankruptcy after declared a default when Extended Stay failed to make a $3.5m payment. Upon its bankruptcy filing, the company estimated its value at $3.3bn. The 685-strong group has cut its debt burden by almost $5bn in the bankruptcy process.

HVM will continue to manage the properties under Gary DeLapp, president and CEO, with Doug Geoga, former president of Global Hyatt, to become the non-executive chairman of the board at Extended Stay.

A spokesperson for the sponsors said: "We are enthusiastic about the opportunity to invest in Extended Stay, which has maintained market leadership throughout the challenges of the past two years. After reducing its debt burden by nearly $5bn, Extended Stay will have the flexibility to improve its customer experience and offerings. We all look forward to a successful partnership with Gary DeLapp and the entire management team as they lead the company to future growth."

Starwood Capital, which was one of Extended Stay's creditors, had previously objected to the deal, having reportedly lost an auction for the group earlier this year in which it had announced its intention to invest up to $905m in the group. The restructuring plan was approved by the bankruptcy court in July.

One of the creditors was the Federal Reserve, through a fund called Maiden Lane, which held around $900m in Extended Stay debt after the collapse of Bear Stearns. The Federal Reserve Bank of New York again found itself in the hotel sector via Bear Stearns after taking a hit of around $180m in agreeing to a restructuring of a loan to Hilton, according to reports in the Financial Times this week. The sale of approximately $320m of debt to Blackstone resulted in the book loss.

The central bank picked up $4bn of $20bn in loans used for the leveraged buyout of Hilton in 2007 when it took on $29bn in assets from Bear Stearns. In April, Blackstone renegotiated the Hilton loans, buying back $1.8bn of debt for $800m.

Blackstone made moves to further strengthen its position in the hotel market this week, after having reportedly acquired junior mezzanine portions of debt on 14 hotels owned by Columbia Sussex Corp. It is thought likely to seize the properties later this month, according to sources close to the group, when a $539m mortgage on the real estate comes due. The debt is backed by hotels including 10 Wyndham Worldwide properties, according to Fitch.

As in the Extended Stay deal, Blackstone is already familiar with the group, having sold the sites for $1.4bn to Columbia Sussex Corp five years ago after acquiring them as part of the former Wyndham International.


HA Perspective: There have been complaints since the credit crunch from the vulture funds that the much-anticipated distress has failed to come onto the market, leaving them with nowhere to invest the capital that they have been stockpiling to take advantage of others' rainy days.

However, as Blackstone has shown with its merry-go-round deals, the lack of traditional distress has meant that funds must use more imaginative means to gain assets, through taking slices in the debt linked to them, aided by the more creative debt structures that came into vogue as the market peaked towards 2007. 

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