June 16, 2009 / 10:26 PM / 9 years ago

UPDATE 1-Early signs suggest lengthy Extended Stay battle

* Extended Stay lender falls 22 pct on NYSE

* Analysts expect more hotel defaults in future

* Firm may end up in hands of Cerberus, Centerbridge - FT (Adds details from hearing, paragraphs 11-15, details on Cerberus, Fortress, Centerbridge, in paragraphs 6-7)

By Deepa Seetharaman and Tom Hals

NEW YORK, June 16 (Reuters) - Initial signs point to a long, drawn-out battle in bankruptcy court for Extended Stay Hotels, the 680-property hotel chain bought in 2007 for $8 billion by a firm little known to the industry at the time.

Extended Stay won interim court approval on Tuesday to use cash against which creditors have a claim. The company said its management company, HVM LLC, would only have about $4 million by the end of Tuesday and the cash was needed to keep it operating.

Several parties objected to the request, which initially ran more than 30 pages and was described by Judge James Peck as a “monstrosity.” Peck approved a simplified version and asked the parties to return to court by the end of the month to take up the issue again.

“This is going to be a mess,” said Mitesh Shah, chief executive of Noble Investment Group, a private equity firm that invests in hotels. “You’ve got a lot of lenders, a lot of people who have already taken steep discounts.”

Shares in one of Extended Stay’s lenders, Ashford Hospitality Trust Inc (AHT.N), dropped 22 percent on the New York Stock Exchange. The real estate investment trust owns a $164 million note in a tranche of Extended Stay’s mezzanine debt. [ID:nN16388554]

Creditors in the business also include private equity investors Cerberus Capital Management [CBS.UL] and Fortress Investment Group (FIG.N), according to a court document.

The Financial Times said Extended Stay is expected to end up in the hands of Cerberus and another distressed investor, Centerbridge Partners. The paper said an agreement in principle with senior lenders values the company at just over $3 billion. Cerberus declined comment and Centerbridge was not immediately available for comment.

Extended Stay filed for Chapter 11 bankruptcy protection on Monday, two years after its owner, Lightstone Group LLC, borrowed $7.4 billion to purchase the chain from the Blackstone Group (BX.N). The price tag turned heads within the industry at the time, as did the relative inexperience of Lightstone’s chief executive, David Lichtenstein.

”You have the Lightstone Group, who was not a traditional owner of hotels,“ said Rod Petrik, analyst for Stifel Nicolaus. ”You have a very inexperienced hotel owner who bought from Blackstone using an extremely high amount of leverage that turns out to be the peak of pricing.

“It’s a recipe for disaster,” said Petrik.

Lichtenstein was an issue in the request to use cash.

    At the judge’s suggestion, a provision was dropped that would have put aside $5 million for Lichtenstein to defend himself against legal claims stemming from his decision to put the company in to bankruptcy.

    The company’s debt structure also seems likely to be a point of dispute. The company has $4.1 billion in mortgage debt held in a trust that issued certificates to investors.

    The company wants to treat each certificate holder as a creditor, but some of the certificate holders want the company to treat the trust as the sole creditor.

    The judge questioned the company’s attorneys about whether the situation with the trust was comparable to a securitized mortgage in a personal bankruptcy, where the individual would deal with the mortgage servicer rather than scores of investors.

    The issue will be taken up at a later date.

    Hotel experts, who were largely unsurprised by the filing, said they will be watching the proceedings to gain clues on what the industry landscape might look like in years to come.

    “Any deal that was done in the 2005 to 2007 period is more likely than not under water today,” Petrik said. “It’s not surprising that these guys were the first, but they’re not going to be the last.”

    The filing comes at a harsh time for hotels, which have seen industry-wide U.S. revenue per available room (RevPAR) tumble double digits this year. (Reporting by Deepa Seetharaman and Tom Hals; additional reporting by Megan Davies; Editing by Gary Hill and Tim Dobbyn)

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