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Cerberus holds $700m claim in Extended Stay bankruptcy

Cerberus expects to make a 100% recovery on the secured $700m loan. The hotel group was acquired by an investor group led by private equity real estate firm Lightstone Group in June 2007 for $7.4bn. There are no plans to close or sell the hotels.

Cerberus Capital Management holds a $700 million secured claim in the bankruptcy of Extended Stay hotel group, which filed for Chapter 11 protection Monday.

A source with Cerberus said the firm expects to make a 100 percent recovery on the loan, which is secured by Extended Stay’s real estate assets.

The loan was not given to Extended Stay as part of a loan-to-own strategy, the source said.

New York-based Lightstone Group and a consortium of investors bought the hospitality firm from The Blackstone Group in June 2007 for $7.4 billion, reportedly injecting just $200 million of equity into the deal, according to The Wall Street Journal.

In its court filing yesterday, Extended Stay general counsel and secretary Joseph Teichman said the group was “significantly over-leveraged”, with projected cash flows unable to cover “over $7 billion in debt”.

Lightstone has spent the past six months attempting to restructure $4.1 billion in mortgage debt and $3.3 billion of mezzanine debt, split into 10 tranches.

As part of the mortgage loan agreement, Lightstone was due to make “significant amortisation” payments beginning this month. However, with revenues down 23 percent between January and May this year compared to 2008, the firm said nothing but a “comprehensive restructuring of the entire capital structure” would do.

At the time of the Chapter 11 filings, the firm had $7.1 billion of assets, with 664 hotels pledged as collateral for the mortgage debt.

The largest secured creditors of Extended Stay’s debt are Wachovia Bank, with claims of $984 million in mezzanine debt and $515 million in mortgage debt, and Bank of America, which claims $958 million in mezzanine debt and $400 million in mortgage debt. The petition also names “Bear Stearns/BlackRock” as the third largest secured claimant with $796 million in mezzanine debt and $274 million in mortgage debt.

Cerberus has the $700 million in secured debt tied to the mortgage loan, while Centerbridge Partners claims $400 million in mortgage debt.

Extended Stay’s 686 hotels, located in 44 US states and Canada, are managed by HVM, an “entity that is affiliated with, but not directly owned” by the Extended Stay companies, Teichman said. HMV said in a statement that Extended Stay would use cash flow from its hotels, rather than debtor-in-possession financing, to fund operations.

Gary DeLapp, president and chief executive officer of HVM, added that there were no plans to close or sell hotels, with HVM able to “meet all of its obligations in the ordinary course of business and pay vendors without interruption”.

“This is a financing problem, not an operations problem,” said one source with knowledge of the matter.

Blackstone originally bought Extended Stay – which is a “hybrid” hotel operating between a hotel and an apartment – in May 2004 for $3.4 billion, including the assumption of $1.1 billion in debt. It sold Extended Stay, which it had grown to more than 680 hotels, in June 2007.

Christopher Witkowsky contributed to this article.