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Extended Stay creditors sue Blackstone, Lightstone for $8bn

Creditors for the North Carolina-based hotel chain are claiming the firms inflated the sales price of the company in the 2007 buyout, leaving the company insolvent.

The Blackstone Group allegedly “inflated” the sales price of Extended Stay when it sold the hotel chain for $8 billion to a group of investors led by Lightstone Group in 2007, causing the company to become “hopelessly insolvent”, Extended Stay creditors claimed in a lawsuit filed in New York last week.

Lightstone, a real estate firm, acquired Extended Stay from Blackstone in the $8 billion buyout, which included about $7.4 billion of debt comprising a $4.1 billion mortgage and $3.3 billion of mezzanine debt split into 10 tranches. Blackstone teamed with Citigroup in 2007 to sell the chain of about 680 hotels to Lightstone’s David Lichtenstein, who was willing to overpay, according to the lawsuit.

Also named in the lawsuits are the lenders involved in the transaction, including Bank of America, Citigroup and JP Morgan Chase.

Extended Stay’s creditors also alleged that Lightstone received management fees, totaling approximately $1 million per year, for “doing nothing”. A spokesperson for Lightstone did not respond to requests for comment.

Ultimately, Blackstone siphoned $2.1 billion in value from the company, according to the lawsuit. Extended Stay alleges that Blackstone and Lightstone’s actions made the company “hopelessly insolvent, inadequately capitalised and not able to pay their debts”. The company filed for bankruptcy in June 2009.

“The grossly inflated purchase price was engineered by the Blackstone-affiliated sellers looking to maximise their profits, working in concert with a buyer that assumed little to no risk of loss,” according to the lawsuit. The company seeks $6.3 billion in punitive damages.

Blackstone said the lawsuit is “completely without merit”. “The real cause of the company’s bankruptcy was an economic tsunami, which resulted in across-the-board revenue per available room declines of more than 20 percent,” said a spokesperson for the firm. “This was an industrywide phenomenon that landed every large lodging transaction executed in 2006-2007 in bankruptcy, foreclosure or restructuring.

“If Blackstone had predicted the greatest economic downturn since the Great Depression and the adverse impact on the industry, then it certainly would not have taken the unusual step of retaining an equity participation in Extended Stay,” the spokesperson said. “With 99.9 percent of all pre-transaction debt paid off in full at the time of our sale, this is an opportunistic claim brought on behalf of sophisticated lenders.”

Extended Stay is the second company to recently accuse Blackstone of inflicting it with financial woes as a result of mega-buyouts. Earlier this month, UK-based nursing home operator Southern Cross Healthcare Group claimed Blackstone left the firm teetering on the edge of financial ruin by selling off the company’s properties and then leasing them back. The company said the sale-leaseback policy left the company unable to meet debt obligations and shouldered with high rent bills.