Extended Stay files bankruptcy to restructure mortgage loan debt

By Caroline Salls

Pittsburgh, June 15 - Extended Stay Inc. filed for Chapter 11 bankruptcy Monday in the U.S. Bankruptcy Court for the Southern District of New York.

According to a statement filed by secretary and general counsel Joseph Teichman, the company has negotiated a restructuring term sheet under an agreement in principal with an informal mortgage lender group that will form the basis of a plan of reorganization.

"Extended Stay is in a liquidity crisis that is directly attributable to the impact of the deteriorating condition and instability of the financial markets on the expected performance of the entire hospitality industry," Teichman said in the release.

Since the company was acquired by an investment consortium consisting of David Lichtenstein and Arbor Realty Trust in 2007, Teichman said Extended Stay has operated in a difficult financial environment driven by reduced consumer and commercial spending and high fuel prices.

Teichman said these problems were exacerbated by the collapse of the financial markets and the credit market crisis.

As a result of company's declining revenues and the inability to meet a debt yield threshold contained in its mortgage loan and mezzanine loan agreements, Teichman said Extended Stay would not have enough liquidity to operate in the immediate future and on a long-term basis.

"Extended Stay is significantly over-leveraged, and the projected cash flows cannot continue to service over $7 billion in debt," Teichman said in the filing.

"As a result, a comprehensive restructuring of the entire capital structure is necessary."

Cash collateral use

In connection with the bankruptcy filing, the company has reached an agreement with the lender group to use the mortgage lenders' cash collateral to allow Extended Stay to continue to operate its properties while in bankruptcy.

The company said it will not need to obtain debtor-in-possession financing.

Plan terms

Under the proposed plan:

• The mortgage loan lenders will receive a new $1.8 billion three-tranche first-lien mortgage loan, an up to $775 million new second-lien mortgage loan, up to $471.25 million in new preferred stock and 100% of the new common stock to be issued by the reorganized company;

• Holders of A4 mortgage certificates will receive new second-lien notes or new nine-year 6% unsecured notes;

• Holders of mezzanine loans will receive no distribution, provided, however, that they will receive call options to purchase new securities in order to resolve any potential claims or causes of action;

• Holders of preferred equity will receive no distribution, but will receive call options and warrants to purchase 10% of common stock to resolve any potential claims; and

• Holders of common equity will receive no distribution.

Debt details

Teichman said Extended Stay had $7.1 billion in assets and $7.6 billion in debt at Dec. 31, 2008.

The company's largest unsecured creditor is Manufacturers and Traders Trust Co. of Buffalo, with an $8.54 million claim tied to the company's 9 7/8% senior subordinated notes due June 15, 2011.

Extended Stay is a New York-based owner and operator of mid-priced extended stay hotels. Its Chapter 11 case number is 09-13764.

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