Extended Stay U.S. Trustee's examiner appointment request approved

By Caroline Salls

Pittsburgh, Sept. 25 - Extended Stay Inc.'s U.S. Trustee received court approval to appoint an examiner to investigate the company's acquisition of most of the assets in its portfolio and subsequent negotiations that led to its bankruptcy, according to a Thursday filing with the U.S Bankruptcy Court for the Southern District of New York.

Region 2 U.S. trustee Diana G. Adams said in her motion that serious questions and concerns have been raised by various parties, including the company's official committee of unsecured creditors.

According to the motion, the Blackstone Group acquired Extended Stay America, Inc. in the spring of 2004 for roughly $2 billion in cash.

After adding some properties to the portfolio, the trustee said the Blackstone Group sold the hotel chain to Extended Stay in June 2007 for four times as much as it had paid.

Two years after the company's acquisition, Adams said the value of the hotels plunged to $3.3 billion - a decrease of more than 41% from the purchase price and less than the amount of the first mortgage.

After negotiating with various constituencies, Extended Stay ultimately decided to file for bankruptcy after reaching an agreement in principle with some of its senior lenders on the terms of a possible restructuring term sheet, according to the motion.

Adams said the proposed term sheet essentially wipes out all of the mezzanine debt that helped finance the 2007 acquisition.

In addition, the U.S. Trustee said the term sheet provides protections and safe harbors for the company's insiders, and chief executive officer and president David Lichtenstein "is the only one who appears to be surviving the debtors' bankruptcy filing relatively unscathed."

Rather than burdening the company's estates with litigation costs, Adams said an examiner should be appointed to investigate the transactions in question.

Extended Stay, a New York-based owner and operator of mid-priced extended stay hotels, filed for bankruptcy on June 15. Its Chapter 11 case number is 09-13764.

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