By Caroline Humer and Emily Chasan
NEW YORK, April 8 (Reuters) - The $8 billion leveraged buyout of U.S. hotel chain Extended Stay America Inc in 2007 left the company drowning in mortgage debt and doomed to bankruptcy, a court-appointed examiner's report showed on Thursday.
The financing obtained by David Lichtenstein's Lightstone Group for the acquisition left the mid-priced hotel chain with little room for error when the economy slowed, examiner Ralph Mabey said in a 458-page report. He said the company and its creditors could have potential claims against the banks, executives and advisers who arranged the deal.
In a deposition cited in the report, Lichtenstein said the deal was 'a brew that was cooked with a lot of people's help.'
Extended Stay filed for bankruptcy protection in June 2009, saying it was 'significantly over-leveraged' and that its projected cash flows were not enough to continue to repay some $7 billion of debt. Lightstone borrowed $7.4 billion to purchase the chain of 680 hotels from a Blackstone Group LP affiliate in 2007, around the top of the buyout and real estate markets.
In the report, Mabey, a former bankruptcy judge, said that Lightstone and Blackstone failed to perform sufficient due diligence around the buyout and may have breached fiduciary duties.
'It appears that little meaningful due diligence was performed by the buyer and the underwriters prior to the acquisition,' Mabey wrote in the report.
He said an additional $1.7 billion in debt put on the company as part of the acquisition, 'greatly exceeded' any direct or indirect benefits of doing the deal.
The examiner said Extended Stay's bankruptcy estate could make claims against the seller, buyer and advisers who put together the 2007 deal for unjust enrichment, and that certain dividends and distributions could be subject to claims that they were illegal.
'NOBODY PUT A GUN TO MY HEAD'
The examiner cited a deposition with Lichtenstein, where the real estate investor revealed he did not have the relevant experience that would have enabled him to evaluate the deal.
'At the end of the day, nobody put a gun to my head and said sign the documents,' Lichtenstein said in a deposition cited in the examiner's report. 'It was a combination; there were a lot of people who (erred) here.'
In his deposition, Lichtenstein said that the banks wanted to be paid as many fees as possible, which helped spur him to increase the amount of financing on the deal.
The examiner, however, said he hadn't found any evidence of a 'secret deal' between Lichtenstein and debtholders made prior to bankruptcy, that would absolve Lichtenstein from a $100 million personal guarantee he made to lenders in case the company filed for bankruptcy.
Blackstone declined to comment and an attorney for Lightstone and Lichtenstein did not return a call.
Mabey, who was appointed as examiner in the case in September, conducted more than 25 interviews and collected more than 20,000 documents as part of his investigation. He completed his report in March but was not able to release it publicly until Thursday.
Examiners' reports are typically used by a bankrupt company and its creditors to justify claims that could help the company's creditors recover more funds.
Extended Stay is working on a plan to get out of bankruptcy by the end of the year and has attracted suitors like Barry Sternlicht's Starwood Capital Group and hedge funds Centerbridge Partners LP and Paulson & Co who are vying for control of the company.
Centerbridge had looked at two other possible deals with Extended Stay before the Lightstone buyout, according to the examiner's report.
The case is in re: Extended Stay Inc. U.S. Bankruptcy Court, Southern District of New York, No. 09-13764
(Reporting by Emily Chasan and Caroline Humer; additional reporting by Deepa Seetharaman and Megan Davies; Editing by Steve Orlofsky, Bernard Orr) Keywords: EXTENDEDSTAY/EXAMINER (emily.chasan@thomsonreuters.com; +1 646 223 6114; Reuters Messaging: emily.chasan.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, April 8 (Reuters) - The $8 billion leveraged buyout of U.S. hotel chain Extended Stay America Inc in 2007 left the company drowning in mortgage debt and doomed to bankruptcy, a court-appointed examiner's report showed on Thursday.
The financing obtained by David Lichtenstein's Lightstone Group for the acquisition left the mid-priced hotel chain with little room for error when the economy slowed, examiner Ralph Mabey said in a 458-page report. He said the company and its creditors could have potential claims against the banks, executives and advisers who arranged the deal.
In a deposition cited in the report, Lichtenstein said the deal was 'a brew that was cooked with a lot of people's help.'
Extended Stay filed for bankruptcy protection in June 2009, saying it was 'significantly over-leveraged' and that its projected cash flows were not enough to continue to repay some $7 billion of debt. Lightstone borrowed $7.4 billion to purchase the chain of 680 hotels from a Blackstone Group LP affiliate in 2007, around the top of the buyout and real estate markets.
In the report, Mabey, a former bankruptcy judge, said that Lightstone and Blackstone failed to perform sufficient due diligence around the buyout and may have breached fiduciary duties.
'It appears that little meaningful due diligence was performed by the buyer and the underwriters prior to the acquisition,' Mabey wrote in the report.
He said an additional $1.7 billion in debt put on the company as part of the acquisition, 'greatly exceeded' any direct or indirect benefits of doing the deal.
The examiner said Extended Stay's bankruptcy estate could make claims against the seller, buyer and advisers who put together the 2007 deal for unjust enrichment, and that certain dividends and distributions could be subject to claims that they were illegal.
'NOBODY PUT A GUN TO MY HEAD'
The examiner cited a deposition with Lichtenstein, where the real estate investor revealed he did not have the relevant experience that would have enabled him to evaluate the deal.
'At the end of the day, nobody put a gun to my head and said sign the documents,' Lichtenstein said in a deposition cited in the examiner's report. 'It was a combination; there were a lot of people who (erred) here.'
In his deposition, Lichtenstein said that the banks wanted to be paid as many fees as possible, which helped spur him to increase the amount of financing on the deal.
The examiner, however, said he hadn't found any evidence of a 'secret deal' between Lichtenstein and debtholders made prior to bankruptcy, that would absolve Lichtenstein from a $100 million personal guarantee he made to lenders in case the company filed for bankruptcy.
Blackstone declined to comment and an attorney for Lightstone and Lichtenstein did not return a call.
Mabey, who was appointed as examiner in the case in September, conducted more than 25 interviews and collected more than 20,000 documents as part of his investigation. He completed his report in March but was not able to release it publicly until Thursday.
Examiners' reports are typically used by a bankrupt company and its creditors to justify claims that could help the company's creditors recover more funds.
Extended Stay is working on a plan to get out of bankruptcy by the end of the year and has attracted suitors like Barry Sternlicht's Starwood Capital Group and hedge funds Centerbridge Partners LP and Paulson & Co who are vying for control of the company.
Centerbridge had looked at two other possible deals with Extended Stay before the Lightstone buyout, according to the examiner's report.
The case is in re: Extended Stay Inc. U.S. Bankruptcy Court, Southern District of New York, No. 09-13764
(Reporting by Emily Chasan and Caroline Humer; additional reporting by Deepa Seetharaman and Megan Davies; Editing by Steve Orlofsky, Bernard Orr) Keywords: EXTENDEDSTAY/EXAMINER (emily.chasan@thomsonreuters.com; +1 646 223 6114; Reuters Messaging: emily.chasan.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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