REPORT FROM THE U.S.—A court-appointed examiner's report into the cause of the Extended Stay America bankruptcy has been released—and turns out he had a lot to say.
Ralph R. Mabey, himself a former bankruptcy court judge, filed his 458-page report Thursday. In it, Mabey placed blame for the bankruptcy on the US$8-billion acquisition of the hotel chain by David Lichtenstein’s Lightstone Group in June 2007.
“The practical effect, according to Mr. Lichtenstein, was the overstatement of the net operating income of the properties, which was problematic because the underwriting of the mortgage debt and mezzanine debt was based only upon the property level numbers and, therefore, made the debt even more difficult for the Company to service,” the report said.
“Similarly, the projections in the Offering Memorandum assumed a rate of growth that, in the opinion of Mr. Lichtenstein, was unrealistic and unachievable in even the best of circumstances in the hospitality industry.”
Spartanburg, South Carolina-based ESA did not immediately respond to a request for comment this morning.
A high price to pay
Mabey also pointed out in his report that the debt held by ESA post-acquisition hamstrung ESA. Lightstone borrowed US$7.4 billion from an affiliate of Blackstone Group to acquire the chain’s 680 hotels.
“This new incremental debt, totaling approximately (US)$1.7 billion, greatly exceeded any direct or indirect benefits that might have been provided through the acquisition,” according to the report. ESA’s ability to borrow money post-acquisition “was almost non-existent,” the report said.
Mabey also took a shot at ESA’s acquirers.
“In fact, however, the new owner (the Lichtenstein/Lightstone entities) had no experience operating any hotel chain or an entity of this size and magnitude, nor were there any expected synergies or strategies that the new owner was bringing to the organization,” Mabey said in the report.
A message left at Lightstone’s offices this morning was not immediately returned.
ESA filed for bankruptcy on 15 June 2009, revealing the company had liabilities of US$7.6 billion as of 31 December 2008 and revenues of about US$1 billion.
Mabey completed his review of the events leading to ESA’s bankruptcy last month, but the report was placed under temporary seal while confidentiality issues were worked out.
ESA tug-of-war
Competing reorganization plans have been pitched in recent weeks by a group led by Starwood Capital Group and another by investment firms Centerbridge Partners and Paulson & Company.
ESA accepted a Starwood plan last month that called for the investment of US$905 million in the company before spurning that offer in favor of one put forward by Centerbridge and Paulson that also called for a US$905-million investment, but with no fees attached, according to The Wall Street Journal.
Centerbridge and Paulson had proposed an earlier bid that would have allowed the two firms to take a 22.5-percent stake in the company for US$450 million. That plan was trumped by Starwood and led to the tug-of-war battle between the two groups.
No reorganization plan had been approved as of press time.