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Starwood consortium reportedly targets Extended Stay

The private equity real estate firm, together with Fortress, DE Shaw and Five Mile, has offered $3.5bn for the hotel group’s $4.1bn first mortgage, according to the WSJ. The plan would rival a bankruptcy court reorganisation plan.

Starwood Capital Group is attempting to wrest control of the hotel group Extended Stay after offering $3.5 billion for its $4.1 billion first mortgage, according to a report in the Wall Street Journal.

Starwood has teamed with Fortress Investment Group, DE Shaw and Five Mile Capital Partners to bid for the mortgage, the report – citing people familiar with the matter – said.

The mortgage was securitised following Lightstone Group’s $7.4 billion acquisition of the chain in 2007. Extended Stay filed for bankruptcy protection in June this year, after it failed to restructure around $7.6 billion of debt.

The Starwood offer would see the consortium inject more than $700 million of new equity while most bondholders would continue to hold their debt. Fortress, DE Shaw and Five Mile are existing creditors with varying degrees of seniority, and according to the report, are at risk of taking big losses under a reorganisation plan proposed by the bankrupt company.

By buying the first mortgage, the group could propose a rival plan that would allow them and other creditors to recover more of their initial investments, the report cited. The deal needs to be approved of the special servicer and bankruptcy court.

In its bankruptcy filings, Extended Stay general counsel and secretary Joseph Teichman said the group was “significantly over-leveraged”, with projected cash flows unable to cover “over $7 billion in debt”. Lightstone had spent the first six months of 2009 attempting to restructure $4.1 billion in mortgage debt and $3.3 billion of mezzanine debt, split into 10 tranches.

As part of the mortgage loan agreement, Lightstone was due to make “significant amortisation” payments beginning this month. However, with revenues down 23 percent between January and May this year compared to 2008, the firm's filings said nothing but a “comprehensive restructuring of the entire capital structure” would do.

At the time of the Chapter 11 filings, the firm had $7.1 billion of assets, with 664 hotels pledged as collateral for the mortgage debt.