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Early Signs Suggest Lengthy Extended Stay Battle

NEW YORK (Reuters) – Initial signs point to a long, drawn-out legal battle in bankruptcy court for Extended Stay Hotels, the 680-property hotel chain bought in 2007 for $8 billion by a firm little known to the industry at the time.

Extended Stay won interim court approval on Tuesday to use cash against which creditors have a claim. The company said its management company, HVM LLC, would only have about $4 million by the end of Tuesday and the cash was needed to keep it operating.

Several parties objected to the request, which initially ran more than 30 pages and was described by Judge James Peck as a “monstrosity.” Peck approved a simplified version and asked the parties to return to court by the end of the month to take up the issue again.

“This is going to be a mess,” said Mitesh Shah, chief executive of Noble Investment Group, a private equity firm that invests in hotels. “You’ve got a lot of lenders, a lot of people who have already taken steep discounts.”

Shares in one of Extended Stay’s lenders, Ashford Hospitality Trust Inc (AHT.N), dropped 22 percent on the New York Stock Exchange. The real estate investment trust owns a $164 million note in a tranche of Extended Stay’s mezzanine debt. For details, see [ID:nN16388554]

Extended Stay filed for Chapter 11 bankruptcy protection on Monday, two years after its owner, Lightstone Group LLC, borrowed $7.4 billion to purchase the chain from the Blackstone Group (BX.N). The price tag turned heads within the industry at the time, as did the relative inexperience of Lightstone’s chief executive, David Lichtenstein.

“You have the Lightstone Group, who was not a traditional owner of hotels,” said Rod Petrik, analyst for Stifel Nicolaus. “You have a very inexperienced hotel owner who bought from Blackstone using an extremely high amount of leverage that turns out to be the peak of pricing.

“It’s a recipe for disaster,” said Petrik.

Hotel experts, who were largely unsurprised by the filing, said they will be watching the proceedings to gain clues on what the industry landscape might look like in years to come.

“Any deal that was done in the 2005 to 2007 period is more likely than not under water today,” Petrik said. “It’s not surprising that these guys were the first, but they’re not going to be the last.”

The filing comes at a harsh time for hotels, which have seen industry-wide U.S. revenue per available room (RevPAR) tumble double digits this year. RevPAR is off more than 20 percent so far in the second quarter compared with the year earlier, according to some estimates.

According to the latest figures from Smith Travel Research, RevPAR has dropped for nine straight months through April and May RevPAR will almost certainly fall as well.

Extended Stay’s bankruptcy presages other hotel defaults, experts said, as the massive debt taken on by hotel investors during boom times coming due during the economic slump.

“It makes you wonder how deep is this damn thing going to go?” said Al Calhoun, managing director at Jones Lang LaSalle Hotels, a hotel advisory firm.

(Reporting by Deepa Seetharaman and Tom Hals; Editing by Gary Hill