Fitch Cuts Bonds Backed by Extended Stay Loan

NEW YORK (Reuters) – Fitch Ratings on Tuesday cut low-rated portions of a commercial mortgage bond backed by a $4.1 billion loan for Lightstone Group’s Extended Stay hotel chain as the slowing economy dents revenue.

The rating company lowered five low-investment grade classes of the Wachovia Bank Commercial Mortgage Trust series 2007-ESH to “BBB-minus” and below, and gave them a negative outlook as cash flows have fallen short amid deteriorating hotel fundamentals. It affirmed ratings on 15 other classes.

“The transaction is beginning to reflect the headwinds of a slowing economy and the decreasing business traveler demand,” Fitch analysts said.

The bond is backed by the single loan with fixed- and floating-rate components secured by 664 owned hotels, 17 leased hotels, an office building and a piece of land within 44 states and two Canadian provinces, Fitch said. Fixed-rate components mature in August 2012, and floating rate ones begin maturing in August of 2009, it said.

Efforts by private real estate firm Lightstone and Arbor Realty Trust to boost occupancy have been delayed, Fitch said. Average occupancy fell to about 65.4 percent for the 12 months through October from 70 percent at the end of 2007, it said.

Hotels are seen as some of the riskiest collateral in the $750 billion U.S. commercial mortgage-backed securities (CMBS) market as the U.S. recession drags on.

A JPMorgan Chase & Co. loan for two Westin hotels was a main contributor to a 0.17 percentage point jump in commercial mortgage delinquencies in November, to 0.86 percent, according to Citigroup Inc. The rate could rise to 1 percent by year end and as high as 3 percent though 2010, it said.

Lightstone Group bought Extended Stay Hotels group from Blackstone Group LP (BX.N) last year, funding the $8 billion deal with $7 billion of debt.

By Al Yoon