The Creditors Strike Back

Creditors are taking back the power they lost with the recent economic meltdown.  Specifically, Starwood Capital Group is acting on its own behalf in dealing with the June bankruptcy filing of Extended Stay, Inc. The Wall Street Journal reported that the investor group, Starwood Capital, is proposing to buy the $4.1 billion first mortgage of Extended Stay Inc.  The investors are willing to make such a large  investment because they are existing creditors of Extended Stay, Inc.  With Extended Stay’s proposed reorganization plan, the creditors stand to lose much of their initial investment. However, by potentially purchasing the first mortgage for $3.5 billion in commercial-mortgage-backed securities, the creditors are striking back.

With their proposal, the creditors would be able to devise their own plan restructuring that would allow them a better recovery.  The bondholders and of course the bankruptcy court would need to approve Starwood’s plan for it to pass.  Also, bankruptcy law gives Extended Stay Inc. the exclusive right to form their own restructuring plan during the “exclusivity” period following filing of bankruptcy. The exclusivity period can last as long as eighteen months.

Despite the obstacles for Starwood’s plans implementation, it  is significant insomuch as it is shows how creditors are turning their bad luck into good fortune.  Starwood may lose money on the deal overall but they are making an investment which will serve them well in the future.  Starwood has already bought distressed hotel assets and invested in commercial property debt.  Buying Extended Stay, Inc.’s first mortgage is just another business opportunity for investors like Starwood which serves the double purpose of protecting their investment and planning for the future.

Although not uncommon for creditors to propose their own restructuring plan, it will be interesting to see if the trend becomes for the creditors to take control of their own destiny in the way that Starwood’s plans to.  As businesses continue to feel the effects of the economy and financing becomes available, more groups like Starwood might emerge and strike back .