Early signs suggest lengthy Extended Stay battle

By Deepa Seetharaman and Tom Hals

NEW YORK (Reuters) - Initial signs point to a long, drawn-out 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.

Creditors in the business also include private equity investors Cerberus Capital Management CBS.UL and Fortress Investment Group (FIG.N), according to a court document.

The Financial Times said Extended Stay is expected to end up in the hands of Cerberus and another distressed investor, Centerbridge Partners. The paper said an agreement in principle with senior lenders values the company at just over $3 billion. Cerberus declined comment and Centerbridge was not immediately available for comment.

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.