Is Commercial the Next Sub-Prime?
‘Tranche Warfare’ Erupts as Property Owners Slide Into Default](http://www.businessweek.com/news/2010-01-20/-tranche-warfare-erupts-as-property-owners-slide-into-default.html?source=patrick.net)
Jan. 20 (Bloomberg) – When Lightstone Group bought Extended Stay Hotels Inc. in June 2007, it relied on more than $7 billion in debt financing to complete the $8 billion deal just weeks before the leveraged-buyout market imploded.
Today, Extended Stay’s creditors are battling each other after the company filed the largest bankruptcy case by a U.S. hotel owner. A company reorganization plan, which includes financing from Centerbridge Partners LP and Paulson & Co., may be challenged by a proposal from Starwood Capital Group LLC that is backed by some so-called mezzanine lenders.
Infighting among lenders with different classes of debt, called tranches, is on the rise in the hotel industry and throughout the $3.5 trillion market for commercial real estate loans after property prices fell more than 40 percent from their peak in 2007. Commercial mortgage defaults more than doubled to 3.4 percent in last year’s third quarter from a year earlier.
“I expect that we will see a lot more of this tranche warfare as you are seeing in the Extended Stay scenario,” said Patrick Campbell, principal at Greenwich, Connecticut-based Wheelock Street Capital LLC, a private-equity firm focused on real estate.
Underlying the conflicts are complex financing arrangements made at the top of the market, according to David Broderick, a partner in the real estate group of law firm Allen & Overy LLP in New York. Those deals divided lenders into multiple tranches, with varying degrees of seniority and risk.