CMBS Market Dodges a Bullet

Hotel operator Extended Stay Inc. and numerous of its affiliates filed for bankruptcy protection in June 2009, the result of a highly leveraged acquisition at the top of the market. This July, the bankruptcy court signed off on Extended Stay’s proposed plan of reorganization, allowing the company to be sold for approximately $3.9 billon to a private equity group. The sale price resulted from an auction and was close to the $4.1 billion of CMBS mortgage debt the company had outstanding.

From the outset, the case pitted some of the fundamental tenets of CMBS deals, particularly those embedded in the common pooling and servicing agreement, against the law and rules of the US bankruptcy process. PSAs have constructs of value and agreed-upon methods of decision making that may collide with valuation methodologies and voting concepts under the Bankruptcy Code. And perhaps the largest question looming over any CMBS deal that ends in bankruptcy is how a plan of reorganization might be confirmed.