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Innkeepers to sell hotels for $1.02B

by Jamie Mason | Published October 19, 2011 at 5:45 PM

Bankrupt Innkeepers USA Trust on Wednesday, Oct. 19, finalized its settlement with affiliates of Cerberus Capital Management LP and Chatham Lodging Trust and will sell the company's 64 hotels to them for $1.02 billion.

Through the settlement, the sale price for the hotels dropped to $1.02 billion from the original $1.13 billion, Innkeepers said in a statement Wednesday.

Still, even with the drop, the final purchase price is $75 million more than the $970.7 million stalking-horse bid for the properties submitted by Five Mile Capital Partners LLC and Lehman ALI Inc. that began its May 2 auction, the bankrupt REIT said in the statement.

Judge Shelley C. Chapman of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan will consider the approval of the settlement and Innkeepers' modifications to its reorganization plan at an Oct. 21 hearing, court papers said.

Once the agreement is approved by the Manhattan court, it could close as early as next week, an Innkeepers' spokesman said.

Through the settlement, Midland Loan Services Inc., the holder of the debtor's fixed-rate pool mortgage loan will receive a new $675 million fixed-rate mortgage loan.

Lehman ALI, the holder of the debtor's floating-rate mortgages, will receive $224 million in cash.

Under the previous plan, which was confirmed on June 23, Midland would have swapped its fixed-rate mortgage loan for $723.8 million in new notes, plus a $12.8 million cash payment.

Lehman ALI would have received a $233.5 million cash payment for the floating-rate mortgage loan, while holders of floating-rate pool mezzanine loan claims would have received $2.36 million in cash.

According to court papers, the floating-rate pool mezzanine claimholders will no longer receive a cash payment.

Both Midland and Lehman have agreed to support the deal and their treatment under the modified plan, the statement said.

The other creditors and equity holders recovery won't be affected by the modified plan.

"We are very pleased with this outcome," said Innkeepers' CRO Marc A. Beilinson in the statement. "The updated agreement provides a significant cash premium to the original stalking-horse bid and a meaningful return to our creditors, and it allows us to move ahead with a timely exit from Chapter 11."

According to the statement, Chatham's CEO Jeff Fisher said, "Chatham and Cerberus are excited about owning this valuable portfolio and look forward to creating significant value for their shareholders and investors."

Innkeepers' $17.5 million debtor-in-possession loan from Lehman ALI and its $53 million DIP from Five Mile were set to mature on Oct. 11 but have been extended until the sale closes, Beilinson said.

Cerberus, a New York private equity firm, and Chatham Lodging Trust, a Palm Beach, Fla., REIT that invests in extended-stay and select service hotels, backed out of the original $1.13 billion deal on Aug. 22, invoking an unspecified material adverse change, commonly known as a MAC.

A week later, on Aug. 29, Innkeepers sued the would-be buyers, asserting claims including breach of contract "caused by the defendants' improper termination of their binding and irrevocable commitment to purchase the ... hotels," court papers said.

Innkeepers wanted to force the buyers to complete the deal or require them "to pay substantial damages," the lawsuit said. The exact amount of damages would be determined at trial.

However, the trial that was set to begin on Oct. 10 was continued several times, and then the settlement was reached. The agreement will resolve the adversary proceeding.

In the lawsuit, Innkeepers contended that the business performance of the 64 hotels "is strong and there has been no change in either the results or prospects" of the hotels since the buyers signed their "binding and irrevocable commitment" for the purchase on May 16.

Innkeepers also argued that, under the original sale agreement, in the event of any breach of contract, the debtor can keep the deposit as liquidated damages.

Cerberus and Chatham Lodging Trust responded separately to the lawsuit on Sept. 9, declaring that the debtor wasn't entitled to retain a $20 million deposit for the sale. They also asserted that the debtor is not entitled to the deposit because they had a "contractual right to call a 'termination event,' which they properly did," they said in court papers.

Innkeepers, which is also based in Palm Beach, filed for Chapter 11 on July 19, 2010, blaming its problems on debt that had become unmanageable in the wake of the economic downturn.

The filing came after Marriott International Inc. declared the debtor's franchised hotels to be in default of their contracts.

In a separate deal, Chatham Lodging Trust purchased five Innkeepers hotels for $195 million. That sale closed July 14, and the related debtors emerged from Chapter 11 a day later. Innkeepers' two other properties have reverted to lenders, with the related debtors emerging from Chapter 11 on July 7 and July 28.

New York middle-market debt investor Apollo Investment Corp. bought Innkeepers at the height of the market in June 2007 for $1.5 billion from management led by Jeffrey Fisher, now Chatham Lodging Trust's chairman, president and CEO. After Apollo took over, it invested about $250 million in improvements.

Anup Sathy, Paul Basta, James Sprayregen, Brian S. Lennon, Jennifer Marines and Patrick Bryan of Kirkland & Ellis LLP are debtor counsel. William Derrough and Zul Jamal of Moelis & Co. are Innkeepers' investment bankers. Todd B. Brents and Raymond Adams of AlixPartners LLP are the debtor's restructuring advisers.

A Schulte Roth & Zabel LLP team led by Stuart D. Freedman, Alan S. Waldenberg and Adam C. Harris and including Dominique Padilla Gallego, Kimberly M. Monroe and Fonda Duvanel represents Cerberus.

Scott Charles, Robin Panovka, David Fischman, Scott Golenbock and Caith Kushner of Wachtell, Lipton, Rosen & Katz advise Chatham.

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Tags: bankruptcy | Cerberus Capital Management | Chatham Lodging | Hotels | Innkeepers USA

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