(Adds details from court papers throughout.)
By Eric Morath
Of DOW JONES DAILY BANKRUPTCY REVIEW
An investor group led by hedge fund Paulson & Co. placed
five well-known luxury resorts into Chapter 11 bankruptcy Tuesday
as the properties faced a deadline to repay $1.525 billion in
secured debt.
The resorts, part of a group of holdings formerly known as CNL
Hotels & Resorts Inc., include the Arizona Biltmore Resort
& Spa in Phoenix, the Doral golf resort in Miami, La Quinta in
Palm Springs, Calif., the Claremont in Berkeley, Calif, and the
Hawaii's Grand Wailea Resort Hotel & Spa in Maui.
The Paulson-led investment group, known as CNL-AB LLC, seized
those five properties, and three other resorts that aren't part of
the bankruptcy, on Friday from a Morgan Stanley (MS) real-estate
fund through a foreclosure proceeding. Winthrop Realty Trust (FUR)
and Capital Trust Inc. (CT) are also prominent investors in
CNL-AB.
The investment group, which formerly held junior debt in the
resorts, placed the properties into bankruptcy to avoid the
"disruption, confusion and deterioration of value" that could have
occurred if the resorts were required immediately to repay mortgage
holders and other secured lenders, Paulson partner Daniel Kamensky
said in papers filed with the U.S. Bankruptcy Court in
Manhattan.
Kamensky said Paulson and the other investors view the resorts
as "iconic" properties with significant potential value. The
properties, however, have been suffering from the decline in
business and personal travel in recent years and from an
overleveraged balance sheet.
The Morgan Stanley fund took on substantial debt to acquire the
resorts for $4 billion at the "peak of the market" in 2007,
Kamensky said.
A Morgan Stanley spokeswoman declined to comment.
Now with the properties in bankruptcy, Kamensky said the
resorts' new owners will work to restructure the properties'
outstanding debt. The five resorts and their affiliates--30 in
total--listed assets of $2.2 billion and debts of $1.9 billion in
court papers.
Already, as part of the foreclosure proceedings, the new
ownership group eliminated $600 million in debt and $200 million of
preferred equity, court papers said.
Given the short window between the foreclosure and the
bankruptcy proceeding, the resorts' ownership was unable to line up
financing, court papers said.
So as a stop-gap measure, Paulson is offering the properties a
$30 million bankruptcy loan to ensure continuity of operations.
That Paulson loan would sit junior to the entity's mortgage
lenders.
The resorts' largest secured lenders are mortgage holders owed
$1 billion and represented by Midland Loan Services Inc. The
resorts also owe some $525 million to several mezzanine
lenders.
The largest unsecured creditors include Hilton Hotels Corp.,
owed $13.4 million; Miller Buckfire, owed $8.0 million; and
Marriott International Inc. (MAR), owed $7.5 million, court papers
said.
Each of the resorts is managed by a third party, such as Hilton
or Marriott, which takes care of everything from hotel operations
to spa services to greens maintenance. Revenue that the operators
collect then flows up to the resorts' owners.
In 2009, the resorts generated $433 million in revenue, a 26%
decline from 2007, the year they were acquired by the Morgan
Stanley fund.
The resorts employ 3,800 workers and collectively boast 14
separate golf courses, more than 35 food and beverage outlets and
some 432,000 square feet of meeting space.
The case has been assigned to Judge Sean Lane. Law firm Kirkland
& Ellis LLP is representing the company. The case number is
11-10372.
The CNL Hotels & Resorts group was formerly a much larger
hotel operator, but 51 non-resort properties were sold to an
Ashford Hospitality Trust Inc. (AHT) affiliate for $2.4 billion in
April 2007. The Morgan Stanley fund only held the remaining eight
resorts.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection.)
-By Eric Morath, Dow Jones Daily Bankruptcy Review;
202-862-9279; eric.morath@dowjones.com