Blackstone and Starwood To Acquire Extended Stay

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Blackstone and Starwood To Acquire Extended Stay
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In a new special report Xtract Research discusses the impact of the anticipated acquisition by Blackstone and Starwood on Extended Stay’s bonds.

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Xtract Research experts believe that there will not be sufficient restricted payment and secured debt capacity to support the acquisition, requiring each series of bonds to be refinanced.

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Extended Stay America To Be Acquired By Blackstone and Starwood

Highlights from the report include:

Extended Stay will need enough restricted payments capacity under each series of Notes to pay the merger consideration with the proceeds of ESH debt financing. The restricted payments covenants in the 2025 and 2027 Notes are substantially similar. Due to minimal capped baskets, the main question is whether there is enough capacity under the Build Up Basket and if ESH can meet the financial test to pay such amounts.

RP capacity under the capped baskets in connection with a potential merger is limited here to a general permitted restricted payments basket up to the greater of $300mm and a 5% Incremental-Loan-to Value Ratio of ESH and its Restricted Subsidiaries. While there are investment baskets that, if available, amount to the greater of $400mm and 6% of Incremental Loan-to-Value that can be transferred to an Unrestricted Subsidiary, there is no two-step dividend exception that would allow Unrestricted Subsidiary shares to be distributed to shareholders.

To the extent that value can be shifted to Unrestricted Subsidiaries through investment baskets to raise debt financing outside of the Notes’ restricted group, Unrestricted Subsidiary debt would reduce restricted group ratio debt availability under the ratio incurrence tests.

The merger would not result in a Change of Control under the 2025 Notes, but one would arise under the 2027 Notes. Given the covenant limitations discussed above and the present redemption and trading prices for the Notes, a noteholder would not be incentivized to exercise the 101% Change of Control put right.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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