Apollo Investment's Innkeepers USA Trust Files for Bankruptcy in New York

Innkeepers USA Trust, a hotel investment company owned by a vehicle managed by an affiliate of Leon Black’s Apollo Investment Corp., filed for bankruptcy protection after room revenue fell and debt payments rose.

The Palm Beach, Florida-based company with a stake in 72 U.S. hotels owes more than $1 billion, according to Chapter 11 documents filed today in U.S. Bankruptcy Court in Manhattan. A prearranged plan supported by franchisor Marriott International Inc. will let Innkeeper’s retain its properties as it reorganizes, Innkeeper’s Chief Financial Officer Dennis Craven said.

“Although the Debtors’ business model is sound, their operating losses from decreased room revenue, significant liquidity constraints, and considerable funded debt burden,” drove the company to bankruptcy, Craven said in court documents.

Craven attributed the financial squeeze on the company to cutbacks in business and consumer travel amid the economic slowdown, exacerbated by higher fuel prices and an oversupply of new hotels.

Marriott, the franchisor of 44 Inkeepers hotels, has agreed to forbear on any claims to the properties. In exchange for Innkeepers improving 23 of the Marriott-branded hotels, Marriott will maintain the branding.

New Loans

The deal with Marriot was needed to negotiate new loans to fund operations and also helps the company avoid costs that would follow from any rebranding, Craven said.

Innkeepers has a $50.7 million loan from Five Mile Capital Partners LLC to fund operations in bankruptcy. A $17 million loan from Lehman will be used to improve those properties.

It intends to file a reorganization plan within 45 days, and is seeking approval of its so-called debtor-in-possession loans.

Innkeepers, which has stakes in hotels under the Residence Inn, Hampton Inn and Hyatt Summerfield names, was led from its inception in 1994 by Jeffrey Fisher. Apollo Investment Corp., based in New York, bought the company for $1.5 billion in June 2007.

The company must take measures to “maintain sufficient financial resources,” Innkeepers said in an April 13 statement after it failed to make some monthly interest payments on debt. The company hired advisers to evaluate options, including a balance-sheet restructuring, according to the statement.

Apollo Investment, which is managed by an affiliate of New York private-equity firm Apollo Global Management LLC, is a fund, or so-called business development corporation, that invests mainly in debt securities rather than buyouts.

Fair Value

Business development corporations are required to carry their assets at fair value. Apollo Investment was holding its $101 million in preferred equity in Innkeepers, the fund’s biggest investment by cost, at $5.3 million as of Dec. 31, according to a filing with the Securities and Exchange Commission.

Innkeepers joins Extended Stay Hotels Inc., in bankruptcy after its June 2009 filing. The midpriced chain, with more than 680 properties in 44 states, blamed its bankruptcy on decreased revenue and high debt costs.

Extended Stay, the largest bankruptcy by a U.S. hotel owner, won approval last month to sell its assets to Centerbridge Partners LP, Paulson & Co. and the Blackstone Group LP in a $3.9 billion deal.

Debt Reduction Deal

Hilton Worldwide, the hotel chain owned by Blackstone, completed a deal in April to reduce debt by almost $4 billion. Blackstone, the world’s largest private-equity firm, bought Hilton in 2007 for $20 billion near the top of the real estate market.

Linens ‘n Things Inc., formerly the second-largest home- goods chain, filed for bankruptcy in 2008 following a $1.3 billion buyout in 2006 by Apollo Global Management, the private equity firm that manages Apollo Investment Corp. through an affiliate.

Innkeepers’ filing listed 92 affiliates.

An organizational chart for the company noted that 100 percent owner Apollo Investment and four units, including KPA Raleigh LLC, are “non-debtor affiliates” of the units in bankruptcy.

Secured Loan

The companies have incurred about $1.29 billion of secured debt. The largest secured loan is a securitized mortgage loan with Lehman ALI Inc. as the original lender with a face amount of $825 million, court papers show.

Innkeepers seeks approval of a “plan support agreement” that will give Lehman ALI all the stock in its reorganized company to satisfy Lehman’s $238 million secured claim, according to court documents.

The Lehman Brothers Holdings Inc. unit lent the Apollo vehicle $1.2 billion to finance the buyout of Innkeepers in 2007 as part of a quest for growth as a lender, according to a report by bankruptcy examiner Anton Valukas. Another leveraged deal that has since foundered, Blackstone’s purchase of Hilton, got $1.5 billion from Lehman in 2007, Valukas said.

Merrill Lynch & Co. was a secured lender to three of Innkeepers’ affiliates, including properties in Washington and San Antonio, according to the filing. Bankrupt Capmark Financial Group Inc. was also a secured lender.

“Our company is entering into this last phase of its ongoing restructuring process in order to return to a position of financial and operational strength,” Marc Beilinson, the company’s chief restructuring officer, said in a statement.

Innkeepers’ advisers on the bankruptcy include law firm Kirkland & Ellis LLP, investment bank Moelis & Co. and restructuring firm AP Services LLC, the company said in the filing.

The case is In re Innkeepers USA Limited Partnership, 10- 13794, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net.

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