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Paulson Group Said to Seize CNL Hotels From Morgan Stanley Funds

Paulson & Co President John A. Paulson
Paulson & Co., the hedge fund run by John Paulson, trimmed positions in Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. in the third quarter. Photographer: Rick Maiman/Bloomberg

A lender group including Paulson & Co., the New York-based hedge fund run by John Paulson, seized control of former CNL Hotels & Resorts Inc. properties from Morgan Stanley’s real estate funds through a $600 million debt restructuring, said two people with knowledge of the deal.

The transaction involves the corporate debt used to finance Morgan Stanley’s 2007 acquisition of the hotel owner near the peak of the real estate market. Under the terms of the restructuring, $200 million of corporate debt was extinguished and $400 million was converted into equity, said the people, who asked not to be identified because the information is private.

In addition to Paulson, the lenders are Winthrop Realty Trust, Capital Trust Inc. and Morgan Stanley’s special property group, according to the people. The restructuring, completed Jan. 6, gave the group control of eight luxury resorts, one of the people said. Morgan Stanley’s real estate funds have the right to participate in future capital raising, they said.

Erica Platt, a spokeswoman for Morgan Stanley in New York, declined to comment. Armel Leslie, a Paulson spokesman, declined to comment, as did Beverly Bergman, a spokeswoman for Boston-based Winthrop. Stephen Plavin, chief executive officer of Capital Trust, didn’t respond to a call and e-mail yesterday.

Morgan Stanley has suffered losses from its real estate funds after the credit crisis pummeled property values and soured deals made at peak prices. The company bought CNL Hotels in 2007 for about $6.7 billion, adding luxury resorts including the Grand Wailea Resort Hotel & Spa in Maui; La Quinta Resort & Club and PGA West in La Quinta, California; and the Arizona Biltmore Resort & Spa in Phoenix.

Deal Financing

The financing for the acquisition included $1.5 billion of senior debt, $1 billion of mezzanine debt and $800 million of corporate debt, of which $200 million was previously converted to equity.

The other properties taken over by the lender group are the Doral Golf Resort & Spa in Miami, where PGA Tour events are played; the Ritz-Carlton Orlando and JW Marriott Orlando at the Grande Lake Resorts; the JW Marriott Desert Ridge Resort & Spa in Phoenix; and the Claremont Resort & Spa in Berkeley, California.

Morgan Stanley booked about $4.4 billion in real estate losses in 2008 and 2009. In November 2009, Morgan Stanley agreed to hand over Crescent Real Estate Equities to Barclays Capital, ending its obligation on a $2 billion loan.

One of the firm’s property funds defaulted in July 2009 on a $192.5 million mortgage on the Maui Prince Hotel in Hawaii, prompting Wells Fargo & Co. to foreclose. The fund bought the golf resort with a Hawaiian developer for $575 million in 2007.

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