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Paulson Group’s Maui Resort, PGA West File for Bankruptcy

The Grand Wailea Resort Hotel & Spa in Hawaii and four other luxury resorts filed for bankruptcy after lenders including Paulson & Co., one of the world’s biggest hedge funds, seized them from Morgan Stanley’s real estate funds.

The five resorts had $2.2 billion in assets and $1.9 billion in debt as of Nov. 30, according to Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. The lending group, which consists of Paulson, Winthrop Realty Trust and Capital Trust Inc., said it will restructure the debt and keep the hotels operating to take advantage of a predicted turnaround in the luxury market.

“We and our partners are excited to be owners of some of the world’s most desirable resorts and look forward to providing new sponsorship to maximize the value of these irreplaceable assets,” Michael Barr, a portfolio manager at New York-based Paulson, which has $36 billion of assets under management, said in a statement.

The Grand Wailea, a Waldorf Astoria resort built in 1991, covers 40 acres along Maui’s southwestern shore and has 780 guest rooms at rates starting at $369 a night, according to its website. Another property in bankruptcy, The La Quinta Resort & Club PGA West in California, sits on 45 acres and has a spa, five clubhouses and nine golf courses, according to court papers.

Foreclosure Auction

Paulson is also a co-investor with Winthrop and Capital Trust in three other properties that didn’t seek court protection. The group’s joint venture, CNL-AB LLC, acquired the eight resorts in a foreclosure auction on Jan. 28. They held junior debt that helped finance Morgan Stanley’s 2007 purchase of CNL Hotels & Resorts Inc., positioning them to foreclose when Morgan Stanley defaulted.

Morgan Stanley bought the hotels “at the peak of the market,” Dan Kamensky, a Paulson partner, said in a court filing. The properties have struggled since then because of “reduced business and consumer spending, higher fuel prices, increased unemployment, and a severe decline in business and personal travel,” he said.

Occupancy rates and average rates for rooms have fallen, with revenue per available room down 26 percent last year from 2007, according to court papers. Hotel guests also spent less in spas, restaurants and stores at the resorts, cutting net operating income to $56.4 million in 2010 from $153.2 million three years earlier.

‘Significant Recovery’

“The hospitality industry is at or near the bottom of a historic down-cycle and is poised for a significant recovery in the years ahead, especially given the extremely limited amount of new supply expected in the luxury resort market,” Kamensky said.

The Paulson group put the resorts in bankruptcy after failing to reach an agreement on a debt extension with trusts overseeing a securitized mortgage. A $1 billion mortgage backed by five of the former CNL properties, and $500 million of additional debt, matured today.

The Paulson and Winthrop group will need approval from other lenders to restructure the debt, said Harris Trifon, an analyst for Deutsche Bank Securities Inc. in New York. Midland Loan Services, a unit of Pittsburgh-based PNC Financial Services Group Inc., is the special servicer for the loans that matured today.

“Over the last few weeks, holders of the mezzanine debt have battled for control of the five properties,” Trifon wrote in a report yesterday. Secured-debt holders probably will be fully repaid and the mortgage loan likely will be extended two years once it is restructured, he said.

Mortgage Collateral

The Grand Wailea makes up 42 percent of the mortgage collateral, while La Quinta comprises 25 percent of the pool, Trifon said. Other properties included in the filing were the Doral Golf Resort & Spa in Miami; the Claremont Resort & Spa in Berkeley, California; and the Arizona Biltmore Resort & Spa in Phoenix.

Together, the five resorts have 14 golf courses, more than 35 food and beverage outlets, and more than 432,000 square feet (40,134 square meters) of meeting space, court papers show.

MSR Resort Golf Course LLC, which listed more than $1 billion in both debts and assets in its filing, seeks to be the lead case for 30 units in bankruptcy.

The three properties that didn’t file are controlled by Capital Trust. The JW Marriott Grand Lakes and Ritz-Carlton Grande Lakes, both in Orlando, Florida, and the JW Marriott Desert Ridge Resort in Phoenix don’t face maturity on their debt until May 2012.

Paulson Loans

Paulson affiliates will fund operations of the bankrupt hotels with a $30 million loan that would be junior to the mortgage liens while the lender group pursues more financing, Kamensky said. Because only a few days separated the Jan. 28 foreclosure from today’s debt maturity, the property owners didn’t have time to negotiate the usual so-called debtor-in-possession loan that funds operations in bankruptcy, he said.

The resorts filed routine first-day motions in the bankruptcy, seeking court permission to continue customer programs and pay employee wages, management fees and utilities. They also asked to use cash collateral of lenders to pay suppliers and service providers.

Programs allowing resort members to pay fees in exchange for preferred rates, spa promotions and other perks should be honored, the debtors said. They owe a total of $236.6 million under the programs, which include about 11,870 members at Wailea and about 2,300 members at La Quinta.

Management Fees

The resorts had total revenue of $465 million in 2010 and pay about $16.1 million a month in management fees and expenses, court papers show. Pyramid Hotel Group will continue to manage the eight properties, according to the lenders’ statement.

Morgan Stanley, the New York-based owner of the world’s largest brokerage, financed the CNL acquisition with $1.5 billion of senior debt, $1 billion of mezzanine debt and $800 million of corporate debt, which was previously restructured.

U.S. Bankruptcy Judge Sean H. Lane was assigned MSR’s bankruptcy case, filed by the law firm Kirkland & Ellis LLP.

The lead case is In re MSR Resort Golf Course LLC, 11-10372, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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