Bankruptcies keep coming as Wall Street waits for rebound

Extended Stay Hotels and Six Flags Inc. (SIXF) today reminded investors not to count their chickens before they are hatched.

The operator of extended stay hotels in 44 states and the owner of 20 theme parks, including New Jersey's Great Adventure, both filed for Chapter 11 bankruptcy protection. The problems at Extended Stay and Six Flags predate the current economic crisis but certainly were exacerbated by it.

In 2007, closely held Lightstone Group,which is not known for its expertise in the hotels business, bought Extended Stay Hotels from Blackstone Group LP (BX). New Jersey-based Lightstone Group funded the $8 billion acquisition with $7 billion of debt. The debt load is crushing Extended Stay, according to court papers cited by Bloomberg News.

The company, which provides temporary housing for workers on assignment, also saw demand for its services shrink as the economy slowed down. Late last year, Extended Stay had hoped to avoid bankruptcy by turning itself over to its lenders.

"Extended Stay is not likely to file for bankruptcy protection because of provisions common in commercial mortgage-backed securities deals that would expose more properties of its founder, David Lichtenstein, the paper said," Reuters reported at the time, citing the Wall Street Journal.

It is not clear what changed.

Businesses are still facing difficulties in getting credit, particularly if their balance sheets are less than pristine. The credit crunch is one of the reasons why some experts are predicting that unemployment will top 10 percent by Labor Day. That makes struggling companies such as Six Flags struggle even harder.

In 2005, Washington Redskins owner Daniel Snyder won a highly publicized proxy battle to gain control of the theme park operator. Now, under the current bankruptcy plan, Snyder along with other common shareholders will be wiped out. Snyder, who also is Six Flags chairman, has failed to turn the company around.

"The 48-year-old company hasn't posted an annual profit since 1998 and had losses of $558.8 million in the two years after Snyder became chairman," Bloomberg News said.

At the end of last year, Extended Stay had $7.1 billion in assets and $7.6 billion in liabilities. It has about 10,000 workers. Six Flags said its prearranged bankruptcy will slash its debt by about $1.8 billion and cut more than $300 million worth of preferred stock obligations. It has no plans to sell parks or cut workers to reduce its debt, according to Reuters.

But given their past credit problems, both Extended Stay and Six Flags are going to face bigger challenges in restoring their fiscal health than they should have otherwise.
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