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Welcome To The Bankruptcy Inn

Tuesday, 23 Jun 2009 | 4:39 PM ET

It looks like we’ll have another bankruptcy of a former LBO in the hospitality space. The WSJ is reporting that Red Roof Inns has defaulted on $332 million of mortgage debt.

It was only last week that Extended Stay filed for bankruptcy after the crushing debt from its $8 billion LBO in the spring of 2007. Of course, it’s not just that business is bad for these companies. It is largely because they were saddled with debt loads that were many multiples of the cash flow the businesses produced that they are now going or about to go bankrupt.

Back in the spring of 2007, even with the mortgage market about to implode, banks were still willing to dole out loans like the ones Red Roof’s buyers received.

The buyers, the Global Special Situations Group of Citigroup (need I say more) and Westbridge Hospitality Fund, spent $1.3 billion to buy Red Roof from Accor. The purchase, financed almost entirely with debt, represented more than 11 years worth of Red Roof’s adjusted cash flow. Don’t you miss the good old days?

Extended Stay and Red Roof (it’s currently in “restructuring” discussions with its lenders) will not be alone in seeking protection in bankruptcy court. Despite the generous capital markets, bankers tell me there are still plenty of former LBO’s with declining businesses and too much debt to try and support from declining cash flows.

Interestingly, Red Roof’s debt, which came in the form of commercial real estate loans, was partially securitized, shining a light on yet another worrisome area for the market. While plenty of REITs have raised capital to cope with expected losses, the loans underlying many of the properties they manage are still in deep trouble as leases come up and are either not renewed or renewed at far lower rates.

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Questions? Comments? Write to faberreport@cnbc.com.