Trump Rolls the Dice with His Creditors

He's betting that they'll rework his debt to avoid a default

You'd think Donald Trump would have learned his lesson. In the early 1990s, the gambling and real estate czar nearly lost his empire after an acquisitions binge left his three New Jersey casinos in bankruptcy. After negotiating with creditors, he began to climb back, winning enough confidence from investors so that by 1995 he could sell $130 million of stock in his Trump Plaza casino to the public. But then Trump got greedy again. Over the next year, his public company borrowed heavily to pick up his two privately held casinos at what many industry watchers considered rich prices. "I was offered a lot of money, and I took it," Trump says today. "You can quote me on that."

That borrowing has come back to haunt him. On Nov. 1, Trump says he deliberately missed two interest payments totaling $90 million on Trump Hotels & Casino Resorts' $1.8 billion debt. The company has seven bond issues with interest rates as high as 15.5%. Even though it has $105 million in cash and over $1 billion in annual revenues, according to Trump Hotels' (DJT ) most recent quarterly report, Trump is not paying. Instead, he is asking creditors to cut interest rates and extend maturities from as little as 2 years to 12. "With the right debt structure, this is a terrific company that will be poised for growth," says Trump.

LOST BUSINESS. Trump isn't the only casino operator with a weak hand. Many are struggling with a downturn in business, worsened by the terrorist attacks. Atlantic City casino revenues fell 6.5% in September. UBS Warburg analyst Robin M. Farley predicts that the gambling center could suffer its first revenue decline in 23 years. Making the situation worse, New York Governor George E. Pataki signed a law on Oct. 31 that allows casino gambling on Indian reservations in New York.

Trump, however, is the only one betting his creditors need him more than he needs them. If he's wrong, creditors could force his company into bankruptcy after a 30-day grace period ending on Nov. 30. Trump says he believes he can strike a deal and avoid bankruptcy court. So far, creditors aren't budging. "He will default," says one bondholder, who asked not to be named. "It's just a question of when he wants to face the music."

Even before September 11, Trump Hotels was struggling to keep up with better-financed rivals such as Harrah's Entertainment Inc. and Park Place Entertainment Corp. They were plowing millions of dollars into improvements such as fancy new slot machines. Meanwhile, Trump Hotels had trouble paying $165 million in interest out of only $207 million in pretax earnings in the first nine months of 2001.

Trump named a new chief executive this year to cut costs so that he could afford to give his franchise a face-lift. Mark A. Brown, a longtime Trump casino manager, centralized hotel operations, food and beverage services, and casino marketing at Trump's three Atlantic City properties. He still cannot afford to pay for some basics, though. "I've got 700 slot machines at the Taj that don't have stools," Brown says. "Slots without stools do $100 a day, with stools they do $300."

Despite his troubles, analysts and investors say, it's unlikely that Trump will lose control of his company. For one thing, vulture investors may be unwilling to go through the red tape involved in obtaining a license to run a casino in New Jersey. There's also a risk that an unwelcome investor could lose the casino brand name: Bondholders agreed that Trump can yank his moniker from the buildings if his ownership stake in the company sinks below 15%. He presently owns 42%.

Perhaps that's why, even though his company has problems, Trump still pays himself a $1.5 million salary as chairman and $2.3 million in consulting fees. On top of that, from 1998 to 2000, he charged Trump Hotels over $4 million for letting high rollers use his condos in New York City's Trump Tower as well as his private 727 jet, according to a proxy statement filed in April. Trump concedes he may have to forgo some of that remuneration to strike a deal with bondholders. "Everything is up for discussion," he says. Everything, apparently, including how much he is willing to pay his creditors.

By Christopher Palmeri in New York

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