TIME: Almanac 1993/TIME Almanac 1993.iso/time/050691/0506200.000

Text File | 1992-08-28 | 9.1 KB | 189 lines

                                                                                BUSINESS, Page 46

Trump Trips Up


Bedeviled by debt, the developer divvies up his empire with his
bankers

By JANICE CASTRO -- Reported by Robert Ajemian/Boston and Thomas
McCarroll/New York, with other bureaus


    American Express never really wanted a 282-ft. yacht.
Bankers Trust isn't sure what it will do with the Grand Hyatt
in midtown Manhattan, especially in the middle of a recession,
nor is Manufacturers Hanover exactly giddy about owning the
Regency Hotel in Atlantic City. But then Citicorp is not exactly
cut out to be a retailer or an airline operator, either.

    Meet Donald Trump's bankers. Like the characters in the
fairy tale The Emperor's New Clothes, a gaggle of major
financial institutions has finally been forced to admit, after
lending Trump billions of dollars, that there's a lot less to
the emperor -- or at least his empire -- than the banks had
believed. Not quite nine months after bailing out Trump with a
rescue package that gave him $65 million in new loans and eased
credit terms on his bank debt, Trump's bankers last week stopped
the game. Already more than $3.8 billion in the hole and sliding
perilously close to a mammoth personal bankruptcy, the brash New
York developer had no choice but to accept the dismantling of
his vast holdings. Meeting round the clock at secret Manhattan
locations, Trump's lawyers and bankers by week's end had begun
to hammer out a complex series of agreements on the distribution
of some of his assets.

    While many of the details remain to be settled in coming
weeks, the broad outlines are clear -- and despite his desperate
situation, Trump, who has always prided himself on his mastery
of dealmaking, once again seems to have come up with a strong
hand. Pooh-poohing any notion that he was cornered, Trump
insisted last week that the talks were friendly. "I have a great
relationship with the banks," he said, adding airily, "The 1990s
are a decade of deleveraging. I'm doing it too."

    That's one way of describing what has befallen him. While
he will give up his beloved Trump Princess yacht, the Trump
Shuttle, the Regency, his half-interest in the Hyatt and his 27%
interest in the Alexander's store chain, he will retain the
Manhattan trophies he values most: the Plaza Hotel, Fifth
Avenue's Trump Tower and a valuable tract of undeveloped Hudson
River waterfront. He'll also keep his lavish Mar-a-Lago estate
in Palm Beach, Fla., which features a 118-room mansion and a
nine-hole golf course.

    Most important, Trump has eluded the specter of personal
bankruptcy by whittling his debt down to more manageable
proportions. The amount of debt that Trump guaranteed personally
-- several hundred million dollars -- is breathtaking even by
the standards of the '80s. In negotiations so far, the banks
have agreed to secure some of that debt with the Plaza and other
assets.

    Trump has bet his future most heavily on Atlantic City by
holding on to his three casinos there: the billion-dollar Trump
Taj Mahal, the Trump Castle and the Trump Plaza Hotel and
Casino. Considering his present straits, the move may make
sense. After all, he still must come up with millions in annual
interest payments. As he once said of the casino business, "Most
of all, I like the cash flow."

    Even with the worst behind him, Trump will be forced to
file for bankruptcy protection for the struggling Taj Mahal
casino next month. Like a growing number of corporate debtors,
though, Trump is not flying blind into bankruptcy court: he has
already negotiated most of the terms of the Taj reorganization.

    For starters, he will cede a half-interest in the casino
to owners of the $675 million in junk bonds that financed its
construction. (Their bonds are now worth about 50 cents for
every dollar they invested.) In exchange Trump will win a
substantial reduction in his annual interest payments. At the
insistence of the largest bondholder, financier Carl Icahn,
Trump must meet rigorous financial-performance targets within
the next year or turn over control of the enterprise to the
creditors. If he meets the goals and makes his interest payments
promptly, however, his ownership stake will climb back to 80%.

    It is not at all clear that Trump will be able to make
that bounce. Atlantic City was already booked beyond capacity
in one-armed bandits, roulette wheels and blackjack tables
before he opened the Taj in April 1990. Instead of drawing more
gamblers to the seedy little gambling haven 2 1/2 hours south
of New York City, the Taj has cannibalized patrons from other
Atlantic City casinos, including Trump's own.

    How did a onetime builder of low-income housing become one
of America's most dazzling success stories and nearly its most
spectacular bankrupt? Trump's financial humbling is rooted in
the speculative frenzy of the '80s. Behind every over-reaching
mover and shaker, after all, were banks and investment houses
looking for the fast hit, the big score. Trump, whose
developments were frequently completed on time and on budget in
an industry infamous for construction delays and cost overruns,
won the confidence of investors early. When the Northeastern
real estate boom took off, Trump found he had unlimited credit.
As he later remarked in his best-selling 1987 autobiography, The
Art of the Deal, "It's funny what's happened: bankers now come
to me, to ask if I might be interested in borrowing their
money."

    Unlike much of what Trump says, that statement wasn't just
hype. For 10 years, as the brassy developer rattled the china
from Manhattan to Palm Beach with his unbridled hubris and
glitzy style, squadrons of bankers indeed lined up to finance
his titanic ambitions. Bigger, bolder and flashier were his
trademarks -- from the imperially appointed Trump Princess, to
the outrageous getups on the Trump Tower doormen, to his plans
to build the world's tallest building in an abandoned railyard
-- and the bankers lapped it up. Not many people can borrow $100
million over the phone, but he did. Bankers Trust gave the
Donald that much without even asking for collateral. No wonder
he boasted that he loved risks: others were so willing to take
them for him.

    While millions of casual observers were dazzled by the
glitter of his empire, few understood that Trump's fortune was
built on a growing mountain of debt. The moneymen who did
understand seemed not to care. "He mesmerized the bankers,"
recalls a top Trump employee. "They fell for the luster and got
greedy."

    Who else boasted that he had done more for the city of New
York than anyone else (thus dismissing some pretty worthy
company)? He claimed that whenever Queen Elizabeth visited these
shores, Buckingham Palace asked to borrow his helicopter --
emblazoned, of course, with his name -- because it was the best
in the country. Asked to list a credit reference once, he put
down "John Cardinal O'Connor."

    Financial wizards usually credited with ample common sense
bought it all. Whatever Donald wanted, Donald got. Citibank
loaned him $1.1 billion; Bank of America some $400 million;
Bankers Trust about $164 million, much of it undersecured. Says
a knowledgeable source close to Trump's bankers: "They ought to
be shot. They didn't ask questions."

    Like most ambitious developers, Trump often faced bigger
loan payments than he could hope to come up with. But leverage
is one thing, recklessness something else. As the loans flooded
in, Trump the builder became Trump the financial playboy. Says a
former top aide: "He overpaid for almost everything -- the
Shuttle, the Taj, the Castle. But I'll say this for him, he
fleeced the banks. He got them into a terrible position on
lender liability."

    With the economy in the doldrums and real estate prices
depressed, Trump has been scraping desperately for more than a
year to meet his interest payments. His bankers bailed him out
last summer, realizing with a chill how badly they had been
taken and how thoroughly mired they were in the mess. He was
carrying a $300 million mortgage on the Plaza, $120 million on
the Grand Hyatt, $75 million on Trump Tower. In December his
father Fred, a builder in Queens, N.Y., had to lend him $3.5
million to pay his bills. Appropriately enough, Fred did so by
purchasing that amount in gambling chips from one of his son's
casinos. Even as Trump's fortunes continued to decline, though,
the bankers tried to look the other way, loath to tip him into
bankruptcy by cracking down.

    Now they are facing facts. What they may not have
anticipated is how expensive it will be to get out from under
Trump's operations. Brinkmanship is the stuff that gamblers are
made of, after all, and casino magnate Trump cut his teeth at
the edge-of-the-cliff school of negotiations. Don't count him
out yet. While he will own less at the end of these
negotiations, he will also owe less, and the effect on his net
worth remains to be seen. After filling an inside straight in
the first round of talks, he's already halfway out of the hole.