The Donald's Trump Card
He just got a better deal than expected. And if real estate revives...
by Larry Light and Joseph Weber
http://www.bloomberg.com/news/articles/1992-03-22/the-donalds-trump-card

Donald Trump. The name is a punchline now, associated with the worst of 1980s extravagance, egomania, and greed. Once, the world marveled at the scope and mastery of Trump's megabuck deals. Today, he's widely regarded as a washed-up real estate mogul who has been stripped of his once lustrous possessions.
But watch Trump move through a crowd at the Taj Mahal casino he built. Accompanied by girlfriend Marla Maples, The Donald struts across the gaming floor like a god, not a has-been. People touch him for good luck. One gambler begs him to autograph her slot-machine-playing hand.
For Trump, the old-time swagger isn't empty posturing. He may be down, but he's far from out -- and he could reemerge as a major player if the New York real estate market revives. On Mar. 13, he is expected to conclude the final segments of a massive debt restructuring, which will give lenders the Trump Shuttle airline and hand over 49% of the Plaza Hotel in exchange for a lower mortgage-interest rate.
Yet unlike other ailing developers, such as fellow New Yorker Peter S. Kalikow, he has avoided personal bankruptcy. He has been able to hang on to a major portion of his assets -- far more than most people thought possible. These include the core of his real estate and casino properties. Although he gave up a dozen assets (table, pages 76-77), he retains four major holdings, including the Trump Tower luxury high-rise. Plus, he kept half-ownership of three others, notably Manhattan's Plaza Hotel and the Taj.
Trump's capacious ego also remains largely intact. With typical bravado, he says: "You'll never see me sitting in the corner sucking my thumb. The name Trump will be hotter than ever."
Much of the credit for his survival goes to savvy negotiations with lenders by his first-rate lieutenants -- particularly his chief financial officer, Stephen F. Bollenbach. Another key factor was the realization by lenders that Trump and many of his key holdings were worth more alive than dead. Tossing them into bankruptcy court would have sharply diminished their value.
In return for the assets Trump is ceding to them, the lenders are reducing his empire's overall debt burden by a third, to $2.5 billion. That should enable cash flow from his operations to cover his interest tab. The lenders also are lowering his personal debt -- the portion guaranteed only by his signature -- from $885 million to $115 million.
That doesn't mean a return to the flush days of the 1980s for Trump. In the first comprehensive analysis of his holdings since his 1990 near-collapse, BUSINESS WEEK estimates that he has a negative net worth of almost $1.4 billion (table). Trump disagrees and claims his net worth is a positive $1.5 billion, but BW's investigation indicates that his valuation of his holdings is substantially inflated.
Trump is also on a very short leash from lenders. They are maintaining strict controls on the cash his operations produce. He faces several fierce debt payments over the next few years, and defaults would permit lenders to seize nearly all of his remaining properties.
BUYING TIME. Even so, he has wiggled free of enough liabilities and hung on to enough properties to position himself for a possible turnaround. He has bought time, and time is on his side. Trump is only 45 years old. And most observers predict a slow but steady rebound in New York's stinko real estate market.
Just having a shot at a turnaround seemed all but impossible for Trump when lenders in effect took control of his kingdom in the summer of 1990. Like other world-class deadbeats with vast holdings, he made full use of a perverse advantage: Lenders didn't dare plunge his wholly owned Trump Organization, or significant pieces of it, into a prolonged bankruptcy struggle. That deprived them of a potent weapon. "They would have had years and years of war on their hands," says Trump.
Values usually diminish drastically when assets are tied up in bankruptcy court -- and Trump's were especially vulnerable. With Trump in a drawn-out Chapter 11, the New Jersey Casino Control Commission would likely have yanked his Atlantic City (N. J.) casinos' operating licenses, rendering them near-worthless. Much the same held true for the Trump Shuttle: If it stopped flying while the lawyers wrangled, the franchise would die as passengers fled to more reliable carriers. Lenders also feared that selling off the planes in a recession would fetch a pittance.
In Atlantic City, Trump had another advantage. While it may be true in few other places, his name remains a magic marketing tool there. And that was the key factor in keeping the three casinos under the Trump Organization umbrella. Mortifying publicity about his marriage, love life, and material excesses only added to the raffish appeal that fascinates the gambling crowd. Prudential Insurance Co., a sizable holder of Taj bonds, initially wanted Trump's name and equity removed from the Taj. The Pru and other Trump-haters relented after a plea from their financial adviser, Wilbur L. Ross Jr., a senior managing director of Rothschild Inc. "The Trump name added value to the casino," says Ross.
OUTSIDE HELP. Still, life for Trump could have been much bleaker were it not for Bollenbach. When lenders demanded that he get a chief financial officer to straighten out his haphazard financial operations, Trump hired Bollenbach, the CFO for Holiday Corp., whom he had spotted on a magazine cover. Bollenbach won such acclaim for his performance with Trump that the financially troubled Marriott Corp. hotel chain has tapped him as its CFO. Trump badly needs a new Bollenbach, who says he's leaving because "the problems here are fixed."
Bollenbach virtually took over operational control of Trump's empire. In talks with lenders, he was quite willing to play hardball. "Trump and Bollenbach threatened to ground the shuttle if they didn't get 100% personal-debt forgiveness for it," one banker recalls. The banks refused but ended by compromising. Trump's personal shuttle debt was pared to $35 million from $135 million. While Bollenbach handled the details of the debt dickering -- something the big-picture-oriented Trump is weak on -- Trump seemed mainly concerned with image. Amid the haggling over the shuttle, the lone detail Trump is said to have focused on was whether his name would stay on the planes' sides. Trump brands that "a false story." His name will soon be replaced by that of USAir Group Inc., which will run the shuttle for the banks with an option to buy.
Privately admitting they were suckers for Trump's ebullient prognostications in the 1980s, the lenders were anxious not to give Trump too many breaks. In addition to the shuttle, they made off with his Regency Hotel in Atlantic City, his Trump Princess yacht, his Palm Beach condo project, his 28% share of Alexander's Inc. department stores, and two of his mid-Manhattan apartment complexes. Trump's long-standing half-ownership of New York's Grand Hyatt Hotel, his first big real estate score, is scheduled to go to the banks after snags are worked out with the Pritzker family of Chicago, holders of the other 50%.
Trump was also forced to cut his casino creditors into his action in a major way. He reorganized the Taj last year under a prepackaged bankruptcy -- a very quick, debtor-led excursion through court that eases debt load but doesn't disrupt operations. The other two gambling emporiums filed prepacks on Mar. 9. Trump has ceded 50% of the Taj, though he could increase his stake to up to 80% if it produces enough cash to pay off the $752 million bond debt. He aims to do a carbon-copy deal for Trump's Castle, which has $287 million in bond debt, not counting bank borrowings. Trump Plaza, with $225 million in bond debt, is in the best financial shape of the trio, which has relieved him of having to relinquish any voting equity. Instead, he will issue $75 million in preferred stock to bondholders.
Trump was also able to hold on to his Florida estate, Trump Tower in midtown Manhattan, a half-interest in the nearby Plaza Hotel, and an undeveloped 71-acre tract called the Penn Yards that runs along the Hudson River on Manhattan's West Side.
ENVIRONMENTAL HEADACHE? Nevertheless, some big perils loom that could sink Trump anyway. On June 30, 1993, two mortgages come due: $140 million for Trump Tower and $200 million for the Penn Yards. Will the banking syndicates holding the loans, both led by Chase Manhattan Bank, roll them over? If not, Trump has no obvious alternatives, since few banks these days want to make real estate loans. Chase says it's too early to tell what will happen. Trump says Chase will renew the loans. He has a point: Trump Tower, renowned for its peach-marble atrium and 80-foot waterfall, is profitable and current on mortgage payments, which might make foreclosure difficult in court. Judges aren't eager to allow foreclosure on a good property simply because the lender won't renew. And Chase may be leery of grabbing the Penn Yards, a huge tract with possible environmental problems whose planned development lies far off. Says one banker: "Chase doesn't need that on its hands."
Trump faces deadlines on his remaining personal debt, too. This $115 million, which is interest-free, is due to the banks in mid-1995. Also on that date, he must pony up an additional $50 million that the banks extended him in 1990 to keep afloat.
Lenders say that under the terms of their agreement, they won't allow Trump to divert any cash from operations or sales of assets to new ventures or his personal use. The money must go to debt service. The only income Trump receives free and clear is $3.4 million in management fees to run the casinos -- chump change by Trump standards. There's one other potential source of cash: the right to sell 10 apartments in Trump Tower for a maximum take of $10 million, with any excess going to the banks. Manhattan's soft real estate market, however, makes such near-term windfalls iffy. Fortunately for Trump, his lavish personal expenses are paid for out of Trump Organization revenue, justified as business costs. The banks, which once scrutinized his personal spending, have given that up now that the restructuring is mostly done.
Given all this, how can Trump get back in the game? He will need access to something that's scarce lately even for developers with stellar credit ratings: fresh capital. A partial answer is to make money the old-fashioned way -- by inheriting it. Fred Trump, Donald's 86-year-old father, is said to have a net worth of $200 million. Fred helped launch his son in the 1970s with the Hyatt deal, and the two remain on good terms. While Fred's will isn't public, and neither Trump will comment on it, Donald could receive as much as $50 million, maybe more, when Fred dies. Other possible heirs include a brother and two sisters.
What Trump needs most is a resurgent real estate market. That possibility seems remote today, but historically, it's quite reasonable. Property is cyclical. Very little commercial construction is taking place nowadays, so by the mid-1990s, the glut of New York office and retail space should have abated.
This would allow room for every real estate operator's favorite ploy: more debt restructuring. Trump contends that rising property values will eventually make lenders eager to revamp the loans once again -- in his favor -- so they can get in on new deals. "Banks made lots of money on Donald Trump," says Richard Roth Jr., chairman of Emery Roth & Sons, an architectural firm. "When the market's back, they'll remember that."
A key Trump aide predicts that Trump expects to pay off the $115 million of his personal debt due in 1995 at a discount. If real estate values do come back dramatically, bankers may be receptive. Because he need not pay interest on the personal debt, they put more importance on the debt collateralized by his remaining property. Says one: "I wouldn't be surprised to see him eventually buy out our claim for 30~ cents on the dollar."
To Trump, debt restrictions are nuisances he cares about only if he has to. Look at what happened to the $5.4 million yearly personal-spending cap the banks imposed on Trump in 1990. He cavalierly brushed that aside in awarding his wife, Ivana, a $14 million divorce settlement. "The banks weren't happy," shrugs Trump. "I wanted my kids taken care of." The banks concede that they let him get away with this as they were qtarting more important talks over the fate of the entire Trump domain.
Since Trump's remaining holdings are top-notch, a market rebound would benefit them early. The Plaza is one of the world's best-known hotels, and he has poured vast sums into upgrading it. If the market turns and financing becomes available, he wants to convert half of its 804 rooms to condominiums. And if bank restrictions are loosened and all his profit doesn't go toward debt payment, he would split the take with Citicorp and the other banks holding Plaza equity.
Trump's profit potential could be more dramatic on the Penn Yards, the largest piece of undeveloped land in Manhattan. Last year, he won over most community activists and politicians by scaling down his once grandiose development plan, an Oz-like vision called Trump City that threatened to block neighbors' sunlight. Now, he's pressing to get the city to rezone the site for 5,700 apartments.
BEST CASE. After some false starts, Trump has enhanced his most valuable holdings, the three casinos, through beefed-up operating performance. In 1991's fourth quarter, operating profit at the Taj, his newest and gaudiest casino, soared 70%, to $22 million. Trump's Castle earned $4.6 million, vs. a $600,000 loss in 1990's final quarter. Trump Plaza was up sevenfold, to $7.8 million.
Most analysts agree that economic recovery should bring solid gains for Trump's casinos this year. Although the overall outlook for Atlantic City gambling is clouded by overcapacity, Trump holds 25% of the 12-casino market. The goal is to make his gambling halls look good enough for Trump to sell equity to the public. Or he might sell one or more of the casinos outright, despite his claims that he won't. The most favorable scenario advanced by Trump-watchers has him selling his 100%-owned Trump Plaza casino, an elegant house favored by high-rollers. If Trump's revenue-growth projections are accurate, the casino might fetch $385 million by 1995. Such a sale would pay mff its $225 million bond debt, its $34 million bank debt, and its $75 million in preferred stock -- leaving him a tidy $51 million profit.
Fanciful? Perhaps not. Trump's gaming parlors are now the best-run in Atlantic City. They had been at a low ebb since the 1989 deaths of three top managers in a helicopter crash. Trump tried to run the places himself, but the recession kept gamblers away, and his irascible style provoked other seasoned executives to quit. Finally, last year, Trump got it right by naming his longtime casino lawyer, Nicholas L. Ribis, as Atlantic City chief. Skilled at handling the harsh Trump temper, Ribis has overhauled the casinos' operations, slicing costs. "I win some arguments," says Ribis, "and Donald wins some, too."
Say what you will about Trump, his no-holds-barred fighting spirit remains. Consider the tussle over subdividing his 17-acre Palm Beach (Fla.) estate, Mar-a-Lago, to raise money. An unloved arriviste in the tony resort, he has faced intense local opposition. If thwarted, he has threatened to sell the property to the Moonies, though they say they don't want it. The plan comes before a skeptical town council on Apr. 16, and the ever optimistic Trump forecasts victory. "They'll do a complete fold-up," says the man who vows never to do one himself. One would hesitate before betting against him.