Trump and His Debts: A Narrow Escape


January 4, 2016

On Labor Day weekend in 1990, as Donald Trump faced the worst crisis of his career, he and Wilbur Ross Jr. headed to Atlantic City, N.J., for talks at Mr. Trump’s opulent Taj Mahal casino, which had just opened but was already on the verge of missing a bond payment.

January 4, 2016

On Labor Day weekend in 1990, as Donald Trump faced the worst crisis of his career, he and Wilbur Ross Jr. headed to Atlantic City, N.J., for talks at Mr. Trump’s opulent Taj Mahal casino, which had just opened but was already on the verge of missing a bond payment.

Mr. Ross, as an expert on distressed assets, represented bondholders. Mr. Trump brought him to the seaside town for talks, in a helicopter bearing the name “Trump” in giant red letters.

“The bondholders were obviously quite angry,” Mr. Ross says. “Their initial inclination was to throw the rascal out.”

The chopper landed on a helipad near the boardwalk. Instantly, people swarmed around a waiting car, thinking Mr. Trump was in it. “They were shoving video cameras at it…It was amazing the adulation he got from the crowd,” Mr. Ross recalls.

“It changed my whole opinion. That memory stuck with me and got me to the conclusion that the Taj Mahal stripped of Trump the individual would likely be a lot less successful than the Trump Taj Mahal with Donald.”

In 1990, Mr. Trump, though known publicly as financially savvy and very rich, was in deep financial trouble. He and his companies owed $3.4 billion and couldn’t make the payments. That posed the risk of lenders seizing his hotels, casinos and other assets.

Worse, $830 million of the debt carried his personal guarantee. Creditors, if they wanted, could force him into personal bankruptcy.

He survived. Today he is a billionaire, who cites his wealth and success as a reason that, as president, he could make America “great again.” Mr. Trump has no government record to weigh. One way to gauge the kind of president he might be is to examine his business career, and particularly how he dealt with its biggest crisis.

He began by bringing creditors around to the realization Mr. Ross had: The developer was worth more to them financially alive than dead. A global group holding $2.1 billion of debt, mostly on New York properties, agreed in 1990 to a complex plan that gave Mr. Trump years to work his way through.

He also squeezed money out of his casino empire and shifted it to struggling properties. He ran all three of his casinos through bankruptcy court.

He continued drawing cash even then. In 1992, when Trump Castle casino was in chapter 11, it paid Mr. Trump $1.5 million for guiding it through the process. In all, he took more than $160 million out of Atlantic City between 1990 and 1996 through fees and other payouts, according to a Wall Street Journal review of a wide array of documents from New Jersey gambling regulators and the Securities and Exchange Commission.

“For many years I took money out of Atlantic City,” Mr. Trump said in an interview. “The money I made in Atlantic City fueled a lot of projects.”

Those who entrusted him with their funds or labor, including employees, vendors and bond and stockholders, often fared less well. Taj Mahal contractors were told to take less than they were owed. Workers lost their jobs.

Between 1990 and 1996, Mr. Trump persuaded creditors to revamp his original restructuring agreement again and again. According to a person familiar with his dealings, he intentionally made them as complicated as possible to keep others from fully understanding what he was doing.

His struggle involved fights and litigation. He sued partners and verbally attacked people who crossed him, including securities analysts, costing one his job. Colleagues, friends and business partners interviewed described a man whose combativeness could verge on the vindictive. In a GOP debate, when candidates were asked about their weaknesses, Mr. Trump said, “I never forgive.”

Mr. Trump says his tough tactics have always been justified by disloyalty or provocation. “What am I supposed to do, roll over?” he asks. “The harder I’ve fought, the more money I’ve made.”

Mr. Trump got his start in the mid-1970s when New York City’s fiscal crisis made commercial real estate cheap. He began with a $1 million loan from his father, Fred Trump, a builder of middle-class housing in Queens and Brooklyn. His early deals included buying a 75-acre site on Manhattan’s West Side and helping convert an old hotel near Grand Central Terminal into the Grand Hyatt.

When New Jersey legalized gambling in Atlantic City, Mr. Trump bought land there with a bank loan and $7.5 million from his father, according to a report by the state attorney general. After gaining control of two casinos through deals that loaded them with debt, he turned in 1987 to the Taj Mahal, a megaproject being built by publicly traded Resorts International Inc.

Mr. Trump bought a class of shares that gave him just a slice of Resorts’ equity, but voting control. From that perch, he pushed through a service contract that would have the company pay him $108 million over five years. He told casino regulators the company could raise the cash needed to finish its casino only by assuring lenders Mr. Trump would remain involved, which this contract did.

Upon news that funding was uncertain, Resorts’ stock plunged. Mr. Trump then told investors the only way to finish the Taj Mahal was for him to buy Resorts at just above its reduced share price. Construction lenders, he said, were put off in part by the high cost of his service contract.

Mr. Trump then cut a deal with another bidder for Resorts, accepted $60 million to terminate his service contract, and in 1988 ended up with the half-finished Taj Mahal casino. It issued $675 million of bonds to complete construction.

By the late 1980s, Mr. Trump’s holdings included three casinos, the Plaza hotel in New York, the Trump Tower nearby and the Trump Shuttle airline. When a recession struck in 1990, he was buried in debt. “I watched my empire collapsing,” he later wrote.

His first salvage move was to reach a debt restructuring agreement with a large group of lenders. It nearly fell through when a creditor abroad balked. Summoned to Citibank offices late one rainy night to telephone the holdout, Mr. Trump arrived “so down he was almost crying,” says banker Robert McSween.

But on the phone, his charisma kicked in. “He went to the pinnacle of total confidence in 10 minutes. He’s telling them it’s going to be great, we’re going to make it happen,” Mr. McSween recalls. After persuading the holdout, Mr. Trump hung up and jokingly asked the bankers, “How’d I do?”

The agreement gave Mr. Trump five years to work out the debt. The banks granted him a $65 million line of credit to keep things going but limited him to $450,000 a month for personal and household expenses.

A signing was set up in a room full of lawyers. “It was a brutal time. You’re put on an allowance, and you don’t control your own life anymore,” says a person who attended. “He was not a happy camper.”

Mr. Trump signed papers agreeing to a plan to sell off prized properties such as the Plaza hotel but giving him a new financial lease on life. As he did so, says Alan Pomerantz, one of the lawyers, Mr. Trump handed out copies of his memoir, “The Art of the Deal.”

The restructuring didn’t cover the newly opened Taj Mahal. As it struggled with a fall 1990 bond payment, contractors were told to accept at least a 30% cut in what they were owed, or risk losing more, says a person familiar with the matter.

James McCullough, a distributor to contractors, says he lost thousands of dollars, as companies “were telling me they weren’t getting paid and they couldn’t pay my bill.”

Mr. Trump says those who lost out might never have had jobs or contracts in the first place if it weren’t for him. “They made plenty of money on me,” he says.

In July 1991, a little over a year old, the Taj Mahal filed for bankruptcy.

When another Trump casino, the Castle, was financially strapped, Mr. Trump’s father bought $3.5 million of chips there and didn’t use them. State regulators deemed this illegal aid to a casino.

Mr. Trump denies it was illegal and says the chip method of aid was used because it put his late father ahead of other lenders. He says his father eventually was repaid.

The Taj Mahal emerged from bankruptcy later in 1991, but his other two casinos, the Castle and Trump Plaza, both filed in 1992.

That year, Mr. Trump unloaded more debt as lenders took over his Trump Shuttle and a stake he had in retailer Alexander’s. By now, his Trump Princess yacht and Boeing 727 were also gone.

In New York, he got into a spat over the Grand Hyatt hotel, of which he owned half. The co-owners, the Pritzker family of Chicago, pushed for a costly upgrade. Mr. Trump saw this move, requiring new cash from each co-owner, as an effort to take advantage of him at his time of weakness. He filed a civil racketeering suit against his partners, alleging they were trying to force him out, which they denied.

“I called Jay [Pritzker] and said, ‘You’re a bad guy, Jay. I’m going to kick your ass,’ ” Mr. Trump says today. Mr. Pritzker is deceased.

All three casinos were out of bankruptcy by 1993. In each case, Mr. Trump saved 50% of his equity. Creditors, valuing his knowledge of the business—and not having casino licenses themselves—wanted to keep him involved.

He resumed borrowing. The Trump Plaza issued $330 million of notes. Mr. Trump used $35 million to buy back the part of the casino he had lost in bankruptcy, and $52 million to pay down debt in New York.

He says the borrowing was the bankers’ idea, and he initially resisted. But he was losing faith in Atlantic City, because of city decisions such as planning a convention center away from the ocean instead of on the boardwalk. So he decided to load the casinos with debt and take money out to put elsewhere, he says. “I said: ‘OK. Now it’s junk-bond time. It’s been a great experience, but I’m out,’ ” Mr. Trump says.

In New York, he still was personally liable for millions of dollars in debt. Part was on his West Side Manhattan site. If it had to be sold, he wanted a buyer who would leave him some equity and a management role.

When buyers appeared who wouldn’t have done so, says Abraham Wallach, a Trump aide at the time, Mr. Wallach—on his boss’s instructions—misled them. “I exaggerated the number of people who had lawsuits” about the project and “told them income from the project was less than it could be,” Mr. Wallach says.

Mr. Trump says he doesn’t recall asking his aide to do this, but “it certainly makes sense” that he did.

The sale of the Plaza hotel showed Mr. Trump at his most combative.

Citibank, which had financed most of his purchase of the storied New York hotel, let him continue managing it while both looked for someone to buy it.

Mr. Trump had a cordial relationship with one Citibank executive, Patricia Goldstein. In 1994, her husband was dying of cancer. Mr. Trump says she asked for help in getting him into a hospice run by the Catholic Archdiocese of New York. Mr. Trump says he contacted the late Cardinal John O’Connor, who got the man in the next day.

Citibank pushed for a sale of the Plaza to foreign investors, who would leave Mr. Trump with little role. “You’re going to go through hell” before that sale happens, he says he told the bank.

He and Mr. Wallach created obstacles by pushing a labor union to oppose the sale and raising concerns about the hotel’s structure with the city buildings department, says Mr. Wallach.

Mr. Trump says he did what he could to scuttle the sale. “I drove [Citibank] nuts,” he says. “I did a number on them that you wouldn’t believe.”

Among his tactics, he appealed to Citibank’s Ms. Goldstein to block the sale, reminding her of his hospice favor. She was “nasty” to him, he says, telling him one thing had nothing to do with the other.

“I said, ‘No one has ever spoken to me in that way. See what I do to you,’ ” Mr. Trump recalls.

After Citibank pushed through the sale, say bank employees of that era, Mr. Trump spoke ill of Ms. Goldstein and told people she had asked him for a personal favor while working on his restructuring.

Mr. Trump says, “I would see her at functions at various ballrooms throughout the city and I would say such things that some people were shocked.”

Ms. Goldstein died last year in a bicycle accident.

“I didn’t send flowers,” Mr. Trump says.

The sale of the hotel ended up being a great deal for him because it reduced his personal debt so much, he says. Citibank declined to comment.

In June 1995, Mr. Trump took the Trump Plaza casino in Atlantic City public. The public company he controlled later bought both other Trump casinos.

Mr. Trump used part of the IPO proceeds to pay off a bank loan on the Grand Hyatt in New York. He settled his suit against the Pritzkers, and their Hyatt Corp. bought his half for $140 million.

The Pritzkers regard this as one of their best deals because the hotel has soared in value, says a person familiar with their thinking. Mr. Trump says he got the best of it, because the sale valued the hotel at more than it was then worth.

“Hyatt will never forget the number I did on them,” he says.

The Trump casinos never recovered full health. The companies that owned them would go on to file for bankruptcy protection three more times.

But Mr. Trump was fast leaving his troubles behind. In 1995 he cut a deal with banks that wiped out the last of his personal debt.

He paid less than half of the roughly $110 million he owed, according to a person familiar with the matter. The discount shows his deal-making skills, Mr. Trump says.

The next year, using cash from the casino sales, he made a deal that wound down the 1990 debt-restructuring agreement. At a hearing on it, an attorney for the New Jersey attorney general’s office—which had spent years studying Mr. Trump’s financial maneuvering—said, “I’m not certain if there’s any one person on our staff that really understood it.”

Mr. Trump, back from the brink, was once again practicing real estate on his own terms, free of restrictions. He also was again leasing a personal Boeing 727—the same one he once had to sell.

Courtesy: WSJ