Trump Trips Up

By Janice Castro

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-performanc e 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.

CHART: NOT AVAILABLE

CREDIT: NO CREDIT

CAPTION: WHAT'S AT STAKE

RESULT

By giving up the Trump Shuttle, his yacht, The Trump Princess, and other properties, the developer could keep such prizes as the Plaza Hotel, Trump Tower and his three Atlantic City casinos while slashing his debt.

With reporting by Robert Ajemian/Boston and Thomas McCarroll/New York, with other bureaus