It is fair to say that the New York Times does not like Donald Trump (but the paper is not alone in this fact!). On 11 June it ran a story “How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions.”
Trump has maintained that “The money I took out of there (Atlantic City) was incredible.” But after its investigation of filed papers and court records the New York Times (NYT) concluded that it was at the expense of others.
Atlantic City was the go to place in Eastern US, within a reasonable drive from New York State. Investors could not lose and Trump saw the opportunity.
He built Trump Plaza in the early 1980s, gaining a prime spot on the boardwalk. But he could not get financing so he did a deal with Harrah’s who gave him US$ 220 million in financing. Harrah’s at Trump Plaza opened in 1984. But the partners did not get on – the entrepreneur, it seems, got in the way of Harrah’s corporate structures.
Trump then acquired Hilton’s nearly completed casino in the marina for US$ 320 million, calling it Trump Castle. The casino opened in 1985, and competed directly with Harrah’s.
Next up, Taj Mahal, which Resorts International was building. Trump got the Taj Mahal. While all this was going on regulators were keeping a close eye on the financial performance of the business.
According to NYT Trump issued US$ 675 million in junk bonds with a 14 percent interest rate, to finish construction and get Taj opened. At the same time Trump was investing heavily in NYC real estate.
Quoting from the NYT, ‘Less than two weeks before the casino opened, Marvin B. Roffman, a casino analyst at Janney Montgomery Scott, an investment firm based in Philadelphia, told The Wall Street Journal that the Taj would need to reap $1.3 million a day just to make its interest payments, a sum no casino had ever achieved’.
Mr. Trump retaliated, demanding that Janney Montgomery Scott fire Mr. Roffman. It did.
Almost immediately, Mr Trump had trouble making the debt repayments on the Taj and his other casinos. It was also clear that the Taj was cannibalising the Castle and the Plaza whose combined gambling revenues dropped by US$ 58 million a year.
Recession hits the casino industry more than any other segment of the gambling market. The early 1990’s recession started to hit Atlantic City. Some of the operators were in sufficiently good financial health to combat the storm. Trump was not. At the same time property values in New York where Trump was a big investor were also falling in value.
Trumps debt now stood at US$ 3.4 billion. In December 1990 Trump’s father sent a lawyer to the Castle casino to buy US$ 3.3million in chips so that Trump could make the next interest payment, a move that caused the regulars to impose a US$ 65,000 fine.
Trump was approaching collapse. In June 1995 Trump formed a new company which he listed called Trump Hotels and Casino Resorts. The company issued 10 million shares at US$ 14 and sold US$ 155million of junk bonds at 15.5% interest rate.
For a time the casinos prospered and some said Trump was back. But over time Trump casinos lagged market performance and they began to lose market share.
In 1996, the public company issued more stock and sold US$ 1.1 billion in junk bonds. The money was used to in part to pay off US$ 330 million in bonds on the Plaza that had been guaranteed by a company Mr Trump controlled, as well as almost US$ 30 million that Mr Trump owed to two banks. The company also bought the Trump Taj Mahal and Trump Castle – soon renamed the Trump Marina – shifting more of Mr Trump’s debt to shareholders.
A whole catalogue of events then ensued. The stock price fell, Mr Trump nearly went into default over a US$ 13.5 million payment to an investment bank. The casino company lent him the money, and a shareholder sued the board for breaching its fiduciary responsibility. The casino company continued to report losses. The share price fell to US$ 3.
In 2014, the casino company filed for bankruptcy protection for the fifth time. Mr Trump had managed over time to move bond holders into shareholders, and to distance himself from the company. At the same time the real estate market in New York recovered where Trumps future prosperity and wealth was invested.
According to Sebastian Pignatello an investor, quoted in the NYT “People underestimated Donald Trump’s ability to pillage the company.” Pignatello once had US$ 500,000 invested in the company. He said “He drove these companies into bankruptcy by his mismanagement, the debt and his pillaging”
To be fair, greed and debt in the gambling industry are not easy bed fellows. Trump, like countless others, invest more and more when times are good forgetting that recessions come and go, and unless you have built sufficient liquidity during the good times, you will suffer when the inevitable strikes.
We have seen so many leveraged buy outs that load good companies’ balance sheets with debt at onerous interest rates for the profit of the investor. The company’s opportunity to invest back into the company is prohibited by interest rates and preferential dividends to beneficial shareholders.
You may have been staggered to read that Trump borrowed at fourteen percent interest rates. This was at a time when inflation was five percent and long term interest rates were eight percent, a sixty percent premium to inflation. Trump was borrowing at a rate 2.8 times more than inflation.
Today interest rates are almost zero and may go negative. Inflation in the UK is running at 1.1% yet gambling companies in the UK are borrowing at 4.875%, a rate 4.43 times more than inflation.
Negative rates of, say, one percent on deposits, in effect adds one percent to the interest rate on a company’s debt. If they have borrowed at four percent, and if the money has not been invested they are now borrowing at five percent, a twenty five percent increase in the rate payment. That is not all – internet gambling companies hold client deposits, negative rates will add to the expenses of the business unless they are passed to the customer. But do the current T&C’s allow for this?
Little wonder that major banks are looking to store notes in strong rooms rather than hold deposits at central banks.
The inflation rate implies a lack of demand in the economy, and the risk is that if we have deflation the debt in real terms grows in value, and what appears now a reasonable rate at 4.8% becomes a premium rate and a drag on the business. In such circumstances highly leveraged businesses are unlikely to survive.