Value and dividend investors are generally conscious of the financial health and balance sheets of companies that make up their portfolios and watch lists. While the use of some debt in a company’s capital structure can enhance returns to shareholders, it can also increase the likelihood of a total loss.
As a result of unforeseen events — such as a technological disruption or change in the macroeconomic environment — debt burdens that seemed manageable during booms can soak up a company’s cash flow and force bankruptcy. That’s why balance sheet health metrics such as debt-to-equity ratio are included for each of the 3,000 stocks included in the Dividend Reference database of dividend stocks.
Which brings us to Donald Trump. While the presidential candidate’s history of corporate bankruptcy filings has garnered increased attention in the midst of his primary campaign, these bankruptcies also serve as useful case studies for wary value investors. Below is a review of the circumstances surrounding each of the four bankruptcy filings, including the concessions made by Trump and his ultimate profits from the bankrupt companies.
Bankruptcy #1: Taj Mahal Casino in 1991
Trump’s first experience in bankruptcy court came in 1991, when a casino project in Atlantic City was buried in debt.
What Went Wrong
Before the doors ever opened, the Taj Mahal was at the center of a dramatic battle between Trump and TV personality Merv Griffin. An agreement between the two gave the Taj to Trump and other properties to Griffin, and the casino was officially opened in a ceremony complete with a Michael Jackson performance in 1990.
The Taj Mahal was the highest grossing casino in Atlantic City, and immediately attracted high rollers. In an evening that later inspired a movie scene, Japanese real estate mogul Akio Kashiwagi lost $2.2 million in less than 10 minutes by playing $200,000 hands of baccarat. So any claims from Trump that he has made millions in minutes are technically true; the adjacent table shows the economics of high stakes baccarat for the casino and a 51 percent owner.
Despite the activity, the Taj was also a financial disaster from the beginning. The casino cost nearly $1 billion to build, and was financed with $675 million in junk bonds that required 14 percent annual interest payments. Under those terms, nearly $260,000 in interest was accruing each day.
The Bankruptcy
Rather than force a liquidation in which bondholders would have received an estimated 43 cents on the dollar for their loans, the creditors agreed to work with Trump to restructure the debt. Wilbur Ross, an adviser to the bondholders, estimated annual debt obligations of $70 million under the restructuring, which would imply an interest rate of about 10 percent.
In exchange for lowering the interest rate, bondholders received half of the equity in the Taj Mahal, and the property continued to operate.
The Aftermath
As the economy heated up in the mid-1990s, so too did activity at Atlantic City casinos. In 1995 the Taj Mahal won $506 million from gamblers, up from about $462 million the previous year. By 1996, Trump Hotels and Casino Resorts, which owned properties elsewhere, was publicly traded under the ticker THCR. The company had a market cap of more than $200 million after an increase in the share price of more than 55 percent since its IPO in June 1995.
In a deal to sell the Taj Mahal to THCR, bondholders received about $40.5 million for their half of the equity while Trump received THCR stock. The company also raised $750 million in new debt to pay off the existing Taj Mahal bondholders.
The Verdict
The 1991 Taj Mahal bankruptcy had a happy ending for all parties. Bondholders received an equity ownership that was worth $40 million within five years, and the Casino was able to keep its doors open.
Bankruptcy #2: Plaza Hotel in 1992
Shortly after striking a deal on the Taj Mahal, Trump returned to bankruptcy court when he was unable to cover the interest payments related to a prominent Manhattan hotel.
What Went Wrong
Former Plaza Hotel President Ivana Trump, perhaps wearing a dress included in her “salary” for that role.
In 1988 Trump bought the Plaza Hotel, which overlooks Central Park, for approximately $390 million. That price tag represented an increase of more than 1,500 percent from the $25 million paid for the property just 13 years earlier by the Westin Hotel company.
In an open letter in the New York Times shortly after purchasing the hotel, Trump seemed to acknowledge that he had paid far too much for the hotel:
I haven’t purchased a building, I have purchased a masterpiece – the Mona Lisa. For the first time in my life, I have knowingly made a deal that was not economic – for I can never justify the price I paid, no matter how successful the Plaza becomes.
Trump named his wife Ivana as president of the hotel, noting that she would be paid a salary of “$1 a year plus all the dresses she can buy.”
The Bankruptcy
Trump’s suspicions proved correct; by 1992, the hotel’s cash flows were insufficient to cover the interest on some $550 million in debt related to the purchase and subsequent renovations. Trump filed for bankruptcy in November 1992, and about five weeks later a judge approved a plan that called for Trump to give up 49 percent of his ownership in exchange for forgiveness of overdue interest payments and a more lenient repayment plan. The group of creditors included Citigroup and the Industrial Bank of Japan.
As part of the restructuring, Trump stayed on as CEO of the hotel but was not paid a salary and did not have a role in the day-to-day operations of the hotel.
The Aftermath
Three years after filing for bankruptcy, Trump sold the Plaza for $325 million to a group that included a Singapore businessman and Saudi Prince Alwaleed bin Talal.
Trump remained a minority partner in the hotel following the sale, but didn’t see a dime from the sale. Proceeds from the sale went to paying down the debt held by banks, which was reduced from about $300 million to $25 million. The remainder of the debt was converted into an equity stake.
In 2012, Indian conglomerate Sahara Group paid $570 million for a 75 percent stake in the Plaza.
The Verdict
The Plaza investment is perhaps one of the most substantial blemishes on Trump’s investment record; he lost control of the property after bankruptcy, and ultimately received very little for his equity stake. After forgiving some overdue interest payments, the creditors were returned a significant portion of their investments from sale proceeds and operating cash flow following the 1995 sale.
Bankruptcy #3: Trump Hotels and Casino Resorts in 2004
Trump Hotels and Casino Resorts went public with the ticker THCR in 1995. By 2004, the company owned three casinos in Atlantic City (including the aforementioned Taj Mahal) as well as a riverboat casino in Gary, Indiana.
What Went Wrong
Trump’s Atlantic City casinos were facing competition from a number of new properties, including the recently opened 2,000-room Borgata. Combined with an interest rate of 15 percent on some $1.8 billion in debt — equating to $270 million in annual interest payments — THCR was struggling to stay afloat. The stock, which has been trading at approximately $2 in August 2004, dropped to about 50 cents after the announcement of a bankruptcy filing.
The Bankruptcy
Bondholders agreed to forgive approximately $500 million in debt in exchange for 20 percent of the company’s equity, reducing Trump’s ownership stake from 47 percent to 27 percent. The creditors also agreed to reduce the interest rate to 8 percent; the combined impact of these measures reduced annual interest payments by about $165 million.
THCR was also able to tap a $500 million line of credit from Morgan Stanley carrying a 4 percent interest rate.
The Aftermath
THCR emerged from bankruptcy in 2005 as Trump Entertainment Resorts. The company raised cash by selling its Spotlight 29 Casino and Gary property, but continued to flirt with financial collapse for several more years as the Atlantic City market remained soft.
The company was still saddled with significant debt, paying out almost $440 million in interest between May 2005 and the September 2008 as it consistently reported net losses.
The Verdict
The outcome for Trump and the bondholders involved in the third bankruptcy is less clear than the previous filings. As shown above, bondholders received more than $440 million in interest payments in the 40 months after the reorganized company emerged from bankruptcy. But the company’s financial health deteriorated further when the financial crisis of 2008 hit, further reducing the ability of the company to repay principal.
Bankruptcy #4: Trump Entertainment Resorts in 2009
In the wake of the financial crisis of 2008, the casino industry was struggling worldwide in early 2009. Trump Entertainment Resorts was no exception
What Went Wrong
Though Trump Entertainment Resorts emerged from bankruptcy in 2005, the company never became profitable and continued to struggle under the weight of a massive debt burden.
By the time it filed for bankruptcy in early 2009 the company owed $488 million in senior debt to Beal Bank, another $1.25 billion in 8.5 percent senior notes to second lien noteholders, and had another $39.3 million in general unsecured liabilities.
The Bankruptcy
By early 2009, the company’s market cap had fallen to $7.3 million, from its peak of $842 million in August 2005. Four days before the company filed for bankruptcy, Trump resigned as chairman and abandoned his ownership stake in the company. But he was very involved in the bankruptcy proceedings, which became contentious after multiple plans were submitted.
Trump ultimately aligned with the noteholders owed $1.25 billion, who agreed to abandon a claim that $290 million of the debt was personally guaranteed in exchange for an equity stake and the right to use the Trump brand in future operations. A rival plan submitted by Carl Icahn would have resulted in a lower debt burden post bankruptcy, but lacked Trump’s endorsement.
Bankruptcy judge Judith Wizmur ultimately ruled in favor of a reorganization plan that raised $225 million from bondholders in exchange for an equity stake. Carl Icahn, who purchased Beal’s senior debt, received $125 million from that offering as well as a new loan of $334 million and the proceeds from a sale for the Trump Marina property (which sold for $38 million in 2011).
Under terms of the approved deal, Trump received 5 percent of the company as well as warrants for another 5 percent that allowed the company to use his name and likeness in perpetuity.
The Aftermath
Data Source: Regulatory filings
Trump Entertainment Resorts has struggled to regain its financial footing; though significantly reduced, debt service obligations remained substantial. In addition to more than $30 million in interest expenses in 2012, the company also repaid about $47 million in principal.
The company filed for bankruptcy again in 2014, and the Trump Plaza casino closed down around the same time. The latest bankruptcy has been complicated by negotiations with various unions.
The Taj Mahal, which was at the center of Trump’s first bankruptcy filing in 1991, is the last remaining property held by the company. Donald Trump and his daughter Ivanka sued the company in an attempt to remove the Trump name, though the pair later dropped that pursuit. Billionaire Carl Icahn now effectively maintains control of the casino through the senior debt purchased during the previous bankruptcy.
The Verdict
The 2009 bankruptcy wiped out more than $1 billion in debt owed to bondholders. Trump maintained a meaningful ownership interest, through that position is likely worthless given the current financial shape of the business.
Bankruptcies in Review
Trump’s four bankruptcy filings have involved three different entities and approximately $4.7 billion worth of debt.
In each case Trump maintained an ownership interest in the company that filed for bankruptcy, though his position was reduced significantly:
Ultimately, the value of Trump’s ownership stake in the reorganized companies was worth very little:
Estimates based on available data. Proceeds from 1991 bankruptcy came in 1995 in form of THCR stock.
Though Trump did receive $40.5 million when the post-bankruptcy Taj Mahal was sold, it came in the form of stock in THCR — which ultimately experienced multiple bankruptcies of its own and today is close to worthless.
This article, By the Numbers: Donald Trump’s $4.7 Billion in Bankruptcies, first appeared on Dividend Reference.