How Donald Trump Survived Near Bankruptcy

16-Oct-2015

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By Warren Cassell

Donald Trump was just thirty-seven when a 68-story, mixed-use skyscraper bearing his name went up on 5th Avenue in New York. With its pink marble interior and 60-foot waterfall, The Trump Tower established Donald (the son of real estate mogul Fred Trump) as a serious property developer in his own right. By his early forties, Trump was more than $970 million in debt and on the brink of personal bankruptcy. But Trump now has a net worth in excess of $10 billion, is one of the world’s most recognizable figures, and a leading Republican presidential candidate). How did the author of The Art of the Deal survive a near-bankruptcy and turn his financial affairs around?

A MAN WITH THE GOLDEN TOUCH

Fred Trump made his name renting mid-rise apartment units to middle-income families in Brooklyn. Donald graduated from the Wharton School of Finance, in 1968, and soon joined the family business, moving to New York in 1971 to pursue a career in luxury real estate development.

As a rule, property developers use debt (or leverage) to finance their project. Developers who forge relationships with multiple lenders tend to acquire sizeable amounts of real estate—and, by the early 1980s, banks and financiers were paying more and more attention to Trump. “The banks would tell Donald to take $80 million if he said he needed $60 million,” George Ross, an Executive Vice President and Senior Legal Counsel at The Trump Organization, has said. Today, it seems, little has changed. During Trump’s 2015 Presidential Announcement speech, the billionaire mentioned that a large bank approached him and said,”Donald, you don’t have enough borrowings. Could we loan you $4 billion?”

Thanks to his connections to any number of financial institutions, Trump continued to build his empire, expanding into a number of industries. In 1986, he bought the Holiday Inn Casino-Hotel in Atlantic City, the New Jersey gambling town where he subsequently acquired two more casinos, including the billion-dollar Trump Taj Mahal, which opened in 1990 as the largest casino in Atlantic City. In fact, the Trump Taj Mahal was so big that it needed to make at least $1 million a day just to service its debts. (See: A Look Into Donald Trump’s Many Income Sources.)

ALL GOOD THINGS MUST COME TO AN END

In the early 1990s, Trump’s winning streak ground to a halt. The national economy started to slow down and New York’s economy stalled, causing Trump’s income streams to dwindle. Soon, he found it difficult to make the interest payments on the debt he’d accrued to finance his different businesses. Trump’s annual loan payments were $300 million. The Trump Organization and its subsidiaries owed $9 billion, andTrump’s personal debt totalled $975 million. One day, Trump was walking with Marla Maples, the woman who eventually became his second wife. Pointing to a homeless man, Trump told Maples,“That guy is not worth 10 cents, but he is worth $900 million more than me!

HOW HE FIXED IT

In order to avoid having to file for bankruptcy, Trump met with four of his major lenders: Citibank, Bankers Trust, Chase Manhattan Bank and Manufacturers Hanover, and told the banks that if they foreclosed on his properties they, too, would lose tremendous amounts of money. By his own lights, Trump was too big to fail. In the end, he convinced the banks to loan him an additional $65 million, which he’d use to keep his businesses afloat. The banks also agreed to defer, for five years, the interest and principal payments on Trump’s outstanding loans. As Trump would say, ‘‘It came out that the banks really liked me a lot and they respected me and they respected what I had done.’’

Some of Trump’s debts were paid down with funds from the sale of his assets, which included an airline company (Trump Shuttle) and a yacht (which was sold to Saudi billionaire Prince Alwaleed Bin Talal). Trump also sold his controlling stake in the Plaza Hotel and turned his Florida beach house, Mar-a-Largo, into a resort. In 1991 and 1992, two of Trump’s Atlantic City casinos (including the Trump Taj Mahal) filed for Chapter 11 bankruptcy, which allowed them to restructure their debt and obtain lower interest rates. Subsequently, Trump combined his three Atlantic City casinos, forming a single company, called Trump Entertainment Resorts, which went public in 1995, raised $2 billion in the initial public offering (IPO), and used those funds to clear its debt.

By 1993, Trump’s personal debt obligations were down to $115 million. By 1997, his name was back in the Forbes 400. That year, the magazine estimated, his net worth stood at $2 billion. Since then, Trump has used leverage much more cautiously. During his presidential announcement, Trump claimed to have only $500 million in debt. In a recent interview with Politico, Trump said that his investment strategy has become very conservative. (See: What You Need To Know About Bankruptcy.)

THE BOTTOM LINE

If there’s one thing Donald Trump knows, it’s how to execute a comeback. In the eighties, the tycoon was known as a brash, but competent—even spectacular—developer. A decades later, his empire stood on the brink of collapse. Somehow, Trump managed to emerge from his financial troubles without having to file for personal bankruptcy protection. Today, he is worth $10 billion, and is a true American icon.

http://www.investopedia.com/articles/professionals/092515/how-donald-trump-survived-near-bankruptcy.asp?partner=YahooSA

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