Major debt holders demand better terms from Trump

Jeannine DeFoe

Thursday, Aug. 12, 2004 | 9:22 a.m.

Donald Trump's plan to reduce $1.8 billion of debt at Trump Hotels & Casino Resorts Inc. may be delayed without the support of one group of bondholders who are demanding better terms.

Investors owning $425 million of debt backed by assets including the Trump Marina in Atlantic City, would get 95.6 cents on the dollar under the proposed deal. The debt traded as high as 99.5 cents in recent days on optimism Trump and his partner, Credit Suisse First Boston's DLJ Merchant Banking Partners III LP, would repay the notes closer to par.

"The offer from the company and DLJ was a big step back," said Steve Gidumal, co-portfolio manager of Virtus Capital Management in Philadelphia, which owns some of the Atlantic City-based company's debt. "Bondholder mindset has to be to seize our collateral in bankruptcy."

Trump, whose company has lost money for eight years, needs the restructuring to cut interest costs and free up more money to reinvest in his casinos. The company has fallen behind competitors in Atlantic City such as Harrah's Entertainment Inc. that have added hotel towers and expanded their properties. Also, Pennsylvania's plan to legalize slot machines will increase competition for gamblers in the region, the company said last month.

"We have a lot of confidence in Atlantic City," Trump, 58, said in an interview. "The biggest problem is that we're paying junk bond rates. Perhaps it could" be a problem not reaching agreement with the investors known as the Trump Casino Holdings bondholders, he said. The 11.625 percent notes are due in 2010.

Casino revenue in Atlantic City rose 8.7 percent in July to $474 million from a year earlier, New Jersey's Casino Control Commission said this week. The month was the second best on record for the market.

Under the plan, the company would seek Chapter 11 bankruptcy protection by the end of September, paving the way for Trump and the DLJ fund to invest $400 million in the businesses and reduce debt by about $544 million.

Some bondholders would exchange existing bonds for new debt, cash and stock. Annual interest expense would be cut by $110.2 million, Trump Hotels Vice President Scott Butera said Tuesday on a conference call. Trump's stake would drop to about 25 from 56 percent.

A committee representing a majority of investors owning the largest part of Trump Hotels debt, or $1.3 billion of so-called Trump Atlantic City notes, agreed to the transaction, the company said. That debt is backed by the Trump Taj Mahal and the Trump Plaza casinos.

"If everybody was on board it would meet the company's time frame" of having a deal completed by the end of the first quarter, said John Maxwell, a debt analyst with Merrill Lynch & Co. in New York. "If they file in September without reaching an agreement with the Trump Holdings bondholder group, it's likely to extend the period they're in Chapter 11."

The Trump Atlantic City holders have more of an incentive to agree to the deal, given the impending maturity, Maxwell said. Trump Atlantic City bonds maturing in 2006 fell 4 cents Tuesday to about 86 cents on the dollar, traders said.

"They have less negotiation room," Maxwell said. "All in all it's not a bad deal for them."

Trump Hotels would exchange the Trump Atlantic City notes for $228.2 million in cash, $851.9 million of 7.625 percent notes and $107.2 million in stock. The Trump Casino Holdings bondholders would receive $55.9 million in cash and $350.4 million of new 7.625 percent notes. The offer is fair, Butera said.

It may take an extra $18 million to win over the Trump Casino Holdings bondholders, according to debt analyst Barbara Cappaert of KDP Investment Advisors in Vermont. It is "not unreasonable" for the group to hold out for par, she said. Those bonds are also backed by management fees from an Indian casino in Southern California.

Trump has clashed with bondholders in the past. The company in May made a $73.1 million interest payment just three days before a 30-day grace period expired. In October 2001, Trump threatened to withhold interest on bonds to force a debt restructuring; the company made the payment before the grace period expired and the restructuring never happened.

Trump Hotels needs to slash debt to invest in its three Atlantic City casinos, which have lost gamblers to the new Borgata casino that opened last year. In March, auditor Ernst & Young LLP raised doubts about the company's ability to survive.

Trump first announced his intention to rework the debt with DLJ in February. Credit ratings company Moody's Investors Service then cut Trump Casino Holdings and Trump Atlantic City one level to Caa1, seven levels below investment grade, from B3. Moody's cited the likelihood the equity deal would result in the notes being redeemed at less than face value.

The casino company is operated separately from Trump's other real estate businesses, which include New York condominium developments. On his television series, "The Apprentice," contestants vie for a position with one of Trump's companies through a series of business challenges.

Trump Hotels stock, which traded at $34 in June 1996, rose 11 cents to 47 cents Wednesday.