Editor's note: This is the first in a series of articles examining the changing face of the Atlantic City gaming market.

Struggling under the weight of $1.8 billion in debt, Donald Trump's Atlantic City empire is on the verge of collapsing like a house of cards. But if Trump can renegotiate the debt, he will once again prove he's no apprentice to the art of the deal -- even if it's at the expense of current shareholders.

In February, Trump Hotels & Casino Resorts ( DJT) announced plans to obtain $400 million in financing from DLJ Merchant Banking Partners, a unit of CSFB, to renovate hotels, service debt and make the company competitive again.

In exchange for the investment, DLJ will become the majority stakeholder in Trump Hotels, forcing Donald Trump into a minority position and out of his role as chief executive. After more than two decades on the Atlantic City Boardwalk, creating the second-largest gaming market in the world, Trump must lose control of his publicly traded company if he wants his moniker to stay on the marquees of the three buildings his company operates there.

"What Trump's doing right now is for the benefit of the company," says Scott Butera, executive vice president and lead negotiator of the debt deal. "You have a whole new cast of characters involved in the deal and there will be a new majority shareholder."

But the deal comes with a catch. To receive the financing, bondholders must restructure $1.8 billion in debt and take a financial hit. If bondholders don't agree to cut what they're owed, auditor Ernst & Young says Trump Hotels could go bankrupt. He says the financial problems "raise substantial doubt about the company's ability to continue as a going concern" in a letter on March 30. Not only would a bankruptcy drastically reduce what bondholders would be paid, but current equity holders likely would be left with nothing.

To get the deal, Trump Hotels will have to juggle the interests of a number of parties. But the main players are the bondholders who own $1.3 billion in Trump Atlantic City debt, which is backed by the Trump Taj Mahal and the Trump Plaza; and bondholders who have $425 million in Trump Casino Holdings debt, which is backed by the Trump Marina, Trump Indiana and the management contract for the Trump 29.

"The holders of the $1.3 billion issue are a fairly diverse group, consisting of collateralized bond obligations to distressed hedge funds," says John Maxwell, managing director at Merrill Lynch, in a research report.

"Some holders have expressed a desire to accept a 'reasonable' haircut. Other holders we have spoken with would be willing to take their chances in bankruptcy if they are not paid in full."

How Not to Get Rich
In eight years as a publicly traded company, Trump Hotels & Casino Resorts has never posted a profit and has seen the gap between total assets and total liabilities narrow significantly
Year EPS Net Sales Total Assets Total Liabilities
2003 ($3.39) $1.161 billion -- --
2002 -0.16 1.229 $2.196 billion $2.114 billion
2001 -1.15 1.176 2.219 2.117
2000 -2.1 1.214 2.199 2.057
1999 -2.82 1.411 2.267 2.066
1998 -1.69 1.359 2.43 2.017
1997 -1.85 1.399 2.473 1.996
1996 -0.25 976 million 2.455 1.895
Source: Company results/TSC research

Bad Blood

If history is any indication, bondholders could hold firm and thwart Trump Hotels & Casino Resorts' plans to refinance.

Trump Hotels stopped paying interest to bondholders on Oct. 31, 2001, until terms on the debt were renegotiated, citing a drop in business due to the World Trade Center attacks. After the company missed payments, bondholders formed a group, retained legal representation and refused to back down, forcing Trump Hotels to relent and pay out $91 million.

Bondholders seethed and refused to renegotiate, but Trump Hotels was able to avert disaster by tapping the capital markets instead. In March 2003, the company refinanced $465 million in debt, used the proceeds to pay down debt, averting a "going concern" notice from auditor Ernst & Young.

"A lot of bondholders don't like the way the company treated them last time," says Marvin Roffman, who is president of money-management firm Roffman Miller Associates and has been publicly feuding with Trump for years. "While the deal sounds wonderful, if Trump doesn't renegotiate, the company is pushing bankruptcy. It's not like he has a big window here. In May, they have a payment due."

Indeed, the payments are coming due, but unlike last time around, Trump Hotels will have a harder time tapping the capital markets if bondholders refuse to cut a deal because of the "going concern" letter from Ernst & Young. Because of this, the heat is on Trump Hotels to get a deal done, but it also provides incentives to bondholders to yield. They won't have to deal with Donald Trump at the negotiating table from here on out.

"Pro forma for the deal you will have a very clean corporate structure, with clear governance. The trust issues have been addressed at this point," says Butera. "That's one of the reasons why the bondholders should like the transaction."

Trump Trumped?

Because the details of the THCR offer have not been disclosed, it's impossible to determine how much of a haircut bondholders are weighing. But one thing is clear -- without a capital infusion and a balance sheet shake-up -- Trump no longer will be king of Atlantic City.

"When our properties came out, they were the newest, biggest properties at the time, but that was 10 years ago," says Butera. "Because of our debt service, we haven't had a lot of money to reinvest, so we need to free up capital so we can get our properties in the same condition that our competition is, most notably the Borgata."

The debut of the Borgata, a joint venture between Boyd Gaming ( BYD) and MGM Mirage ( MGG) and the first casino built in Atlantic City since the Taj Mahal in 1990, has had a negative impact on all of Trump Hotels' Atlantic City properties. In the fourth quarter of 2003, EBIDTA at the Plaza fell 12.6% year over year, while the Taj Mahal fell 14% and the Marina was off 16.6%.

While all three properties are slumping, the Trump Marina has fallen behind neighbors in room capacity. Over the last seven years, the number of hotel rooms on the marina jumped to 4,358 from 1,902, a gain of 160%. Since 1997, the 2,000-room Borgata has opened, Harrah's Marina has added 456 more rooms, but Trump's Marina hasn't added a single room to its original 728.

"We believe the initial trial of the Borgata has been the main catalyst pulling business away from the Trump properties, which will naturally improve over time," says Andrew Zarnett, managing director at Deutsche Bank, in a note. (Deutsche Bank was a book runner for the $465 million debt Trump Hotels refinanced in March 2003, after bondholders balked.)

Butera says a new pedestrian ramp between the Borgata and Trump Marina has "definitely helped" and says loyal Trump Marina customers are returning to the fold. Although revenue from the Taj and Plaza was off 7.4% year-over-year in 2003, EBITDA was off just 3% because of the company's ability to trim operating expenses by 5.6%.

The bondholder deal and $400 million investment would help immeasurably, freeing up cash flow, most of which is currently being used to service debt instead of upgrading properties. More importantly, it would help shore up the balance sheet. According to Deutsche Bank estimates, Trump Hotels' total leverage will be about 6.7 times 2004 EBITDA without a deal, but if the bondholders agree to restructure their debt at a 10% discount to face value, leverage would drop to 4.6 times 2004 EBITDA.

But while a deal would improve results, even if Trump Hotels survives, the company has a lot of work to do if it wants to post a profit, something it hasn't done since going public eight years ago.

A Raw Deal for Equity

Investors looking to profit off Trump's legendary ability to snatch victory from the jaws of defeat may want to think twice. Over the last four months, Trump Hotels stock is up 75%, rising along with the popularity of Trump's reality show, "The Apprentice." Shares, which hit a 52-week high of $3.65 on March 25, closed at $2.30 April 2, as a bankruptcy likely result in the cancellation of equity -- leaving shareholders with nothing.

Even in a best case scenario -- one where Trump Hotels reaches a deal with bondholders and DLJ makes a $400 million investment -- equity holders will lose out because the restructuring will have a powerful dilutive affect on shares. After all, Donald Trump's stake in the company will go from 57%, fully diluted, to close to 20%, according to reports.

" Equity investors will be diluted, but isn't dilution better than bankruptcy? But we don't know what the deal is. This is going to be the real test of the art of the deal and it isn't a slam dunk," says Roffman. "The bondholders are in the boardroom and Trump is where the apprentices sit. Now they can say 'you're fired.' It's not an assured thing. We'll have to wait and see."

As originally published, this story contained an error. Please see Corrections and Clarifications.

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