An ex-loser is back in the money (Fortune, 1996)

June 23, 2013: 9:01 AM ET

Editor's note: Every Sunday we publish a favorite story from our magazine archives. This week, we turn to a story from 1996 chronicling the comeback of U.S. businessman Donald Trump. Since 2007, Trump hasn't signed his name to a U.S. real-estate project but that doesn't mean he's lost his appetite for putting his mark on big buildings. This week, the master of self promotion expanded deeper into the international real estate market by unveiling plans for a Trump-branded hotel and condominium tower in downtown Vancouver, British Columbia. Pure business genius or a dicey venture?

By Shawn Tully

1996-donald-trumpIn the black days of 1991, Donald Trump often strolled with his finance chief, Stephen Bollenbach, from the peach marble atrium of Trump Tower to lunch at another Trump trophy, New York's fabled Plaza Hotel. At the time, Trump wallowed in so much debt that angry bankers threatened to grab not only the Tower and the Plaza but everything else, from the Atlantic City casinos to his Piaget watches. Spotting a panhandler huddled in front of the Plaza, the usually blustering Trump turned uncharacteristically wistful. "That bum isn't worth a dime, but at least he's at zero," sighed The Donald. "That puts him $900 million ahead of me."

Five years after his spectacular, seemingly fatal fall, Trump has staged an even more stunning revival. His rebound vehicle is Atlantic City, now the hottest address in gambling, with Circus Circus, ITT, Mirage, and others clamoring to get in. The seaside resort rakes in $3.7 billion a year from gaming, 20% more than the Las Vegas Strip, and Trump pockets no less than 30% of those winnings, or about $1.2 billion a year. In addition, with $375 million worth of shares in Trump Hotels & Casino Resorts and trophy properties like the Grand Hyatt Hotel in Manhattan, Trump has masterfully--and quickly--catapulted himself from that infamous $900 million black hole to a net worth of at least $700 million (see chart below).

Trump's comeback proves once and for all that behind his gaudy--and many would say obnoxious--showman's facade lies a bit of business genius. No, this isn't Warren Buffett. But for those who have witnessed other giants--the Reichmanns and Robert Campeau--fall into deep financial trouble and never really recover, Trump's return is something to marvel at. "I didn't think anyone could do it," says Bollenbach. "I know of no other case of someone going from almost a billion down to over half a billion in net worth."

The feat is a tribute to Trump's audacity. Even in the bleakest hours, he aimed not just to survive but to recapture the jackpot. Now Trump is placing the biggest bets of his career on Atlantic City, wagers that could make him richer than ever. Over the next two years he'll pour over $400 million into the resort, nearly doubling his horde of hotel rooms and building a 430-foot floating gambling palace--the world's biggest yacht.

If Atlantic City fades, Trump's newfound wealth could fall along with it. But even in hard times, Trump believes he'll never again sink to the depths of five years ago simply because he will never again borrow as recklessly as he did in the late Eighties. Instead, he's using his still golden name--without putting up one cent--to market Manhattan condos and hotels in exchange for a fat share of the profits. Says Edward S. Gordon, chairman of one of America's largest commercial real estate companies: "Donald hasn't forgotten what it's like to wake up at 2 a.m. soaked with sweat, with the bankers pounding on your door."

What's no less memorable, though less well known, is how Trump pulled off that Houdini-like escape from creditors. Back in 1990, both Atlantic City and Manhattan real estate were reeling from recession, and Trump was drowning under $960 million in personally guaranteed loans. Those guarantees meant that if a loan on an asset like the Grand Hyatt defaulted and the price of the hotel was not enough to cover the loan, the banks could grab Trump's other properties--which meant the casinos.

That's basically what happened when in 1990 Chemical, Bankers Trust, and other lenders one by one took liens on Trump's equity in the casinos. If Atlantic City rebounded, they, not Trump, would get the income. And if Trump failed to make interest payments they could foreclose and either sell the casinos or try to run them.

trump-chartThe serpentine loan agreements effectively doomed Trump to work for the lenders or declare bankruptcy. Then, in 1990, the banks unintentionally did Trump a favor: They demanded that he hire a CFO. Rather than finding a docile financial type, Trump went for a polished tough guy, Steve Bollenbach from Holiday Corp. Says Trump: "Steve could say no with the coldest steel in his eyes, and nobody would get mad at him. That's what I wanted."

Beyond negotiating skills, Bollenbach brought a new sense of realism. At the time, Trump was scrambling to pay all his lenders, desperately trying to keep his image from being tarnished. It was his new CFO who persuaded him to change. "I told him to admit he was broke and stop paying everybody-- that we had to concentrate on saving the key assets," says Bollenbach. Trump's salvation, adds Bollenbach, came largely because he was willing to shed his golden boy image and get scrappy.

Amazingly, the first, and most crucial, test of wills with the banks came over a yacht, the Trump Princess. Trump was spending $800,000 a quarter on insurance alone. He feared the lender holding the mortgage, the Bank of Boston, would take the boat if he didn't keep the insurance in force. Bollenbach talked Trump into sending the next insurance bill to Boston. "I told them, 'If it sinks [and there's no insurance], you have no collateral,' " says Bollenbach. The bank paid the premium.

That mano a mano victory emboldened Trump to go for more. Above all, he wanted to win back from the banks his equity in the Atlantic City casinos. Though Atlantic City was in the dumps, Trump and Bollenbach saw it as the real ticket to a financial comeback. After all, Trump reckoned, with its key location--the city is only a tankful of gas away from 100 million people--Atlantic City had to bounce back. He also knew that despite his problems, the Trump name was still a powerful draw for gamblers. Together with Bollenbach and Nicholas Ribis, then Bollenbach's deputy, Trump mapped out a strategy to offer the banks real estate holdings plus cash in return for releasing their liens on the casinos.

The scheme worked, not because the bankers liked it but because Trump successfully exploited their fears of entering the casino business. He stressed to them that if the banks were to take over his gaming empire, they would have to apply for new casino licenses, an extremely tortuous process. He also asserted that causing a massive bankruptcy would poison the Atlantic City market. Without his name on the marquees, business would dwindle. "Donald kept telling the bankers it was an alien business where people wore silk suits and slicked-back hair," says Ribis.

nicholas-ribisAfter Bollenbach left in late 1991 to become CFO of Marriott Corp., it fell to Ribis to carry on the charge. He traded 100% of the Trump Shuttle, for example, and most of Trump's equity in the superb Riverside South site near Manhattan's Lincoln Center in return for release from Trump's personal guarantees on several loans.

Ribis and Trump were unlikely partners in their scheme to outflank the banks. Ribis, a small, wiry extrovert with a cackling laugh, is the son of Italian immigrants. As a teen he rose at 4 a.m. to work in his parents' New Jersey deli, then delivered papers before heading to school. Today he shuns the limelight and works from a cramped office adjoining Trump's. But location is everything: "I don't mind sitting next to the throne," he says.

Trump, born to wealth, considers himself a natural sovereign. In an era of political correctness, he remains a prophet of narcissism with a decadent appetite. At Yankee Stadium he'll consume three hot dogs, followed by Cracker Jacks and ice cream sandwiches. His flair for zany excess flourishes in Atlantic City, where the Oriental Pavilion at Trump Plaza features none other than the Great Wall of Slots.

In confronting the bankers Trump combined tough tactics with tender indulgences. When one hardened lender fell sick with hepatitis, Trump overcame his Howard Hughesian aversion to germs to visit him in the hospital. The banker broke into tears at the sight of The Donald and, rising from his bed, escorted his celebrity visitor into the next room to meet an AIDS victim and a terminal cancer patient he had befriended. After saying hello, Trump rushed down the hall and washed his hands in a janitor's sink. In all, the visit was a gesture that bought Trump valuable goodwill.

Ultimately, Trump and Ribis had a higher mission: They not only wanted to erase the bankers' liens on the casinos but also strove to buy out the loans on the cheap. With little cash to throw into a deal, they instead negotiated options to pay off the loans for 30 to 50 cents on the dollar in the future, if and when the casinos started coming back. That's how Trump managed to reclaim two down-at-the-heels hotels flanking the Trump Plaza that he had lost to the banks--at minimal cost. One of these, the shuttered Penthouse casino, he leased from Midlantic Bank with an option to buy it for $27 million. On the other, the former Regency Hotel, which didn't have a gambling license, he took an option to purchase for $60 million.

Meanwhile, Atlantic City began to revive, spurred by both a buoyant economy and a loosening of New Jersey's draconian--at least in comparison with anything-goes Vegas--rules. Starting in 1993, regulators allowed casinos to stay open 24 hours a day, up from the previous 20-hour weekend limit.

Betting heavily on the renaissance, Trump opened the old Penthouse--rechristened the East Tower--in early 1995, even though it was still owned by Midlantic. Trump enticed Warner Bros. into leasing storefront space for about $2 million a year. He also immensely enhanced the value of the old Regency, now called the Trump World's Fair, by making it a casino. Until last year no casino owner could control more than three gambling licenses, and Trump already held the limit. But Trump, aided by strong lobbying from Ribis, championed a new regulation removing the cap and quickly won a license for the hotel.

With the East Tower thriving and the World's Fair a potential knockout, he seized the opportunity to exercise his options and buy the hotels back from the banks. To raise cash for this, in mid-1995 Trump took his casinos public and raised $300 million in capital. This year he made a $1.2 billion bond offering.

The two deals allowed Trump to pay the banks $87 million for loans on the two properties that, with accrued interest and penalties, totaled over $200 million. Including the renovation costs, Trump spent just $177 million on two properties that more than doubled the gambling space in the Plaza and swelled the hotels' capacity from 505 to 1,400 rooms. Next year they should generate about $70 million a year in cash flow, giving them a market value of around $600 million, more than three times Trump's investment.

Still, for all these masterful strokes, Trump has not removed all the risk from his future. He is far less dependent on personal debt than he once was, but his wealth is heavily concentrated in a single locale. States like Pennsylvania and Massachusetts could warm up to gambling, creating tough competition for Atlantic City. Any decline in revenues would hit Trump hard, since his casino company is still heavily leveraged with $1.3 billion in debt.

But the cotton-candy-coiffed optimist sees just one threat clouding the horizon. It is, in Donald-speak, Steve Wynn's "disgraceful" scheme to "steal" land in Atlantic City for a rival casino. Trump wants to blast Wynn as badly as he bested the bankers. He loves to brag that he owns 37% of his company, while Wynn owns only 6.7% of Mirage--not mentioning that Wynn's dollar stake is higher. "I'll beat him in Atlantic City," crows Trump, munching on Bordeaux cookies aboard his red-velvet-upholstered jet. "Then we'll be in Las Vegas to pick up the pieces." Maybe. What's indisputable is that picking up the pieces is one thing The Donald knows how to do exceedingly well.

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