How Donald Trump made bankruptcy work for him

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Trump Plaza, Atlantic City. Image via Flickr.

Here at FORBES, we track donald trumpwealth since inauguration Forbes 400 rich list in 1982. Today we value him at $2.7 billion, although he claims he’s worth much more. A question we are often asked when discussing Trump’s fortune: how can a man who has gone bankrupt so many times still be a multi-billionaire? How much more is it worth now, after the bankruptcies? We spoke to bankruptcy attorneys and casino industry experts – some of whom have been involved firsthand in Trump-related Chapter 11 cases – to try to explain how he survived bankruptcies. businesses and flourished thereafter.

1. It’s nothing personal…

First of all: donald trump filed for corporate bankruptcy four times, in 1991, 1992, 2004 and 2009. All of these bankruptcies were related to overleveraged casinos and hotels in Atlantic City, all of which are now operated under the banner of Trump Entertainment Resorts. He never filed a case staff bankruptcy – an important distinction when considering its ability to emerge relatively unscathed, at least financially.

“The corporations, limited partnerships and limited liability partnerships in which he had an interest or the companies to which his name was attached have filed for bankruptcy,” said Michael Viscount of the Atlantic City law firm.

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Rothschild LLP, which represented unsecured creditors when Trump Hotels & Casino Resorts, as it was then known, filed for Chapter 11 protection in 2004. “Therein lies the great distinction.”

(See: Trump exaggerates his net worth (by 100%) in the presidential candidacy)

He took a personal hit the first time: He had financed the construction of the Trump Taj Mahal with junk bonds and was unable to pay the high interest. His business was in the red, and so was he, about $900 million in personal debt. By the mid-1990s, he had reduced most of that debt by selling his Trump Princess yacht, his Trump Shuttle airline and his stake in a handful of other businesses. More importantly, he stopped backing the debt with his own wealth. “The first bankruptcy was the only time his personal fortune was at stake,” said Ted Connolly, a Boston bankruptcy attorney who used Trump as a model for getting out of debt in his book. Getting Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems. “He learned from that. He’s isolated.”

2. …it’s just business.

Trump has never apologized for using Chapter 11 as a trade tool – indeed, when he spoke to my FORBES colleague Keren Blankfeld recently, he noted that many “great entrepreneurs” have used bankruptcy to restructure their debt, free up capital and improve their businesses.

“I’ve reduced the debt – by the way, it’s not me personally, it’s a business,” Trump said. “Basically, I used the laws of the land to my advantage and to the advantage of others, just like Leon Black at, Carl Icahn, Henry Kravis has, along with many, many others at the top of the business world.”

But to those uninitiated in bankruptcy laws, four consecutive business failures can seem staggering. “To the average person on the street, that might come as a surprise, but certainly not to me,” said Michael Venditto, a partner at Reed Smith, who has represented clients in high-profile Chapter 11 cases, including the airline in TWA bankruptcy. “Chapter 11 is about how to reshape and restructure a troubled business. It doesn’t indicate anything bad or even mismanagement.”

3. It’s better than the alternative.

More important, Venditto said, are the implications Chapter 11 could have for creditors relative to, say, liquidation. “You may have a gut reaction to the fact that this company has been through Chapter 11 multiple times, but the bondholders are looking at it and the alternatives are much, much worse. What’s an empty casino sitting on the boardwalk worth? Atlantic City? If he’s working and he has cash flow and revenue, he might not be able to repay every penny on the dollar, but creditors are better off in the long run.”

4. He took advantage of his personality.

Trump’s name and image have undoubtedly helped him survive every bankruptcy and come out on top. He is able to demand a high percentage of reorganization equity based on the value his brand brings to a casino or hotel. So says Edward Weisfelner, a partner at New York firm Brown Rudnick who was involved in two of the three casino bankruptcies, first representing bondholders and then as a lawyer for Icahn Partners. by Carl Icahn, who tried to buy most of the debt at Trump entertainment complexes. “The leverage he had was that his name was on his casino side,” Weisfelner said. “The cost of throwing it away, rebranding it, and changing its name everywhere would be very high.”

Joseph Weinert, senior vice president of Atlantic City’s casino advisory firm Spectrum Gaming Group, which produced research for Trump, added, “Stakeholders decided they were better off with Trump’s name than they weren’t.”

5. He is less and less interested in bankrupt companies.

With each bankruptcy, Donald Trump’s stake in the Atlantic City casinos and hotels that bear his name has dwindled. When the Trump Taj Mahal first went bankrupt, it handed over 50% of the shares to bondholders in exchange for favorable interest rates. In the 2004 Chapter 11 filing, his interest was reduced to 25%. During feuds with bondholders just before the 2009 bankruptcy, Trump resigned from the board of directors of Trump Entertainment Resorts; its equity stake is now 5%, with an additional 5% in warrants.

6. He’s not the only one to blame.

Atlantic City attorney Viscount doesn’t think Donald Trump himself should be held responsible for his company’s bankruptcies – his creditors, he said, knew what they were getting into when they loaned Trump money again and again. “They’re all great boys and girls,” he said. “They’ve all played this game before, in insolvency. The company that bore his name filed for bankruptcy because it was over-leveraged. What does that tell you? People want him lend money. He does great things with it.

Icahn’s attorney, Weisfelner, does not blame these corporate bankruptcies on creditors and questions whether Trump’s companies used Chapter 11 as its creators intended.

“Good faith exists,” he said. “The purpose of bankruptcy laws is to protect businesses, their customers and employees, to give them a second chance, and to treat debt holders fairly. If bankruptcy is instead used to artificially elevate your interests above above legitimate creditor claims and avoiding obligations, you could argue that this is not what the laws were designed to do.

The Viscount doesn’t think Trump abused the system at all. “Chapter 11, in my view, is the ultimate forum for business transactions,” he said. “It’s the place you go to keep a business alive and healthy. He didn’t do anything improper.”

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