How Trump's Debt Addiction Crushed the Biggest Company He Ever Ran
He says he’ll fix America’s national debt problem, but his business track record argues otherwise.
Donald Trump claims that as president he’d use his business prowess to tackle
one of America’s most urgent problems: the towering national debt. “We’re getting to be like a large-scale version of Greece,” Trump warned in a Fox News interview last month. “Look at the country as a profit-making or losing corporation. Right now, we’re losing.”
The key to solving this debt dilemma? Trump-style management, asserts Trump. The frontrunner for the Republican presidential nomination promises that he’d remake the U.S. economy into a growth machine and erase the country’s national credit problem.
As evidence, he trumpets his success managing his own enterprises, boasting that the businesses in his portfolio have “very low debt and tremendous cash flow.” That example, Trump has declared, demonstrates the “kind of thinking this country needs with $19 trillion in debt, believe me.”
There’s just one problem with this narrative:
Trump’s actual track record as an executive who has overindulged on credit time and again.
Indeed, a close examination of how Trump ran the largest business he ever headed demonstrates an entirely different kind of thinking from the belt-tightening rhetoric he spouts on the campaign trail. Over more than a dozen years heading at the time one of America’s biggest casino operators,
Trump showed a penchant for aggressively loading up on debt—way, way more than the business could support.
Much of the debt was accumulated through a series of self-dealing transactions, in which his public company bought out Trump’s personal stakes in various casinos. Trump made those sales to rescue himself from potentially ruinous personal guarantees, and moved huge portfolios of junk bonds that he couldn’t repay personally onto the newly-formed public company. In one major deal, he also appears to have, in effect, paid himself a highly inflated price.
In the end, Trump’s myopia for the risk created by all the crushing credit obligations at his businesses punished employees, banks, investors, and bondholders alike—almost everyone but Trump himself. It also tanked Trump’s investment in Atlantic City, a place where Trump says he is “very, very proud” of how he did.
Let’s take a closer look at Trump’s corporate credit record through the prism of Trump Hotels.
Borrow early, borrow often
Trump’s operating model for his casino operations can best be summarized thusly: high debt and insufficient cash flow. As chairman, chief shareholder, and sometime CEO of Trump Hotels & Casino Resorts (later named Trump Entertainment Resorts) from 1995 to until early 2009,
Trump leveraged his Atlantic City gaming properties to such an extent that even if they’d fared well—which they didn’t—they still wouldn’t have turned a significant profit.
The Trump Hotels saga is a twisted sort of growth story—one that’s about the growth of debt, not revenues or profits. When Trump Hotels went public in 1995, it carried just $494 million in long-term debt. By the end of the next year, under Trump’s direction, its borrowings had ballooned more than three times to a staggering $1.7 billion, or 4.4 times its equity. Conservatively leveraged companies, by comparison, hold half as much debt as equity. By 2002, Trump Hotels’ debt had risen to $2.1 billion and
its leverage ratio had expanded to 27, approaching the levels that later sank Lehman Bros. during the Financial Crisis.
The result was a bottom line that stayed stuck in the red. In 1997, Trump Hotels lost $42 million, as its $205 million in interest expense far exceeded the operating earnings of $143 million. And it only got worse. By 2003, operating earnings had declined 7% to $135 million, and interest costs grew 10% to $227 million—deepening the deficit to $87 million.
From the IPO in 1995 through two separate bankruptcies in 2004 and 2009, the main Trump casino operator never made money.
Year after year, its operating profits were decimated by gigantic interest costs. Over the almost 15 years Trump served as chairman, Trump Hotels posted net losses, excluding extraordinary items, totaling nearly $1.7 billion.
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