Donald J. Trump's financial troubles took a nasty turn for the worse Friday when the New York developer missed interest payments on $300 million in bonds of Trump Castle, one of his three casino hotels in Atlantic City, N.J.
The move came after Trump, caught in a critical cash squeeze that threatens to undo his financial empire, failed to reach final agreement with his bankers on a plan to borrow another $60 million and gain time to sell real estate to pay his mounting debts.
One banker close to the talks said all the domestic lenders approved the accord, but several Japanese banks balked. Trump's outstanding loans total about $2 billion.
"That's the fly in the ointment right now," the banker said.
The missed payment of principal and interest exceeded $42 million, said First Fidelity Bank, the New Jersey-based bond trustee, but Trump did make a $16-million payment on Trump Plaza bonds.
In a brief statement, Trump said talks are continuing, adding that the Trump Castle payments would not be made "pending the outcome" of the negotiations.
One official close to Trump said the developer's move was a warning to the banks "that he is playing hardball" and might allow the casinos to seek protection from their creditors in bankruptcy court if the rescue effort is not approved.
"Personally, he has very little (equity) risk in those casinos," the official said.
Moody's Investors Service reacted to Trump's announcement by lowering the credit ratings on bonds at the developer's other two casinos, Trump Plaza and Taj Mahal. The move affects about $925 million in long-term debt, the rating agency said.
The Taj, which cost about $1.1 billion, opened in April amid much fanfare as the world's most expensive casino, while the Trump Plaza has long been one of Trump's most profitable assets. Both are located along the Atlantic City Boardwalk.
"Even if Trump is able to gain additional support from his banks, he may still be unable to meet additional funding needs at Taj Mahal," Moody's said in its statement. "Consequently, a payment default could occur on the outstanding bonds in November, when the next interest payment is due."
Trump has a total of about $1.3 billion in publicly traded debt on his three casinos. The market value of all those bonds fell Friday.
Trump's problems represent yet another setback for the gambling industry in Atlantic City, where he controls a third of the market. "As Trump goes, so goes Atlantic City," one Trump associate said.
"This is a real downer, especially coming at the start of the tourist season," said one casino industry consultant in New Jersey. "This does not portend well."
New Jersey casino regulators could not be reached for comment.
Moody's said its actions reflect the weakened condition of gaming in Atlantic City. The decayed seaside resort town has a total of 12 casino hotels, 10 of them along the town's venerable Boardwalk. The other two, including Trump Castle, are on an inland marina nearly two miles away.
"The Atlantic City gaming market will continue to experience only modest revenue growth, and . . . intense competition could further weaken the earnings and cash flow of Trump's casino properties," the rating agency said.
Trump Castle, once managed by Trump's now-estranged wife, Ivana, has been hurt by sharply higher costs and extensive shake-ups in its top management. It lost $8.39 million in the first three months of 1990, following red ink totaling nearly $10 million in 1988 and 1989.
Trump's borrowing enabled him to invest well over $400 million in Trump Castle, a property he bought in 1985 from Hilton Hotels for $320 million. He later added rooms and renovated a nearby marina for better access by large pleasure boats, including his own $29-million yacht.
Trump raised permanent financing for the property with two bond issues secured by the casino property. First Fidelity, the bond trustee, said a notice of default would be filed immediately and added that Trump will have at least 10 days to make the payments before the bonds are officially in default.
Fidelity First also said it has resigned as trustee of the bond funds because it is also one of Trump's lenders. The bank said the move was to "avoid the appearance of any conflict" and said it would continue to administer the funds until a new trustee was appointed.
Trump has $70 million of his own money in Trump Castle, raised through a personal loan from Manufacturers Hanover Trust, Securities and Exchange Commission records show. The loan was to mature Friday.
Manufacturers Hanover is one of four major New York banks now negotiating with Trump. The others are Chase Manhattan, Citibank and Bankers Trust. None of the banks has confirmed its role in the talks, but Citibank is believed to be Trump's largest lender, with loans of more than $300 million.
Earlier this week, the four banks agreed to lend Trump another $60 million to meet his operating expenses, including the interest payments, but the agreement bogged down after some secondary lenders balked.
Talks to break the logjam continued into Friday evening, but communications were complicated because the Japanese bankers--the ones believed to be balking--have to confer with their home offices overseas, one banker said. The identity of the Japanese banks could not be learned.
"They have not shut the door completely," he said, referring to the Japanese lenders. "It is not dead, but it's not a done deal either." The talks should continue into the weekend, he said.