Now, let’s try substituting another name in place of Third World countries. How about the U.S. real-estate industry? To get more specific, how about Donald Trump? It’s not too farfetched to draw parallels between the banks’ lending practices in those countries in the 1970s and their relationship with Trump and other developers a decade later. Rolling in deposits and caught up in the go-go 1980s, the banks poured billions into real-estate loans, feeding a frenzy of construction and acquisition. Trump is now overleveraged, the real estate industry has gone bust, especially in the Northeast and Southwest, and loans are growing shaky. The banks, says business journalist James Grant, “have been woefully ignorant of history.”
Last week it was deja vu all over again. The country’s biggest banks were laboring feverishly to nail down yet another debt-restructuring agreement–this time Donald Trump’s. His troubles seemed only to deepen. He missed a Friday deadline to pay $42 million in interest and principal on bonds that financed Trump’s Castle casino in Atlantic City. Almost immediately, Moody’s Investors Service downgraded the credit ratings of bonds for Trump’s two other casinos, the Taj Mahal and Trump Plaza. The missed payment, which came a day after Trump’s 44th birthday, didn’t mean he had technically defaulted. He has a 10-day grace period to make the payments before bondholders could act to take control of the property. “This is a very serious occurrence because it starts the clock ticking,” said Bill Jacobs, a vice president at First Boston Corp. “But he has time to work it out.”
The banks are owed so much by Trump, about $2 billion, that they have no choice but to try to keep him going. The tentative restructuring plan called for the banks to give Trump fresh capital of about $60 million. They would also agree to defer payments on interest owed them. In return, Trump would put up more collateral, possibly forfeit stakes in some of his properties and impose a corporate structure that would keep a tighter lid on expenditures. But sources close to the negotiations concede those provisions alone wouldn’t solve his debt crunch. The agreement’s main purpose, they said, would be to give Trump breathing room to raise cash by selling off some of his properties. Explains one source, “He’s got a classic situation of having assets with long-term value versus shortterm credit demands. This is a standstill to give him time to sell the assets. He doesn’t want to sell at a fire sale.”
Lower values That’s the corner into which many developers and banks are now painted. Bad real-estate loans are dragging down banks’ earnings–they fell by about a third last year–and analysts think property values can only go lower this year. Some leading money-center banks, including Citicorp, Chase Manhattan and Chemical, had far more commercial real-estate loans on their books than loans to the Third World in 1989. Experts doubt the banks will take as big a hit with real-estate portfolios, because of the underlying assets. In Trump’s case, properties like the Shuttle, his casinos and a 76-acre undeveloped lot in Manhattan could all eventually fetch respectable prices. Christopher Mahoney, a Moody’s analyst, guesses that Trump’s banks will swallow losses of 20 to 30 percent before he works himself clear. Like it or not, the banks are no longer just Trump’s lenders–they’re his partners.
