Trump Casinos Prove To Be, Well, Dicey

Citing increasing concerns over the company's high debt leverage and limited liquidity, Standard & Poor's Ratings Services downgraded Trump Hotel & Casino Resorts Holdings LP and its subsidiaries last week to CCC-plus from B-minus, and slapped a negative outlook on the companies.

"Trump credits are highly leveraged - no financial flexibility or liquidity, especially at Trump Holdings, the parent company," said one gaming analyst. "Weakness at the parent is hurting the credits. Our general concern is a capital concern."

Even though analysts did not go so far as to warn that Trump would not meet interest payments in the near term, they did caution that debt at the holding company, parent of Trump Atlantic City and Trump Marina, could not be fully supported by cash flow from the Indiana riverboat operations.

While cash has been shifted from the Atlantic City casinos to cover the credit, this support is limited by Trump Atlantic City's own debt burden.

In its report, S&P cautioned that "the inability of the Indiana riverboat to meet the full debt service requirements at [Trump Hotel & Casino] is an immediate concern."

Trump's holding company and its subsidiaries have approximately $1.8 billion in outstanding debt.

"Trump has a funky capital structure," said one high yield analyst. "Anytime there's a holding company structure, it needs to garner cash from the operating companies. The riverboat in Indiana is barely skating by, it's a dicey credit."

Stabs at generating additional cash flow from Trump's Atlantic City operations have failed. Not only are the Atlantic City casinos being weakened by the credit support they provide to the holding company, but the casinos target day-trippers in a seasonal market. Gaming analysts do not believe it can be transformed into a year-round, Las Vegas-style mega-resort.

One analyst suggested Trump's holding company would need to attract a significant equity infusion to deleverage its balance sheet.

"Maybe he'll put equity himself into it," said one analyst.

The New York Post reported last week that Trump rebuffed a $500 million offer for his ailing Atlantic City casinos. The bid, launched by Los Angeles-based investment fund Colony Capital late last year, could have paid shareholders a premium of 300%. Colony reportedly offered the company as much as $12 to $15 per share (shares traded at $3.25 at press time) plus a $100 million cash injection.

Donald Trump, however, told the Post the deal was off and that he would not sell any of the casinos in the near term. He said he was focused on turning around the troubled businesses. Trump owns 42% of the company.

Trump's troubles come in the midst of a number of other casino companies cashing in. The stocks at several of the high yield names have seen dramatic upturns over the past year.

And Moody's Investors Service recently upgraded Isle of Capri Casinos Inc.'s $390 million 8.75% senior subordinated notes from B3 to B2.

According to Moody's, the move reflects Isle of Capri's improved geographic and property diversification, as well as its larger size with a pending acquisition of Lady Luck Gaming Corp. Pending shareholder approval, Isle of Capri should complete the acquisition by early March. Once the merger is completed, the company will operate 11 casinos in five states.