ATLANTIC CITY - In the latest financial crisis to jolt the gaming industry, Atlantic City's smallest casino has defaulted on its mortgage as it struggles to compete in the land of the giants.

The Atlantic City Hilton Casino Resort disclosed in a financial statement filed with the state Casino Control Commission that it failed to make its monthly loan payment July 9 due to the "severe impact of the current economic conditions."

The casino noted it is in negotiations with its lender to revise the terms of the mortgage agreement. As of June 30, its outstanding debt under the loan was $348.2 million, plus $868,000 in accrued interest, according to the financial statement.

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Nicholas L. Ribis, chief executive officer of the Hilton, said Friday the casino would continue with "business as usual."

"Our day-to-day operations will continue without interruption and seamlessly," he said. "For our employees and customers, there is no change."

Daniel Heneghan, a spokesman for the Casino Control Commission, said the agency has been in contact with the Hilton, but no regulatory action is anticipated at this time.

"We have been monitoring their financial condition very closely. We will continue to do so," Heneghan said.

This week, the commission reported that the Hilton fell to a gross operating loss of $603,000 in the second quarter, compared to a profit of $4.2 million in the same period last year. Through the first six months of 2009, the Hilton has posted a gross operating loss of $9 million, compared to a profit of $8.4 million for the same time a year ago.

Hilton is owned by an affiliate of Colony Capital LLC, a Los Angeles-based private real estate investment firm that has struggled in the ultra-competitive casino industry. Now quaint by modern standards, the Hilton features a modest 800 hotel rooms and only 60,000 square feet of gaming space with a 1980s-era decor that reflects its beginnings as the Golden Nugget casino.

Colony Capital also owns Resorts Atlantic City through another affiliate, but agreed this month to let the lenders take over the property after the casino defaulted on its $360 million mortgage and faced foreclosure. The Casino Control Commission is scheduled to vote Wednesday on Resorts' request for the lenders to take control.

Other Atlantic City casinos have been battered by the recession and stiff competition from slot parlors in Pennsylvania. For the year, gaming revenue has plunged nearly 15 percent industrywide.

The three Trump Entertainment Resorts Inc. casinos missed making a $53.1 million debt payment last December in a prelude to their Chapter 11 bankruptcy filing in February. Donald Trump and an affiliate of Dallas-based Beal Bank have offered to buy Trump Entertainment out of bankruptcy for $100 million and take it private.

J. Carlos Tolosa, president of the Eastern Division of Harrah's Entertainment Inc., said things appear particularly grim for the Hilton and Resorts. Tolosa, whose company owns the Harrah's Resort, Bally's, Caesars and Showboat casinos, predicted that the Hilton and Resorts may not survive in the next few years.

"My sense is that at least two casinos will close - Hilton and Resorts," Tolosa said. "All you have to do is look at their dismal financial performance."

Hilton has been the worst performer among Atlantic City's 11 casinos. Its gaming revenue has plummeted 25 percent in the first six months this year. Resorts is not far behind, with a 22 percent decline.

Hilton has been hindered by its small size and relatively remote location at the southern tip of the Boardwalk. Plans for a $1 billion expansion, including a new 1,000-room hotel tower and a doubling of its casino space, fell through early last year after the economy began to falter.

Colony Capital owns the Hilton through its Resorts International Holdings LLC affiliate. Colony acquired the Hilton and three other casinos in Mississippi and Indiana in 2005 for $1.24 billion. It sold one of those casinos, Resorts East Chicago, in East Chicago, Ind., to Ameristar Casinos Inc. in 2007 for $675 million.

Proceeds from the East Chicago deal were supposed to help finance the Hilton's makeover, but the plan was shelved. Hilton last underwent a major expansion in 1997, when it added 300 hotel rooms at a cost of $50 million.

The property opened in 1980 as the Golden Nugget, casino mogul Steve Wynn's luxury resort. Wynn sold the casino for $440 million to Bally Manufacturing Corp. in 1987, beginning a string of ownership and name changes that tainted its reputation. It became the Hilton in 1996 after another ownership switch.

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