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Doral Financial Struggles as Puerto Rico Annuls Tax Refunds

THE DEAL (New York) -- Doral Financial, (DRL) the holding company for Puerto Rico-based Doral Bank, is trying to save itself from insolvency by considering legal action to recoup $229.88 million in tax overpayments from the Commonwealth of Puerto Rico after the government repudiated the promised funds.

Doral exhorted the commonwealth's government and Treasury Department to "honor its obligations" in a May 15 statement, slamming the letter it received on Wednesday that annuls a March 26, 2012, agreement promising Doral a refund of tax overpayments made between 2000 and the present.

Doral strident response and subsequent legal action strongly indicates how badly the company needs funds. Doral received a letter from the Federal Deposit Insurance Corp. on May 1 warning that Doral Bank may no longer count the expected tax repayments from Purto Rico's government as Tier 1 Capital--and without it, Doral will fail to comply with the FDIC's regulatory capital requirements.

The company has been operating under a consent order with the FDIC since Aug. 8, 2012. Its bank deposits are insured by the FDIC up to $250,000.

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Doral is in the process of developing a revised capital plan to try to comply with regulatory requirements, and it must submit a contingency plan for the sale, merger, or liquidation of Doral Bank in case it can't raise enough capital within 120 days.

In the meantime, the company isn't allowed to accept new brokered deposits or roll over old deposits until it can receive a waiver from the FDIC, which has indicated that it won't provide such waivers.

Standard & Poor's downgraded Doral to CC from CCC- in a May 7 report based on these developments and asserted that a default is a "virtual certainty."

The ratings agency fears that Doral "may not be able to raise capital given its much weakened stock price and financial condition," and that its regulatory troubles may stand in the way of potential asset sales.

Doral Financial succeeded in divesting its healthcare finance business on May 15. The company sold Doral Healthcare Finance, an asset-based lender, to a subsidiary of Dallas-based Triumph Bancorp Inc. for an undisclosed sum, subject to regulatory approval.

Houlihan Lokey Inc. advised Doral Financial on the deal.

The company's stock popped on its announcement that it would seek to recoup funds from Puerto Rico's government, but the stock price fell 19.45% today after Doral revealed that the government had sent a letter annulling the agreement.

Doral, which trades on the New York Stock Exchange under the symbol DRL, closed at $9.82 on May 1 before it disclosed the letter from the FDIC. The following day, it cratered to a closing price of $3.73 and was down to close at $1.90 by May 9. On May 12, when the company revealed in a regulatory filing that it had requested the funds, it surged to close at $3.76, but it closed at $2.70 on Thursday, down nearly 18%.

Doral's problems extend to an entity called the Puerto Rico Conservation Trust Fund, which issued $200 million in senior unsecured notes due April 26, 2022.

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