Doral Financial


plunged 22% after the struggling lender got a bailout from some Wall Street investors at a steep discount to recent trading prices.

The Puerto Rican bank said a consortium led by

Bear Stearns'

( BSC) merchant banking arm agreed to take a 90% stake in the company for $610 million. The investors, which include Marathon Asset Management, Perry Capital, D.E. Shaw and

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

, will pay 63 cents a share -- barely half of Wednesday's closing price of $1.24 a share.

The deal will sharply dilute existing shareholders, who will be left with a 10% stake in the company. Shares fell 27 cents to 97 cents Thursday.

The financing will help Doral repay $625 million in floating rate notes that mature in July and also pay for the company's $129 million settlement of shareholder lawsuits filed two years ago.

Doralhas had a messy couple of years. The company needed to restate earnings from 2000 to 2004 stemming from its improper use of derivatives to hedge its mortgage portfolio against interest rate fluctuations. Later, Doral found problems related to the sale of some of its mortgages to other Puerto Rican banks.

It has been embroiled in regulatory investigations related to accounting problems and has had a host of executive shake-ups as a result of the scandal.

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As it struggled to right itself, Doral's stock has fallen 97% from the beginning of 2005. Its market capitalization is currently $105 million.

The company agreed in March to sell its 11 branches in New York City to

New York Community Bancorp

( NYB).

"The transaction comes at the end of an exhaustive process by the company's board of directors to explore financial and strategic alternatives to secure Doral's future," said Dennis Buchert, Doral's chairman. "It will permit Doral to continue as a well-capitalized major financial institution in Puerto Rico.

"Although highly dilutive to existing common shareholders, the board believes it is the best and probably the only means to retain some value for existing shareholders and enable them to participate in the future of the company," Buchert added.

Doral has already obtained $415 million in equity commitments and is in "active discussions" with investors for the rest, it says.

"They're trying to salvage as much as possible from the company," says Avi Barak, an analyst at Sandler O'Neill & Partners, who does not formally cover Doral. "It's a step in the right direction in terms of an indication that the company will survive. But I think we're still a long ways away before we get to any kind of resumption of normalcy in Puerto Rico."

"Aside from all these liquidity issues, the economy in Puerto Rico is not doing well either," Barak says. Yet, the consortium "clearly believes that there is value built in -- that 90% of this company is worth at least $600 million.

But to some observers, it's possible that Doral's condition is even worse than first believed.

"It's safe to say this averts bankruptcy and a liquidity crisis, but the longer term viability of this company without additional capital is still a primary concern," says Anthony Polini, an analyst at Soleil Securities. "In other words, there may need to be another dilutive round of capital infusion."

Doral cautioned that if the transaction does not close and the company could not repay the notes, it would likely seek bankruptcy protection.

The stock purchase is contingent upon shareholder and regulatory approval, and final approval by the U.S. District Court for the Southern District of New York for the settlement of the pending lawsuits.