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.

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.

Puerto Rico's government issued the notes in order to buy back medium-term notes Doral had issued, constituting a form of tax-exempt financing for the company. Doral Financial is the sole obligor on the Conservation Trust notes.

Moody's downgraded the Conservation Trust to C from Caa3 on May 9, citing a "high likelihood of default and high loss severity in the event of a default."

"Everyone is aware of the Government's tight fiscal situation," Doral conceded in a May 15 statement, "But the way out of it cannot be for the Government to default on its obligations and damage its credibility for generations to come."

Puerto Rico's treasury is in a tough spot after revenue collections for April, a key month because of tax collections, fell short of expectations by $442 million, or 26%. The revenue miss may make it difficult for the commonwealth to repay certain debt obligations during fiscal 2014, which ends on June 30, without taking out new loans, which it has promised to do.

Doral noted on May 13 that it would be late in putting together its financial report for the first quarter since it needs more time to review the implications of the FDIC's May 1 examination report. Doral expects that this quarter's results will be "significantly different" from its results during the first quarter of 2013.

Doral Bank primarily does business in Puerto Rico, but it also has operations in New York City and northwest Florida.

Spokeswomen for Puerto Rico's Treasury Department and governor's office didn't return calls. Nor did a Houlihan spokesman. A Doral spokesman declined comment.

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