Puerto Rico-based Doral Financial Corp. is likely to default on more than $150 million in municipal notes and bonds after regulators ruled that receivables from the commonwealth government can't be included in Tier 1 capital, ratings agencies said.
These receivables were $289 million out of the bank's $679 million of Tier 1 capital. The ruling will force the bank to either increase capital within 120 days or submit a contingency plan to the Federal Deposit Insurance Corp. to sell, merge or liquidate, Joseph Pucella, vice president at Moody's Investors Service wrote Friday.
On Friday morning Moody's downgraded a bond and a note issued by the Puerto Rico Conservation Trust Fund to C from Caa3. C is Moody's lowest possible rating. Doral Financial is the securities' obligor.
The $100 million note was sold with tax exempt interest in 2002. $30 million is still outstanding. The $100 million bond was sold with tax exempt interest in 2001 and all of it is outstanding.
In addition, Moody's downgraded senior secured bonds from Doral Financial's subsidiary Doral Properties to C from Caa3. These were sold in 1999 and more than $39 million in par is still outstanding.
Moody's action follows similar actions by Fitch Ratings and Standard & Poor's. Fitch dropped Doral Financial's issuer default rating to C from CCC on Monday. C is Fitch's second-lowest rating.
S&P dropped Doral Financial to CC on Wednesday. CC is S&P's third-lowest rating.
Doral Financial Corp. is the parent company of Doral Bank.
Doral Financial has had problems for years and its stock on Friday was down 98% from its five-year peak in April 2010.
On Aug. 8, 2012, Doral Bank signed a consent order with the FDIC. On May 2 the bank announced that the federal government had declared that tax receivables from Puerto Rico's government cannot be treated as Tier I capital to fulfill the consent agreement.
"In response, the company stated in its May 1 8-K that as part of its revised capital plan, 'it must seek immediate financial support from equity and debt holders and/or external sources," Pucella wrote for Moody's. Moody's said that this indicates a high likelihood of default and severe losses for Doral Financial's creditors. An 8-K is a statement from companies to investors about important events, required by the United States Securities and Exchange Commission.
Doral Financial didn't respond to a request for a comment.
Since Doral isn't one of the biggest Puerto Rico banks, its collapse wouldn't have a big impact, said Vicente Feliciano, president of Advantage Business Consulting, adding, "It's not to be taken lightly."
The collapse of three Puerto Rican banks in April 2010 was more significant, Feliciano said. The FDIC made sure all deposits were honored and not just the first $250,000, he said, and it would probably do the same for Doral's depositors.
