Garnet Capital Advisors Blog

February 23, 2015

Doral problems worsening

Doral Financial's problems only seem to be getting worse. While the Puerto Rico-based holding company was able to improve its financial position late last year by attaining a legal victory, it has been encountering rising pressure from regulators, according to American Banker. 

Doral's future uncertain
Currently, great speculation surrounds Doral Financial's future, as the company admitted in a recent filing that it might have to enter receivership, American Banker reported. The company's path took a decisive turn recently, when the The Federal Deposit Insurance Corporation slapped it with a prompt corrective action directive, ordering the organization to bolster its capital position without harnessing a $230 million tax refund received from Puerto Rico's government. 

Capital challenges
Amid this situation, Doral has been considering different methods it can pursue to help shore up its capital, according to American Banker. One approach the organization has unsuccessfully pursued is selling assets. The company's capital situation was thrown into question early in 2014, when Puerto Rico's Treasury voided an agreement with Doral Financial to give the firm a tax refund. 

This decision prompted the company to pursue legal action, and in October 2014, Puerto Rico's Court of First Instance ruled on the matter, giving the Puerto Rican government five years to pay the $230 million tax refund. While this reprieve was beneficial, one expert cast doubt on how helpful the refund would be. 

"Unless Puerto Rico writes a check and the funds are transferred quickly, then it isn't clear [that] a favorable decision for the bank will solve their capital problems," Bert Ely of Ely & Co. told American Banker. After providing that commentary late last year, Ely recently gave American Banker an even bleaker outlook. 

"I think the likelihood that Doral could raise sufficient capital is as close to zero as you can possibly get," he told American Banker. "I don't think Doral will be able to continue as an independent organization." 

However, some provided a more optimistic view of the bank holding company's prospects. Doral could potentially recapitalize, noted Craig Miller, a lawyer at Manatt, Phelps & Phillips, according to American Banker. Taking this particular course of action would certainly have its drawbacks, as it would require substantial dilution. 

Should Doral Financial end up entering receivership, this change of ownership would be a watershed event that would impact the entire Puerto Rican banking industry. Should Doral Financial's assets be sold off, financial institutions might benefit from purchasing its loans out of the receivership.