S&P Lowers Doral (DRL) to 'BB'; Cites Weakend Capital Position

Standard & Poor's Ratings Services today said it lowered its issuer credit rating on Doral Financial Corp. to 'CC' from 'CCC-' and placed the rating on CreditWatch with negative implications.

"Our downgrade of Doral reflects the institution's weakened capital position to the point that it has breached minimum regulatory capital requirements under its current consent order with the FDIC," said Standard & Poor's credit analyst Sunsierre Newsome.

The FDIC advised Doral Bank that it may no longer include in its calculation of its Tier 1 capital some or all of the tax receivables from the government of Puerto Rico. These receivables accounted for nearly 43% of the bank's $679 million of Tier 1 capital as of Dec. 31, 2013. "Because the institution's capital fell below its minimum regulatory capital requirements, the rating is now 'CC', consistent with our criteria," said Ms. Newsome.

We revised Doral's capital and earnings score to "very weak" from "weak" (as our criteria describe the terms). Even if Doral develops a capital plan that receives regulatory approval, the bank may not be able to raise capital given its much weakened stock price and financial condition.

Doral Bank entered into a consent order with the FDIC on Aug. 8, 2012. Under the consent order, if the bank's Tier 1 capital ratio falls below the minimum requirements, the bank is required to either increase capital in an amount sufficient to comply with the capital ratios in an approved capital plan or submit to the FDIC a contingency plan for the sale, merger, or liquidation of Doral Bank in the event the primary sources of capital are not available within 120 days. In addition, the FDIC indicated that it will not consider granting Doral Bank waivers to accept brokered deposits. We believe that Doral's inability to accept and roll over brokered deposits hurts its liquidity position at a time when options may be limited, and as a result we have changed our assessment of the bank's liquidity to "weak" from "adequate."

Furthermore, without regulatory consent, Doral may have difficulty implementing a strategy that includes selling assets, which may further hurt its financial condition. Doral's currently vulnerable financial position and depressed stock price could mean that the bank faces significant challenges in trying to raise capital.

"Our ratings reflect our view that the bank's difficulties could result in additional regulatory intervention, and we expect default to be a virtual certainty," said Ms. Newsome.

We are placing the ratings on CreditWatch with negative implications. During the CreditWatch period, we will monitor whether the company is able to obtain regulatory approval for its revised capital plan and execute on the plan to improve its capital ratios. We believe it might be difficult to successfully execute on a plan to raise capital given the company's residential mortgage-heavy asset base and depressed stock price. Conversely, if the bank does obtain approval from regulators for its revised capital plan and is able to raise its capital above the regulatory minimum by more than 100 basis points, we could remove the rating from CreditWatch. The company has 120 days to submit a revised capital plan, which is somewhat longer than our usual 90-day CreditWatch time horizon. Nonetheless, if the company has not submitted and obtained regulatory approval for its revised capital plan within our 90-day period, we could extend our CreditWatch assessment.

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