Doral's Closure May Lead to More Than $34 Million in Muni Defaults

The failure of Doral Bank may lead to a default on more than $34 million in municipal bonds and notes.

At stake are two maturities of debt issued on behalf of Doral Financial Corp., the holding company for the failed bank, as well as municipal notes sold through a conduit.

The Commissioner of Financial Institutions of Puerto Rico shut down Doral’s bank operations Friday and appointed the Federal Deposit Insurance Corp. as receiver. The bank’s branches and deposits were sold to Banco Popular de Puerto Rico. In turn Banco Popular de Puerto Rico sold Doral’s stateside assets to Banco Popular North America and Centennial Bank. Finally, Banco Popular sold some of Doral’s Puerto Rico branches and deposits to FirstBank Puerto Rico.

Doral Financial Corp. in 1999 sold a bond through the Puerto Rico Industrial, Tourist, Medical, and Environmental Control Facilities Financing Authority. This bond still has an $11 million maturity due in 2029 and a $23 million maturity due in 2026. There was an additional CUSIP maturing in 2029 with an unknown amount due.

It has also been reported that Doral Financial has owed significant amounts of money on notes sold through the conduit Conservation Trust Fund of Puerto Rico.

The institutions that bought portions of Doral Bank on Friday didn’t buy either of these securities.

On Monday Doral Financial announced in an 8-K statement filed with the U.S. Securities and Exchange Commission that Doral Financial “has previously disclosed that it may not be able to continue as a going concern if Doral Bank were placed into receivership. The company is currently evaluating what actions it should take in response to the receivership of Doral Bank.”

The statement continued, “The company is unable to determine the extent of any recovery for its debt holders and creditors as well the preferred or common holders under a receivership of Doral Bank by the FDIC as the amount of any recovery will depend upon the priority of the claim and the price at which assets and businesses can be sold.”

Doral Financial may declare bankruptcy, said Richard Carri-n, chief executive officer of Popular Inc., the holding company for both the Puerto Rico and North American branches of Banco Popular.

Observers have also been following the fate of Doral’s suit against the Puerto Rico Treasury for $229 million. On Feb. 25 the Court of Appeals of Puerto Rico overruled a lower bank’s opinion that the Treasury owed the bank the money. Doral subsequently appealed.

FDIC spokesman David Barr said the FDIC has asked the court to put a 90 day stay on the lawsuit. “We have to review the litigation and decide how to proceed.”

Doral Bank had 26 branches, of which 18 were in Puerto Rico, according to the FDIC.

“This transaction brings additional stability to Puerto Rico’s banking sector,” Carri-n said. “Our participation in this transaction reflects our long-standing commitment to our main market, Puerto Rico. The prospect of adding deposits and loans to our Puerto Rico franchise, as well as the excellent fit of the New York operations with our existing business in the region, made this an attractive opportunity for us.”

According to Doral’s annual report for 2013, it had 1089 employees at the end of 2013. Carri-n said that all nonexecutive employees will be retained for at least 90 days but that all executives have been let go. He said that Doral had about 750 nonexecutive employees in Puerto Rico. He said he was unsure what portion of these employees will be kept on beyond 90 days.

Carri-n said he thought Doral’s demise would have little impact on Puerto Rico’s economy. Other than in the field of mortgage loans, Doral has not been active for many years, he said.

President of Puerto Rico-based Advantage Business Consulting Vicente Feliciano was less optimistic. He likened Doral’s demise to that of many other Puerto Rican firms that have gone bankrupt in the last few years. “As excess capacity is put away, jobs are lost, emigration continues and tax revenues decline. It is negative for the economy. Ultimately, it is also negative for the Puerto Rico bondholders who need the economy to improve.

“The way out of this predicament is to produce for the external market,” he said. “New capacity and new players are coming to the tourism sector and to aeronautical production. We need more growth from the market segments catering to the external market.”

Stern Agee analyst Brett Rabatin also had a mixed view. “We think the transactions over the weekend should give investors some confidence that actions are being taken in Puerto Rico that will improve the banking climate,” he said in a press statement. “Other governmental actions need to occur for some confidence in the local economy.”

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