Puerto Rican Bank Doral Facing Dire Situation

Jacob Harper |

Like so many lenders Doral Financial Group (DRL) was absolutely hammered in the global financial meltdown of 2008. While many banks were destroyed in the aftermath, others like Doral survived, but not without their scars. And with a startling rejection from their home government concerning a potential bailout, Doral is now facing another catastrophic situation, but, this time around, they might not escape intact.

On May 12 Doral demanded $230 million dollars from the Puerto Rican government after claiming they had grossly overpaid on taxes, asking to be paid “immediately.” The timing was crucial for Doral, as they were in danger of failing the stress tests banks must be able to withstand to prove their viability in the event of another meltdown. The bank had previously been using bonds as a part of their Tier 1 capital  requirements, or the minimum amount of capital a bank must hold to be considered sound. When informed that they no longer meet requirements, and had not for some time, the bank started scrambling for funds.

But even without a meltdown on the horizon, Doral is sorely undercapitalized and in desperate need of the capital injection. The need was ignored by Puerto Rico on June 3, who finally answered Doral’s demands with a "no."

They did hint they would repay Doral “in some way,” though the details and timeline of such a repayment remained unclear.

Stockholders Sue Doral

To add insult to injury, on June 3 Pomerantz Law Firm reminded clients that if they had bought shares of Doral between April 2, 2012 and May 1, 2014 were entitled to participate in a class action lawsuit against Doral for violation of securities law. The lawsuit alleges the bank issued a series of intentionally misleading financial reports that both overstated assets and understated loan reserves, and that the bank was woefully undercapitalized throughout the period while hiding this fact from stockholders.  

Facing both a class action lawsuit and a lack of help from their home government, and the additional default risk the bank faces on $150 million of municipal bonds, Doral is facing down a real liquidity crisis, and barring a sudden change in fortunes could be heading for very serious trouble indeed.

Shares of Doral plummeted 16.57 percent in June 3 trading action to hit $2.97 a share.

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