NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded Doral Financial Corp.'s (DRL) Issuer Default Rating (IDR) to 'C' from 'CCC' and Viability Rating (VR) to 'c' from 'ccc', respectively. Long-term IDRs of 'C' and VRs of 'c' indicate that default appears imminent or inevitable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRs, VR and Senior Debt
DRL's downgrade follows the company's recent announcements that it will not meet the minimum capital requirements outlined in the company's current Consent Order and Written Agreements with regulators. Further, Fitch believes that DRL's liquidity position may be pressured since the company also announced that the Federal Deposit Insurance Corporation (FDIC) would no longer consider granting certain waivers that allowed the company to continue the use of brokered deposits for funding until DRL submits a revised capital calculation plan.
On May 1, 2014, the company was advised by the FDIC and Office of Financial Commissions (the local Puerto Rico bank regulator) that it could no longer include some or all of certain tax receivables due from the Government of Puerto Rico as part of its Tier 1 capital calculation. The tax receivables, which total $289 million, account for roughly 43% of DRL's current Tier 1 capital ($679 million). Given the exclusion of these receivables, DRL is no longer in compliance with its minimum regulatory capital requirement. The regulatory order requires Doral Bank to maintain a minimum Leverage Ratio of 8%, Tier 1 RBC of 10% and Total RBC of 12%.
Furthermore, in the consent order, Doral Bank is not permitted to accept, renew or rollover any brokered deposits unless a waiver is granted by the FDIC. The FDIC had previously granted such waivers. As of Dec. 31, 2013, DRL had a total of $1.4 billion in brokered deposits accounting for 28% of total deposits and 18% of total funding.
Given these changed circumstances, Fitch believes that it is unlikely that DRL would be able to address the capital shortfall in a timely manner. Moreover, the inability to access the brokered deposit market will further pressure DRL's weak funding profile. DRL's ratings have incorporated many of the company's on-going challenges such as longer-term strategic plans, geographic and product concentration in Puerto Rico with a limited franchise, high levels of non-performers, weak capital and liquidity profile. This development further adds to these already significant issues.
Fitch had previously assigned a recovery rating to DRL's uninsured deposits, in accordance with its 'Recovery Ratings for Financial Institutions Criteria', however, in light of DRL's changed circumstances, Fitch does not believe it has adequate information on which to base a recovery analysis. In the event information becomes available, Fitch will assess potential recovery.
KEY RATING SENSITIVITIES - IDRs, Senior Debt and VR
DRL's ratings are the lowest rating category. In previous ratings actions Fitch noted that the company's ratings are highly sensitive to compliance with its regulatory agreement. Additionally, DRL's ratings remain sensitive to its ability to access funding markets.
KEY RATING DRIVERS AND SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS
DRL's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
The ratings of long and short-term deposits issued by DRL and its subsidiary are primarily sensitive to any change in DRL's IDR.
KEY RATING DRIVERS and SENSITIVITIES - Support and Support Rating Floors
DRL has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, DRL is not systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING DRIVERS AND SENSITIVITIES - Holding Company
DRL has a bank holding company (BHC) structure with the bank as the main subsidiary. The subsidiary is considered core to the parent holding company supporting equalized ratings between the bank subsidiary and the BHC. IDRs and VRs are equalized with those of DRL's operating company and bank reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.
Fitch has downgraded the following ratings:
Doral Financial Corporation
--Long-term IDR to 'C' from 'CCC';
--Viability rating to 'c' from 'ccc'.
Doral Bank
--Long-term IDR to 'C' from 'CCC';
--Long-term deposits to 'CC' from 'B-/RR3';
--Viability rating to 'c' from 'ccc'.
Fitch has affirmed the following ratings:
Doral Financial Corporation
--Preferred stock at 'C/RR6';
--Senior debt at 'C/RR6';
--Short-term IDR at 'C';
--Support at '5';
--Support Floor at 'NF';
Doral Bank
--Short-term IDR at 'C';
--Short-term deposit at 'C'.
--Support at '5';
--Support Floor at 'NF'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Recovery Rating for Financial Institutions' (Sept. 24, 2013).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Recovery Ratings for Financial Institutions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538
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