Puerto Rico bank gets $610 million bailout
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| Published on Friday, May 18, 2007 |
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By Bradley Keoun
NEW YORK, USA (Bloomberg): Doral Financial Corp. has agreed to sell a 90 percent stake to investors led by Bear Stearns Cos. in exchange for a $610 million cash infusion that pulls the Puerto Rican bank owner back from the brink of insolvency.
Bear Stearns, Goldman Sachs Group Inc. and hedge funds including Marathon Asset Management and Perry Capital will pay 63 cents a share, about half of Wednesday's closing price, San Juan-based Doral said Thursday in a statement. Current shareholders, who must approve the transaction, will be left owning 10 percent. The stock fell 24 cents, or 19 percent, to $1 in composite trading on the New York Stock Exchange at 4 pm.
"It's probably the best deal they could have gotten," said Soleil Securities analyst Anthony Polini. "We thought common shareholders' value was much closer to zero."
The bailout may end a crisis that sent the company's stock price tumbling more than 80 percent in the past year. Doral, the parent company of Puerto Rico's seventh-biggest bank by deposits, said it would probably have to file for bankruptcy protection without the financing, which will go to repay $625 million in bonds due July 20.
The floating-rate notes soared 4.938 cents on the dollar today to 98.688 cents, according to Trace, the bond-price reporting system of the NASD.
Doral reported a $223.9 million loss for 2006 amid higher losses on mortgage sales and an economic slowdown in Puerto Rico that cooled demand for credit. The loss came after the company in April 2005 said it would have to restate earnings from 2000 through 2004, triggering an investigation by the Securities and Exchange Commission and a shareholder lawsuit.
In November Doral hired Bear Stearns to advise it on ways to refinance its debt.
Bear Stearns assembled a cast of hedge funds and buyout firms to provide the financing. The transaction required a legal structure that won't subject investors to regulation by the Federal Reserve or other agencies as a bank-holding company, said David King, a senior managing director with Bear Stearns Merchant Banking. For example, none of the investors will have more than a 9.9 percent stake.
"It's a very complex situation," King said. "We're very concerned about, as is the Fed, structuring this so there is no control entity, no control group."
Other investors include the D.E. Shaw group, Tennenbaum Capital Partners, Eton Park Capital Management and General Electric Co.'s GE Asset Management, according to the statement.
The six months it took to arrange the financing shows that many large banks and other institutions probably deemed Doral too risky an investment, Polini said. The share price the Bear Stearns-led group is paying works out to about 0.7 times pro-forma book value, he said. Book value represents assets -- including the capital invested by the Bear Stearns Group -- minus liabilities.
Most bank stocks trade from 1.5 times to more than 2 times book value.
"The board believes it is the best and probably the only means to retain some value for existing shareholders," Doral Chairman Dennis Buchert said in the statement.
The financing is contingent on resolution of the lawsuit brought over Doral's earnings restatement. Under a settlement reached in April, shareholders will get $129 million, including $34 million from insurers and $1 million in cash or company stock.
The US District Court in New York is scheduled to consider final approval of the proposed settlement on July 16, Doral said Thursday.
The company plans to fund the shareholder settlement with the proceeds from the pending sale of Doral's 11 bank branches in New York City to a unit of New York Community Bancorp., said Michael Driscoll, an associate director at Standard & Poor's. The Puerto Rico bank remains viable, he said.
"If you look at just the pure bank, it remains profitable," Driscoll said. "The holding company has been a mess." Brian Sterling, co-head of investment banking at Sandler O'Neill & Partners in New York, said the transaction shows the growing interest of private-equity firms and other investors in owning banks.
Lawyers have found ways of satisfying the demand for takeover targets while keeping their clients free from scrutiny by banking regulators, said Isaac Lustgarten, head of the financial-services group at law firm McDermott Will & Emery.
"The precedent that is set is that there's a lot of money chasing a lot of deals, and this is a viable, non-controversial structure," Lustgarten said. | | | | Reads : 309 | | | |
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