S&P cuts Doral to junk

Standard & Poor's said it lowered its long-term ratings on Doral Financial Corp., including Doral's long-term counterparty credit rating to BB+ from BBB-.

S&P also cut Doral's senior unsecured rating to BB+ from BBB- and preferred stock to B+ from BB.

At the same time, Doral's ratings were placed on CreditWatch Negative.

S&P said the ratings actions are based on Doral's statement that it is writing down the value of its interest-only strips (IOs) by $400 million to $600 million, which will result in a non-cash after-tax charge to earnings of between $290 million and $435 million.

Consequently, Doral must restate its financial statements back to 2000 and will delay the release of its first-quarter 2005 earnings.

While S&P said it already removes IOs from capital calculations, Doral's disclosure confirms concerns over the sustainability of its business model of originating and selling mortgage loans to generate gains on sale combined with a wholesale funded balance sheet.

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