Cash-strapped medical finance company DVI Inc. missed the coupon payments on five of its nine outstanding equipment lease securitizations last Friday and breached three servicing covenants, trustee U.S. Bank announced to bondholders. If the company does not rectify its breaches within 30 days, 56 classes of DVI Receivables X through XIV will default. Additionally, DVI reported a miscalculation of the aggregate discount contract balance for its August payment, thus coming up short.
With respect to its September 2003 payment, DVI failed to make servicer advances, failed to provide the monthly servicer report (due out last Thursday) and failed to pay certain taxes applicable to its contracts or equipment, according to the notification disseminated to ABS holders.
Furthermore, at the request of certain ABS investors, an investor committee is being formed, headed by Mark van der Herik of PPM America and Anup Agerwal of Invesco, "in order to assert the collective interests of the holders related to DVI bankruptcy proceedings."
Iya Davidson, an associate director at DVI's PR firm Gavin Anderson & Co., had no comment on the issue. The previous company spokesman John Shoenfelder, vice president of international banking and investor relations, fell victim to a recent round of layoffs, in which it trimmed nearly one-third of its workforce.
Insiders said that the inaccurate calculations and missed coupon payments are the result of $1.5 million in defaulted leasing contracts, that hadn't been charged off. DVI's reserve account, liquidated upon entering bankruptcy, could not cover the entire principal payment due this month, sources close to the situation said.
Market talk was that DVI's lease obligors, also facing a liquidity crunch, are willingly withholding payments with the intent of forcing leasing arrangement renegotiations.
Further details of the missed coupon payment and trust performance are expected to emerge this week, assuming the company releases its September servicing report. Those with knowledge of the details of the servicing report expect delinquencies to spike, as servicing quality has deteriorated.
As of press time it was unclear whether trustee and backup servicer U.S. Bank would step in or if a yet-to-be determined acquirer would take over the servicing. DVI is in the process of auctioning off
DVI had a hearing scheduled for last Thursday in regards to its proposed sale of its unsecuritized assets. In its bankruptcy court petition, DVI listed its total indebtedness as $1.618 billion and its total consolidated assets as $1.866 billion.
In related news, Moody's Investors Service downgraded 50 classes of DVI ABS last Thursday, due to deteriorating performance and left all 50 classes on review for further downgrades. The downgrades totaled $1.7 billion of the roughly $1.8 billion of DVI ABS outstanding.
Moody's analyst Irina Faynzilberg said that Moody's did not base its downgrades on the default indentures, but strictly on the deterioration in performance and the likelihood of further deterioration.
"Moody's review will focus on the outcome of the sale of DVI's assets and on the ability of the buyer to service the highly specialized receivables of DVI effectively," Moody's said in its release. "If the asset sale is not accomplished, the review would concentrate on the timeliness of the servicing transfer to U.S. Bank."
"This (notice of default) did not play into the most recent downgrades," Faynzilberg added. "The bankruptcy-related amortization event triggered changes in the payment waterfall and payments were delayed because DVI must recalculate its payments of principal and interest. We are hoping to have this situation corrected by [this] week," she added.
Faynzilberg also said that servicer advance fees - as an asset owed by the trust to whichever entity ends up servicing the portfolio - may also further deteriorate future performance, taking away cash flows from bondholders as they are deemed unrecoverable. "To the extent that (servicer) advances are non-recoverable, the trust must pay un-reimbursed advances back to either DVI or the new servicer," she said.