Investors holding DVI Inc. medical equipment lease ABS got their first bit of good news in roughly one year last week, as one of the most prominent lease obligors agreed to repay the $60 million it owes the trust. RadNet Management, the primary operating subsidiary of Primedex Inc. - which represented cashflows in each of the nine outstanding transactions - reported last Monday that it would repay its lease obligations at the previously agreed-upon terms.
Of the current $500 million in defaulted loans, replacement servicer US Bank identified $334 million being sought as collectable via restructuring, with an extra $100 million deemed collectable by legal means. About $2.6 million had been charged off. Of the $334 million US Bank is attempting to restructure, $145 million has been either restructured or resolved in a cash payment, the servicer told participants in a conference call held last week.
US Bank is "actively working on other" accounts but is unsure of receiving par value for all remaining collectable accounts, a source said. Presgar Imaging, another "relationship account" described in April's examiner's report (see ASR 4/19/04), had exposure through five units, three of which have been restructured at 100%.
If US Bank finds success in collecting the entirety of the $434 million, it is believed that senior ABS holders will receive most, if not all principal owed them, albeit at a later date than scheduled upon pricing. The status of subordinate bonds is unclear at this point, as funds owed by smaller exposure accounts are reportedly on the back burner.
"It only makes sense that US Bank go after the low-hanging fruit first; one would expect they would go after the bigger obligors first," said Merrill Lynch researcher Theresa O'Neil.
There is no guarantee, however, that DVI ABS does not default, as some classes have seen downgrades due to the rapidly approaching legal final maturity. Either way, investors cheered the news, as RadNet represented nearly 20% of the defaulted receivables deemed most important to collect immediately. Many others on the street, however, failed to even notice.
"Future performance of the pools will largely depend on [US Bank's] ability to reduce the flow of future delinquencies as well as on the magnitude and the timing of recoveries on defaulted receivables," noted Moody's Investors Service, following its latest round of downgrades in April. "The latter will depend on [US Bank's] ability to either work out the already defaulted contracts or liquidate the underlying equipment."
In particular, tranches most at risk to breach the maturity dates are the series 2001-1 A3 class, 2001-2 A3 class, and A2A and A2B classes of the 2003-1 transaction. The 2001-1 A3, 2003-1 A2A and A2B have a final maturity date of Nov. 11, while the 2001-2 A3 matures July 11, 2005, according to Moody's.
"At this point, investors aren't worrying about legal final maturities, or extension," said Moody's Senior Credit Officer Irina Faynzilberg. "It's possible for final maturities to get blown but depending on recoveries, some investors may receive partial or even full recovery of principal."
"US Bank and the team are doing a terrific job collecting on DVI leases," one DVI holder said. "I won't be surprised if they will continue to exceed everyone's expectations for recoveries."
"This is the best news since the servicing transfer and a heck of a lot more interesting than a couple hundred grand of missing cash," the investor added, calling DVI paper "cheap" at current valuations.
Trades were nonexistence on the Primedex news, as most were unaware of the fact that Primedex was related to DVI via RadNet. "I haven't seen a market in DVI in over a month," one trader reported. "When there were trades, they were at dollar prices, not spreads."
DVI filed for Chapter 11 bankruptcy Aug. 25, 2003, and since then, things have gotten worse, including DVI's refusal to honor early amortization triggers, fighting the eventual servicing transfer and a special examiner report detailing outright fraud, as well as double-pledging of assets.
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