DVI Inc. took another wrong turn last week, as the trustee announced that DVI Financial Services, as servicer, "may have inappropriately used somewhere between $2.5 and $3.5 million" of funds due to nine trusts in question prior to filing for Ch. 11 bankruptcy.

While some investors were crying foul play over this misappropriation, others took a more tempered approach, citing the decreased financial flexibility upon entering bankruptcy and the planned auction of DVI's assets. While this is a relatively small amount for DVI to be short, seen only eating into the most subordinated of bondholders, "Most holders assumed the problems did not impact the securitizations," one investor said. "We now know this is not true; this involves assets in the trust."

Trustee U.S. Bank also reported to bondholders that it has "reason to believe that some vendors of equipment, which may be the subject of the contracts owned by these special purpose vehicles, have not been paid in full for such equipment and/or related services." An investigation into this belief is currently being conducted by U.S. Bank, and further developments will be announced to bondholders as details become available.

DVI successfully revised the schedule for the planned auction of its assets. According to the release, bids for DVI's assets are due by 5 p.m., Oct. 3, with the auction to be held Oct. 8 in the Chicago offices of law firm Latham & Watkins. The winning bidder will be announced, barring objections, Oct. 15 at 9:30 a.m.

Also, pending bankruptcy court approval, DVI has obtained $148 million in debtor-in-possession financing provided by co-loan agents Goldman Sachs & Co. and Ableco Finance LLC. Ableco Finance is a New York-based lender formed by executives of buyout specialists Cerberus Capital Management and Gabriel Capital Group. Ableco invests in leveraged buyouts, bridge loans acquisitions and debtor-in-possession financing.

Proceeds of the DIP facility are earmarked for the retirement of a revolving facility set up with Fleet Bank N.A. in March 2002 as well as reimbursement of up to $20 million of servicer advance fees to the trusts. Both had been considered a liability that would become the responsibility of the potential winning bidder.

There is also debate as to what amount any potential replacement servicer would be liable for its cure payment schedule, or the funds owed to the trust. Upon entering bankruptcy, DVI claimed this amount to be zero. U.S. Bank objects to this assessment, citing known servicing agreement breaches, for which any new servicer would have to cover before taking over the platform.


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