The decision to transfer the servicing rights of DVI Inc.'s deteriorating medical equipment portfolio has reportedly been made by debtor-in-possession provider Goldman Sachs. If all goes well, the servicing rights will be transferred to the winning bidder by Dec. 15, in an attempt to turn around the declining performance the collateral has experienced since the filing for bankruptcy in late August.
The timeframe Goldman has set, according to sources close to the situation, is as follows: proposals are due by this Friday (Oct. 31, 2003); the winning bidder will be announced Nov. 19; the deal closing is expected Dec. 8.
"The transfer needs to be complete by the end of the year in order to protect ABS holders' residual interest," one source planning to bid on the servicing rights said.
The decision to sell the servicing rights was made last week by corporate turnaround and financial advisory consulting firm AlixPartners LLC (formerly Jay Alix & Associates), which has been retained to manage the firm though bankruptcy. Apparently, however, there are still some pre-bankruptcy DVI staffers who would prefer to turn the company around, retain servicing rights and emerge from bankruptcy.
There are positive aspects to DVI's portfolio, which make it attractive to potential third-party servicers. While total on- and off-balance-sheet assets come to roughly $2 billion ($1.8 billion of securitized assets and $200 million still on balance sheet) the large contract size means relatively few obligors to contact. The portfolio as a whole averages $450,000 per lease, with a total of roughly 3,000 leases outstanding.
The downside, of course, is should performance continue to decline, losses become more severe. This is increasingly so in the most recent vintages, as the average contract size grew in DVI's last four securitizations. The average contract size in the company's final ABS, series 2003-A - issued in May - is roughly $714,000.
"When a company sees the end coming, the only way it sees to outrun the problems is to boost originations and that tends to come at the expense of lower credit underwriting standards," a source said. "The situation [with DVI] is either ineptness or fraud," he added. "Obviously we are hoping it's ineptness; we can fix that."
The potential new servicer will need to start in-depth credit analysis of the lease obligors, as well as deal documentation. Servicing fees for the nine most scrutinized transactions vary, with fees having increased starting with the 2001-2 deal, which priced in November 2001. The new servicer will also have to identify servicer advance fees due to the trust as well as any property tax liabilities that could supersede bondholder payments in the cash waterfall.
"The first thing any winning bidder would have to do is isolate that cash and sweep it into a lockbox immediately, and work from there," the source added.
As for the lease obligors, there would be little change, other than the address to which payments are sent. The servicing will likely be done on a private-label basis, with billing statements and even customer service seemingly unchanged from when DVI serviced the leases.
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