As expected, specialty medical equipment finance company DVI Inc. announced it intended to file for Chapter 11 bankruptcy protection last week. DVI also placed its CFO Steven Garfinkel on administrative leave. Anthony Turek and John Boyle will assume Garfinkel's responsibilities.
There was no word as of press time whether trustee and backup servicer U.S. Bank will step in as the primary servicer. Trading was limited after last Wednesday's announcement.
"Despite extensive discussion with potential funding sources, DVI was unable to arrange for the funding required to continue operations," the company said in its release. "Its attempts to address its problems through a sale or recapitalization have been hindered by the recent discovery of apparent improprieties in its prior dealings with lenders involving misrepresentations as to the amount and nature of collateral pledged to lenders."
Fitch Ratings promptly commented on the developments last week, stating that it expects to lower DVI's senior unsecured debt to D' from C'. Fitch also noted the likelihood that collateral performance would deteriorate.
Interestingly, a quick news search for CEO Michael O'Hanlon shows that his previous position ended in scandal as well.
Prior to joining DVI in 1993, O'Hanlon held a similar position at Concord Leasing Inc., which experienced similar erroneous valuations of its shipping assets. Shortly after Concord was acquired by HSBC, O'Hanlon was let go following a review of Concord's books, according to press reports. HSBC then pledged $100 million to the new subsidiary and charged $75 million against profits. Over the next three years, the bank took numerous write-downs and eventually, in 1995, it transferred Concord to its Marine Midland subsidiary. After a $170 million loss in February 1995, it was reported that Concord had not been profitable from 1991 through 1995.
Unfortunate timing
for HPSC
Separately, small ticket medical equipment lender HPSC Inc. said in an amended 10-K last week that it has brought two previously off-balance securitizations back onto its books. The company attributed this to an accounting technicality that caused it to lose non-recourse sale treatment in the opinion of its auditor, Deloitte & Touche.
"We certainly regret having to take these steps with all the additional work and confusion it causes in the market, especially since there is no problem with the facilities, or their purpose, or their underlying portfolios," said Chairman and CEO John W. Everets in an investor conference call. "As I said, it's simply a technical mistake."
Everets said the technical issue is in no way credit related. As a result, HPSC's unearned income increased by $30 million to $157 million.
Apparently, the technical issue involved the use of a second SPE that collected cashflows at the bottom-of-the-waterfall before being passed through to HPSC as servicer.
Details beyond that - or how this violated sale treatment under FAS 140 - were unavailable.
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