Spreads for DVI medical equipment ABS once again widened last week after the company missed a $7.7 million coupon payment for its only outstanding unsecured bond obligation. Described as having "one foot in the grave and the other on a banana peel," market participants see only two ways for DVI to continue as an ongoing concern - through bankruptcy or by obtaining a covenant waiver - the latter being viewed as unlikely.

Spreads for DVI's ABS spiked, bid at 150 to 200 basis points wider than the previous week's 200 basis point level over Libor for the A3A class of DVI XIX 2003-1. Banc One Capital Markets and Merrill Lynch were restricted from commenting or issuing research on the name. The only research issued on DVI came out of Banc of America Securities, which said that trustee and backup servicer U.S. Bank "would likely accept servicer responsibility if a servicer transition occurs."

But, despite the securitizations being placed on watch for a downgrade by all three rating agencies, the only classes that have been downgraded have been the corporate guaranteed 1998-1 C class, which has seen its ratings move in line with DVI's senior unsecured ratings. Sources report that the bonds continue performing in line with expectations, although, "if there is a servicing transfer, we will likely see a disruption," a trader noted.

"The securitization structures are not overly complex; in fact they are very straightforward," said company spokesman John Schoenfelder. "DVI continues servicing the transactions as before," he added.

Most in the ABS market hope that DVI's portfolio will be acquired by a well-capitalized equipment finance concern, such as GE Capital or The CIT Group. In the interim, the market is banking on the expertise of U.S. Bank to leverage its experience in medical equipment finance and leasing.

South of the border

Additionally, DVI has securitized its Brazilian receivables, with an $80 million transaction that priced in 2000 via Deutsche Bank Securities. Named MSF Funding, it has so far fared much better than its U.S. counterparts, and it is expected to pay down without incident. A servicing transfer, however, to trustee JPMorgan Chase might boost its vulnerability, sources added, as the New York-based operations may have more difficulty taking over a Brazilian deal.

The vehicle, issued with a final maturity of July 25, 2007, has repaid faster than expected ant will likely fully amortize before maturity. Sized at $52 million, the senior tranche was rated investment grade by all three agencies. Citing the "financial instability" plaguing DVI, as servicer, Moody's put its A2' rating on the A class as well as the sub tranches on watch for a downgrade.

By contrast, Standard & Poor's has affirmed its ratings on the transaction, including an A' on the senior tranche, of which approximately US$15.4 million is outstanding. Fitch Ratings currently has the senior tranche at BBB'.

Performance on the credit has been encouraging, with just 2.6% of the total pool balance having defaulted, according to S&P. Part of the reason, sources said, is that, as with its U.S. securitizations, DVI has been active in substituting leases within the trust. A change in servicer might affect that substitution. "It may start eating into the credit," a source said.

"Right now it's very stable, but you can't just ignore it," said Sam Fox, head of Latin American structured finance at Fitch. He noted that the leases within MSF are denominated in dollars, while hospital bills and such are typically in local currency, another potential Achilles' heel.

Bolstering the MSF transaction is massive combined enhancement in the form of a single-B rated D tranche and an un-rated E piece, which now totals about 30%. The fact that about 70% of the notes have already amortized adds further support.

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