As the situation at bankrupt equipment finance company DVI Inc. worsened last week following the release of the August servicing report, investors were ironically growing more comfortable with the name - bidding improved, with buyers outnumbering sellers, sources said. Collateral performance, meanwhile, took an expected turn for the worse with 30-day delinquencies spiking to nearly 30%, versus historical averages between 5.5% and 8%.
After a one-month delay, DVI released its September (August period) servicing reports for the nine transactions currently in question (see ASR 9/29). For DVI's series 2002-1 transaction, 30-day delinquencies jumped to 23.17%, up from 5.77% the previous reporting period. Delinquencies for series 2001-2, meanwhile, were reported at 20.27%, up from 6.04% the previous reporting period.
Sixty-day delinquencies, the next hot-button distribution, are expected to spike, in line with August 30-day delinquencies. For series 2002-1, 60-day delinquencies are at 5.28%, up from 0.14% the previous month. For series 2001-2, 60-day delinquencies currently sit at 3.37%, up from 0.49% the previous month.
Early payout triggers are set at three-month averages of 8% for delinquencies and 6% for gross defaults, sources said. But it is unclear whether a payout event would be honored even if it were to occur, as the trustee and ABS holders currently argue that two such events, servicer and indenture events of default, have already occurred.
"The servicing deficiencies are directly responsible for the decline in performance," one equipment-leasing source said, noting that the delayed asset sale and subsequent refusal to sell to any bidders does not instill confidence. "Performance will continue to deteriorate," the source added. "You've only got two to three servicers who could assume the servicing and one of them is the trustee and they don't seem to want to step up to the plate."
Two remaining potential replacement servicers were identified as Portfolio Financial Servicing Co., a unit of Bank of America, and Information Leasing Corp., a unit of Provident Bank. Goldman Sachs, as debtor-in-possession lender, is reportedly exploring the options and has discussed issuing requests for proposals (RFPs) for the servicing operations.
"Any potential replacement servicer would have to act fast, in order to prevent further deterioration that [the portfolio] is likely to see in the next 45 days," the source added. The market now awaits the October servicing report (tracking September perfomance), which was expected last week, although it had not been filed as of press time.
While trades are few and far between, the market for DVI ABS has improved, depending on the vintage, traders reported. "People are getting comfortable saying I'm interested at such and such at such and such level,'" a distressed specialist said. "But the bid/ask [differential] is still at least five [basis points] off."
Trades for the older-vintage outstanding were seen as high as the high 80s to low 90 dollar price area, while more recent transactions were discounted further, due to the longer expected life and a perceived decline in underwriting standards on behalf of the issuer, as the end neared. DVI's 9 7/8 unsecured debt due February 2004, meanwhile, was quoted at 12 cents on the dollar last week.
"The most recent deal from May, for example, is the least desirable to buy because most think that as the end approached this became the last hurrah for the company," the trader explained. He cited the late-vintage offerings from defunct issuers ContiFinancial and Conseco Finance as being the worst performers across vintages.
DVI, meanwhile, continues its refusal-to-pay servicer advances back into the trust. The servicer advances due the trust, totaling roughly $7.8 million, are a liability to any potential replacement servicer and will negatively impact the price any potential acquirer would be willing to pay. Additionally, these payments are senior in the payment waterfall to ABS Holders. In its most recent letter to the trustee, DVI says, "DVI Financial will refrain from making such servicer advances, but will endeavor to file servicer reports on a timely basis."
Since the servicer disputes the early amortization, it takes the position that it won't forward advances if it believes those will be used to pay principal.