Amid a shroud of secrecy and following numerous delays, U.S. Bank N.A. has won the servicing rights for DVI Inc.'s deteriorating portfolio of medical equipment finance receivables. The announcement likely clears the way for the servicer event of default to be honored, making those who bought senior DVI paper at a discount the big winners in the saga.
"DVI FS and the trustee for the securitizations are negotiating a settlement agreement formally authorizing the transfer of servicing and amending certain provisions of the securitization documents," DVI reports in a filing with the Securities & Exchange Commission. "As soon as the settlement agreement is finalized, DVI FS will seek an expedited hearing in order to transfer servicing on a timely basis,"
The announcement comes just in time, as in its most recent performance statistics, DVI reports that it had - for the first time - breached performance-based early payout triggers on two of its outstanding ABS, adding to the troubles the bonds have experienced throughout the defunct issuer's navigation through bankruptcy. One other outstanding transaction, series 2003-1, was approaching the early payout trigger.
Both the 2001-2 and 2002-1 deals each surpassed the 8% three-month average for 90-plus-day delinquencies, according to the servicer reports filed Nov. 14. DVI's series 2003-1 deal is 90 basis points shy of surpassing the threshold.
Previously, ABS holders and the trustee argued that a servicer breach of default had already occurred on DVI's Aug. 25 Chapter 11 filing, though DVI has failed to honor the amortization event and has withheld servicer advance fees due bondholders. It is unclear at this point what position U.S. Bank will take once it assumes servicing, but most anticipate it will honor the deal documentation and begin paying ABS holders theoretically at par on a sequential basis.
As most had feared throughout the process, DVI ABS performance rapidly and persistently declined in the months following the bankruptcy. In its most recent downgrade announcement, Moody's Investors Service cited employee defection, with just four collections agents still at the firm, versus the eight that had previously performed collections.
"U.S. Bank has been serving DVI's warehouse lines and conduit facilities since the summer and has brought delinquencies down [near] historical levels," one source said. "They already have the systems mapped and have run the tapes, and are in position to take over as soon as DVI lets them."
Under the rapid payout agreement, most believe U.S. Bank will adhere to the documentation across all series. Senior ABS holders will receive principal on a sequential basis with subordinated holders receiving what is left over. The subordinated holders had seen ratings on their holdings drop to just one notch above default. U.S. Bank will assume the servicer advances due the trusts upon completion of the transfer.