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Rating Action:

MOODY DOWNGRADES 55 CLASSES OF DVI FINANCIAL'S MEDICAL EQUIPMENT LEASE SECURITIZATIONS AND CONFIRMS THE RATING OF ONE CLASS

02 Apr 2004
MOODY DOWNGRADES 55 CLASSES OF DVI FINANCIAL'S MEDICAL EQUIPMENT LEASE SECURITIZATIONS AND CONFIRMS THE RATING OF ONE CLASS Moody's Investors Service downgraded 55 classes of notes issued in nine medical equipment lease securitizations by DVI Financial Services, Inc. (DVI). The downgrades reflect the continued deterioration in performance of all nine receivables pools and substantially lower estimated recoveries on defaulted receivables than Moody's projected at the time of the last rating action on November 17, 2003. The rating of one class of securities was confirmed. Today's rating action concludes Moody's review of the transactions.


Since DVI's filing for Chapter 11 bankruptcy protection on August 25, 2003 and prior to today's action, Moody's had downgraded equipment-backed notes sponsored by DVI twice. The second set of downgrades, on November 17, 2003, was prompted by an increase in delinquencies in all nine pools to a range of 25% to 38%, which represented a four-to-seven times increase from the average delinquency rates for the first seven months of 2003. In addition, the actions reflected uncertainty regarding the timeliness and effectiveness of an expected servicing transfer from DVI to a successor servicer.


Since the previous rating actions, the servicing issue has been resolved, as servicing was transferred from DVI to U.S. Bancorp Portfolio Services (USBPS) on February 24, 2004. Subsequent to the transfer, USBPS restated monthly servicing reports covering collection periods from August 2003 through January 2004, reflecting sequential rather than pro-rata distributions of principal. Pursuant to the transactions' documents, principal payments are allocated sequentially upon the occurrence of an amortization event, with DVI's bankruptcy defined as one of the events. USBPS made its first distributions of cash on February 27, 2004, based on the information and priorities of payment provided in the restated reports.


The latest servicing reports for the transactions, covering the February 2004 reporting period, reflect a continued deterioration of the delinquency and default performance of all nine pools of receivables. Delinquencies remained within a very high range of approximately 15% to 32%. In addition, large amounts of delinquent receivables have reached the default bucket of 180 days past due. For example, during the seven-month period since DVI's bankruptcy, cumulative defaults in the 2002-1 and 1993-1 transactions reached approximately $81 million and $94 million, respectively. This represents 27.8% and 20.7% of the Aggregate Discounted Collateral Balance (ADCB) as of July 31, 2003, the last reporting period before the bankruptcy filing. In comparison, Moody's original assumptions for the life-time defaults in DVI's transactions were in the range of 8% to 10% of the initial ADCB.


As a result of a high level of defaults, the transactions have various amounts of collateral shortfall, i.e., the outstanding note balances are greater than the pool balance. Although the exact reasons for the substantial performance deterioration remain unknown, some of the possible explanations include inadequate servicing performed by DVI during the months between its bankruptcy and the servicing transfer to USBPS, and financial distress that some borrowers experienced as a result of constrained liquidity, previously provided by DVI through its sister company, DVI Business Credit.


USBPS indicated that they have dedicated substantial resources to servicing the DVI portfolio in both collections and work-out functions. However, Moody's believes that it could take months before their efforts would produce any tangible improvements in the delinquency and default rates.


Future performance of the pools will largely depend on USBPS's ability to reduce the flow of future delinquencies as well as on the magnitude and the timing of recoveries on defaulted receivables. The latter will depend on USBPS's ability to either work-out the already defaulted contracts or liquidate the underlying equipment. Although it is difficult to predict the amount of recoveries from either source, recoveries from the equipment liquidation are particularly uncertain since they depend on the equipment's market value relative to the outstanding balance of the corresponding receivables. Based on uncertainty with respect to the amount and timing of future recoveries, Moody's in its analysis used lower recovery assumptions relative to the previous rating actions.


In its current rating actions Moody's considered the collateral shortfall of the transactions, projected future defaults, and expected recoveries on both current and future defaults. The analysis indicated that many classes are likely to experience principal shortfalls, and the classes that would not have a shortfall would have a low level of credit support.


The downgrades of four of the tranches -- Class A-3 of the 2001-1 transaction, Class A-3 of the 2001-2, and classes A-2A and A-2B of the 2003-1 transaction - was not the result of low levels of credit protection, but instead because they have approaching legal final maturity dates. The reduced cash flows, resulting from high delinquencies and defaults, may be insufficient to repay each class by its maturity date. Class A-3 from the 2001-1 transaction and classes A-2A and A-2B from 2003-1 have a final maturity date of November 11, 2004, and Class A-3 from the 2001-2 transaction has a final maturity date of July 11, 2005.



Moody's confirms the short-term rating of P-3 for Class A-1 Notes of the 2003-1 transaction. The current principal balance of the class is $2.9 million and should be paid off soon; during the month of February 2004, the transaction had approximately $3.6 million available for principal reduction. Even if collections decline during the next three months, there should be enough cash to pay-off the class by its final maturity date on June 14, 2004.


The complete rating actions are as follows:


Issuer: DVI Receivables VIII, L.L.C., Series 1999-1

$13,079,696 Class A-5 Asset-Backed Notes, downgraded to Ba2 from A3;

$439,691 Class B Asset-Backed Notes, downgraded to B2 from Baa1;

$880,381 Class C Asset-Backed Notes, downgraded to Caa1 from Baa3;

$586,254 Class D Lease-Backed Notes, remains rated to Caa3 from Ba2;

$734,818 Class E Lease-Backed Notes, remains rated Ca from B2;


Issuer: DVI Receivables X, L.L.C., Series 1999-2

$32,013,340 Class A-4 Asset-Backed Notes, downgraded to Caa3 from Baa1;

$800,773 Class B Asset-Backed Notes, downgraded to Ca from Ba1;

$1,600,545 Class C Asset-Backed Notes, downgraded to C from Ba3;

$1,067,363 Class D Lease-Backed Notes, downgraded to C from B2;

$1,333,954 Class E Lease-Backed Notes, downgraded to C from Caa1;


Issuer: DVI Receivables XI, L.L.C., Series 2000-1

$48,720,085 Class A-4 Asset-Backed Notes, downgraded to Caa3 from Baa2;

$1,128,518 Class B Asset-Backed Notes, downgraded to Ca from Ba1;

$2,258,036 Class C Asset-Backed Notes, downgraded to C from Ba3;

$1,505,358 Class D Asset-Backed Notes, downgraded to C from B2;

$1,882,197 Class E Asset-Backed Notes, downgraded to C from Caa1;


Issuer: DVI Receivables XII, L.L.C., Series 2000-2

$58,051,581 Class A-4 Asset-Backed Notes, downgraded to Caa3 from Baa2;

$1,309,625 Class B Asset-Backed Notes, downgraded to Ca from Ba1;

$2,619,250 Class C Asset-Backed Notes, downgraded to C from Ba3;

$1,746,166 Class D Asset-Backed Notes, downgraded to C from B2;

$2,182,709 Class E Asset-Backed Notes, downgraded to C from Caa1;


Issuer: DVI Receivables XIV, L.L.C., Series 2001-1

$7,652,456 Class A-3 Asset-Backed Notes, downgraded to Baa3 from Aa2;

$83,165,562 Class A-4 Asset-Backed Notes, downgraded to Caa2 from Baa3;

$1,996,524 Class B Asset-Backed Notes, downgraded to Caa3 from Ba3;

$3,988,957 Class C Asset-Backed Notes, downgraded to Ca from B2;

$2,659,305 Class D Asset-Backed Notes, downgraded to C from Caa1;

$3,326,177 Class E Asset-Backed Notes, downgraded to C from Caa3;


Issuer: DVI Receivables XVI, L.L.C., Series 2001-2

$49,634,996 Class A-3 Asset-Backed Notes, downgraded to B3 from Aa2;

$111,728,089 Class A-4 Asset-Backed Notes, downgraded to Caa3 from Ba2;

$3,310,038 Class B Asset-Backed Notes, downgraded to Ca from B2;

$6,625,217 Class C Asset-Backed Notes, downgraded to C from Caa1;

$4,415,098 Class D Asset-Backed Notes, downgraded to C from Caa3;

$5,520,157 Class E Asset-Backed Notes, downgraded to C from Ca;


Issuer: DVI Receivables XVII, L.L.C., Series 2002-1

$167,768,410 Class A-3A Asset-Backed Notes, downgraded to Caa1 from Baa3;

$62,759,332 Class A-3B Asset-Backed Notes, downgraded to Caa1 from Baa3;

$4,522,384 Class B Asset-Backed Notes, downgraded to C from Ba3;

$9,044,768 Class C Asset-Backed Notes, downgraded to C from B2;

$6,027,635 Class D Asset-Backed Notes, downgraded to C from Caa1;

$7,539,517 Class E Asset-Backed Notes, downgraded to C from Caa3;


Issuer: DVI Receivables XVIII, L.L.C., Series 2002-2

$191,518,181 Class A-3A Asset-Backed Notes, downgraded to B1 from Baa2;

$82,683,552 Class A-3B Asset-Backed Notes, downgraded to B1 from Baa2;

$5,646,118 Class B Asset-Backed Notes, downgraded to Caa1 from Ba1;

$11,284,101 Class C Asset-Backed Notes, downgraded to Caa3 from Ba3;

$7,525,446 Class D Asset-Backed Notes, downgraded to Ca from B2;

$9,404,773 Class E Asset-Backed Notes, downgraded to C from Caa1;


Issuer: DVI Receivables XIX, L.L.C., Series 2003-1

$2,954,836 Class A-1 Asset-Backed Notes, P-3, rating confirmed;

$25,200,000 Class A-2A Asset-Backed Notes, downgraded to B3 from Aa2;

$27,000,000 Class A-2B Asset-Backed Notes, downgraded to B3 from Aa2;

$229,620,000 Class A-3A Asset-Backed Notes, downgraded to Caa1 from Baa3;

$32,000,000 Class A-3B Asset-Backed Notes, downgraded to Caa1 from Baa3;

$16,036,251 Class B Asset-Backed Notes, downgraded to Caa3 from Ba3;

$5,411,410 Class C-1 Asset-Backed Notes, downgraded to Ca from B2;

$8,484,789 Class C-2 Asset-Backed Notes, downgraded to Ca from B2;

$5,977,062 Class D-1 Asset-Backed Notes, downgraded to C from Caa1;

$4,713,772 Class D-2 Asset-Backed Notes, downgraded to C from Caa1;

$8,805,325 Class E-1 Asset-Backed Notes, downgraded to C from Caa3;

$1,885,509 Class E-2 Asset-Backed Notes, downgraded to C from Caa3;




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