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Dell financing arm finds deficiencies

  Securities  -   POSTED: 2007/04/04 15:11

Dell Financial Services (DFS) has found and reported several operational deficiencies in its business, including the way it has posted customer payments, collected on delinquent accounts and failed to reconcile some accounts on a timely basis, according to filings with the Securities and Exchange Commission by the company's primary financing partner.

The report filed by CIT Group's collateral unit, which has funded some DFS operations, is among the first under new, more stringent rules enacted by the SEC that are designed to provide greater detail to investors in asset-backed securities, securities that provide cash for many credit and leasing operations.

The items spelled out do not involve accounting issues.

Gavan Goss, DFS' chief financial officer, told CRN the issues involved have either been fixed or are in the process of being fixed.

DFS is a joint venture between Dell and CIT Group and has become Dell's US$6 billion-a-year financing arm. According to CIT Group's disclosure, DFS fell short of complying with its role under the financing terms in a US$1 billion asset-backed securitization sale, including the following:

A failure to make sure its third-party "lockbox vendors" - like banks - completely and accurately met compliance reporting requirements. DFS reported this as a "material deficiency" in this aspect of its operation, according to the CIT filing.

DFS reported "certain loss mitigation or recovery actions that were not initiated, conducted or concluded in accordance with the required time frames established under the transaction agreement," according to the CIT disclosure.

DFS took more than an allotted 90 days to reconcile certain accounts last year.

Through the middle of last year, DFS had about US$6 billion in assets under management, and the unit has become strategic to Dell's long-term plans. In addition to providing credit and financing so customers can buy its products, Dell executives have said DFS offers a competitive advantage to rivals because it gives the company an ongoing touch point with customers during the life of a product or a financing agreement.

As of Dell's most recent financial reports last year, computer and service sales through DFS accounted for more than 10 percent of Dell's total revenue. And while Dell owns 70 percent of the joint venture with CIT, it has an agreement to buy the rest of DFS outright as early as next year.

DFS executives told financial analysts in a teleconference last year that about half of its financing activity was conducted with commercial customers, and about half through consumers.


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