A Walkthrough of the 6s Capital Trust Structure

This post was originally published on the RWA Co. blog. Here is the link: A Walkthrough of the 6s Capital Trust Structure  — RWA Homepage


DISCLAIMER

The content of this communication is for informational purposes only. You should not construe any information contained herein as legal, tax, investment, financial, or other advice. You should not rely on the information contained herein as a basis for making any business, legal or other decisions. RWA Company LLC and its members, officers, directors, owners, employees, agents, representatives, suppliers and service providers cannot be held liable for any of the information contained in this communication.

Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer by RWA Company LLC or any third party service provider to buy or sell any securities or other financial instruments in any jurisdiction.

I am not a lawyer nor a financial advisor, please do your own research. This post is just my opinion. Do not make any kind of investment or legal decisions based on what you read.


Summary

In order to access the Maker Protocol, 6s Capital has put forth the following structure. It aims to provide sufficient control and recourse for MKR holders through a Delaware Statutory Trust where a federally chartered bank is acting as Trustee. This Trustee executes its responsibilities based on a Trust Agreement and a Credit Agreement, and has a senior lien on the assets of the borrower via a Security Agreement. For administrative needs, the Delaware Trustee is directed by a Cayman Islands Trust. However, for material issues (which will be outlined below) the Trustee cannot act without the “affirmative vote of MakerDAO”, which is independently verified by the Delaware Trustee on the blockchain. Draft documents of all relevant agreements can be found here.

Visual Overview


(A visual overview of the 6s Capital Trust Structure)

Entities and Control

  • Cayman Charitable Trust - A Trust set up in the Cayman Islands where the beneficiaries are local charities. This Trust owns the shares of the Cayman Limited Company.

  • Cayman Trustee - Crestbridge, who controls the Cayman Charitable Trust.

  • Crestbridge - An international regulated, independent provider of administration and management services (click here for Crestbridge’s homepage).

  • Cayman Limited Company - The entity which is listed as the Trust Sponsor on the Trust Agreement with the Delaware Statutory Trust. This company directs the creation of the Delaware Trust, the approval of the Trust Agreement (which governs the Trust), and then instructs the Trustee to execute the Credit Agreement. To accomplish the foregoing, it appoints the Authorized Representative, whose powers are limited and enumerated here.

  • Independent Directors - Crestbridge, who control the management and affairs of the Cayman Limited Company, including the appointment of the Authorized Representative.

  • Delaware Statutory Trust - A Trust set up in Delaware pursuant to Statute that will originate the loans to 6s Capital LLC, Series A pursuant to the Credit Agreement.

  • Delaware Trustee - WSFS Bank, who controls the Delaware Statutory Trust pursuant to Statute.

  • WSFS Bank (Wilmington Savings Fund Society) - A federally chartered bank in the United States that provides a variety of financial, administrative, and management services (click here for WSFS’s homepage).

  • Verification Agent - WSFS Bank, who verifies the information provided to the Delaware Trustee by the Authorized Representative by checking that an affirmative vote of MKR has passed on the Ethereum Blockchain confirming the accuracy of this information.

  • Broker Dealer - Genesis Global Trading, Inc., a NYDFS-Bitlicensed securities broker-dealer registered with the SEC and FINRA (click here for Genesis’ homepage) which converts the Dai from the Maker Vault into US Dollars and deposits it in an escrow account that is controlled by WSFS Bank for the benefit of the Cayman Limited Company and the further benefit of the Delaware Statutory Trust. Genesis has irrevocable instructions to only perform this specific flow of funds in both directions.

  • 6s Capital (Series A) - A Delaware Series LLC which specializes in credit tenant lease financing. This series of the entity is the counterparty to the loan from the Delaware Statutory Trust. (As a reminder, each series within a series LLC has legally isolated assets and liabilities thus allowing 6s Capital to utilize another series for another vault / industry.)

  • 6s Development LLC - A Delaware LLC which owns and manages the various 6s SPVs (one per project) and provides a completion guarantee to 6s Capital (Series A) for the development and construction of properties.

  • 6s SPV - A project-specific Delaware LLC which deploys the funds in the development of properties. Each entity takes a loan from 6s Capital (Series A) and includes the lease and title to the underlying real-estate per location.

  • Maker Vault - The smart contract where Dai is originated, also the smart contract where the risk parameters (ultimately passed on to 6s Capital) may be viewed by the Verification Agent.

Transaction Flows

Note: The terms in the agreements are pending an enforceability opinion and could be changed for that reason

Step 1: Dai originates from the Maker Vault

6s Capital controls the Maker Vault where they may draw Dai up to their debt ceiling. This Dai legally flows through the Cayman entities and throughout the structure, but technically the Dai is sent to a smart contract called the Secure Conduit (MIP21) where it can only be sent to a target address approved by MKR voters (on-chain). This target address will belong to the Broker Dealer, who has irrevocable instructions to convert this Dai to US Dollars and will only send the USD to the escrow account controlled by WSFS Bank, who has further irrevocable instructions to only send the USD to the Delaware Statutory Trust. The Cayman entities are somewhat relevant as it pertains to their role in the legal structure, but are intentionally and largely irrelevant when it comes to the cash flows to and from MakerDAO.

Step 2: The USD arrives at the Delaware Statutory Trust (getting the dollars to Delaware)

Once the Delaware Statutory Trust is in control of the funds, the Delaware Trustee will manage them according to the Trust and Credit Agreements which will be delivered with enforceability opinions.

A brief summary of the (in my opinion) material terms of the Credit Agreement are as follows:

  • The agreement is for a revolving line of credit (e.g. a revolver).
  • 6s Capital may only lend to projects that secure a first position lien to the Lender, specifically the net-lease commercial real-estate space. Further, 6s is constrained to lend on projects with the following Tenants: Dollar General, Service King, Caliber Collision, Signature Collision, O’Reilly Auto Parts, Wawa, Tractor Supply, Grocery Outlet, Dutch Brothers Coffee, Starbucks Coffee, 7-Eleven, Tesla, FedEx, United Parcel Service (UPS), and Brambles Companies (including Chep).
  • The interest rate on the loan is set at Prime plus a premium set by MakerDAO, this rate can be modified on a monthly basis and can be raised a maximum of 2% per quarter.
  • The Trust has extensive rights over the underlying collateral via the Security Agreement
  • 6s Capital must produce a considerable amount of documentation to meet the Delaware Trustee’s requirements for drawing a loan, including financial statements and the Downstream Documents (samples posted to the Maker Forums) all of which must be delivered to the Trustee and Trust Sponsor prior to a closing.
  • For new and retrofit construction projects, 6s Capital cannot exceed a 70% debt-to-equity ratio (as it relates to the budget)
  • For stabilized projects, 6s Capital cannot exceed an 85% debt-to-equity ratio (as it relates to the stabilized appraised value)
  • To meet equity requirements, 6s Capital may use the following instruments at the following discounts:
    • Cash and cash equivalents - 0% discount
    • U.S. Treasury securities with maturities less than three years - 5% discount
    • Other marketable securities of investment grade issuers - 20% discount
    • Tenant leases (executed) - 20% discount
  • Effectively any breach of the credit agreement is considered an “Event of Default” - in which the Delaware Trustee will exercise its powers to recoup the loan
  • Only the Delaware Trustee has the ability to amend the Credit Agreement

A brief summary of the (in my opinion) material terms of the Trust Agreement are as follows:

  • The Trust Sponsor is the beneficial owner of the Trust for the benefit of MakerDAO
  • 6s Capital must pay all fees, yet they are able to be reimbursed by the Trust. Expenses cannot be arbitrary and must be approved by the Delaware Trustee. In practice this will likely mean that MakerDAO ends up covering the fees, but this point can be negotiated as Maker can prevent 6s Capital from taking out further loans if it is not happy with the fee split. Based on conversations with 6s Capital I believe these fees could amount to around $200k/yr, meaning that this structure is (intentionally) only viable at scale.
  • In order to revolve the facility (take out new loans after a previous loan has been paid back), the Verification Agent will check the blockchain to ensure that the debt ceiling is higher than the amount of cash sitting in the escrow account. If, for example, the debt ceiling on the Maker Vault was set to 0, the Delaware Trustee would refuse to lend out any more money.
  • The Delaware Trustee will check for rate changes once per month and requires 15 days to implement them, so if Maker wants to change the interest rate on 6s Capital’s loan, it should take this delay into account
  • The Trust Sponsor (the Cayman Limited Company) has the ability to amend the Trust Agreement for administrative purposes, but is prohibited from doing so for pretty much anything material. The list of things that the Trust Sponsor cannot change without a verified MKR vote is as follows:
    • Replacing or removing the Verification Agent
    • Changing or removing the Delaware Trustee
    • Altering the list of Authorized Representatives of the Trust Sponsor
    • Changing or removing the Trust Sponsor
    • Changing the beneficiaries of the Trust
    • Expanding the powers of the Trust Sponsor
    • Changing the situs [place of legal jurisdiction] of the Trust
    • Any amendment which permits the Trust to make loans under the Credit Agreements in an aggregate principal amount which exceeds the Debt Ceiling
    • Any amendment which adds a new Tenant to the Credit Agreement
    • Any amendment which amends Section 6.09 of the Credit Agreement (i.e. the equity requirements and financial ratios that 6s Capital must maintain)
    • Revokes the payment instructions
    • Eliminates or waives the role of the Verification Agent (a bit different than the first point)
    • Amending Exhibit E or F (the instructions for the Verification Agent and the Delaware Trustee to verify MKR votes)
  • If the Delaware Trustee resigns for any reason, the Trust Sponsor gets to appoint the new Trustee. However, they can only appoint a Trustee that’s “a Person eligible to act as Trustee under the Section 3807 of the Delaware Statutory Trust Act and shall be a corporation organized and doing business under the law of the United States of America or any State thereof having a combined capital and surplus of at least $500 million, or a direct or indirect subsidiary of such a corporation, or a member of a bank holding company group, having a combined capital surplus of at least $500 million and such subsidiary or member itself having a combined capital and surplus of at least $25 million, which corporate trustee shall be a citizen of the United States of America and which is authorized under such laws to exercise corporate trust authority and is subject to supervision or examination by federal or state authority.”

Step 3: 6s Capital takes out loans and further lends these funds to the 6s SPVs owned by 6s Development

The funds begin accruing the interest rate that was indirectly passed to the Delaware Statutory Trust by MakerDAO. 6s Capital invests into its downstream structure. As individual projects (the 6s SPVs) are completed and sold as a stabilized project, the funds are sent back to the Delaware Statutory Trust. 6s Capital does not collect funds in its own account and must go through the Delaware Statutory Trust for each new loan it wishes to take out. This is done intentionally to ensure the senior lien (e.g. UCC-1) is only removed when sale proceeds are received in a closing.

Step 4 (optional): The funds are sent back to the Maker Vault

Once 6s Capital has stopped using the facility, either voluntarily or involuntarily, the funds in the Delaware Statutory Trust are sent back to the Broker Dealer based on the irrevocable instructions and converted to Dai, this Dai is sent back through the Secure Conduit and repaid to the Maker Vault.

What potentially happens in a default?

Keeping in mind that the Delaware Trustee has a fiduciary duty to recover as much as possible, the specific actions are (and should be) variable based on the circumstances - the Trustee will use reasonable business judgement to protect the Delaware Trust. What is, in my opinion, certain is that given the various agreements in place with 6s Capital, the Trustee has a significant amount of recourse it can pursue. Based on precedent, upon an Event of Default I would expect events to look like this:

  1. After the cure period expires (10 days for monetary defaults, 30 days for nonmonetary defaults) the Delaware Trustee calls 6s Capital and the Cayman Limited Company’s Independent Directors and requests a deed in lieu (so the property can be sold without foreclosure).
  2. If 6s Capital refuses to sign a deed in lieu, the Delaware Trustee files a foreclosure petition in Delaware, and at the same time, the Delaware Trustee starts the process to sell the mortgage.
  3. If the mortgage is not sold by the Delaware Trustee, they will continue to bring the foreclosure suit in Court. If no buyer bids the debt amount at this public sale, the Delaware Trustee will bid that amount and then proceed to take title (this can take about 60 days). With clear title, the Delaware Trustee will be able to sell the property for whatever price it can get and will send 6s Capital a bill for the difference. If 6s Capital does not pay the difference, the Court will issue a deficiency judgment against 6s Capital and it will be served and the funds taken from other 6S Capital Series A assets. During this process 6s Capital can purchase its own mortgage or try to convince someone else to do so in order to halt the foreclosure.

Again, the Delaware Trustee is using reasonable business judgment, so if giving 6s Capital more time to pay and charging the default rate (an additional 2% on top of the general interest rate, as outlined in the Credit Agreement) plus costs makes more business sense, the Trustee will likely take that route instead.

Also note that the Delaware Trust is separate and distinct from any of the upstream entities in this structure. This should, in theory, offer a considerable amount of protection from bankruptcy attachment. Here is an article where you can read further about the bankruptcy remote characteristics of Delaware Statutory Trusts.

What will RWA Co. do for 6s Capital?

Since 6s Capital intends to become our client, we will likely be doing the following on their behalf:

Note: these processes are still being developed, this list is subject to change

  • Presenting a (hopefully) positive result from our background checks on 6s Capital’s ownership, along with a credit check on the business itself
  • Handling the quarterly reporting to the DAO on behalf of 6s Capital (we will be listed as an “interested party” to the Delaware Trustee and be an observer of the communications)
    • This data will be made available in the Maker Forums, on our website, and eventually via API
    • We will make positive or negative representations whenever there is confidential data that the DAO requires but cannot be shared
  • Running spot checks on 6s Capital’s underwriting process
  • Engaging with Maker Governance on behalf of 6s Capital, including requesting debt ceiling increases

Conclusions

It’s my opinion that the 6s Capital Trust Structure provides sufficient recourse to the Maker Protocol when attempting to enforce the rights of MKR holders in the “real world”. In my opinion, the mechanics for obtaining legal recourse have enough precedence for me to feel comfortable, and the enforceability opinion that 6s Capital is obtaining on the document set adds an additional level of comfort for MakerDAO. There is always room for improvement, such as bringing more functions of this agreement on-chain or achieving a more direct link between MKR holders and the Trustee, but we will need to show service providers that this is a worthwhile investment of their time and effort in order to achieve that. For the time being, having a strong foundation and sufficient recourse must be the primary focus of those of us engaging with real world assets in the Maker Ecosystem.

11 Likes

Thank you for this walkthrough - it provided a much needed explanation.
Question: In case of a default - what entity pays the Delaware trustee’s legal expenses?

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The money will come out of the “Trust Property” according to my understanding, so ultimately it will come from the principal that MakerDAO put into the structure. I’d analogize this to the cost of “liquidation.”

Note: This assumes that 6s’ equity is entirely depleted, if it’s not then it would probably come from there.

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Second question: it looks like it is only 6s Capital, 6s Development, and 6s SPV that are the unique components per customer - all other entities are more or less lego pieces. Is this a reasonable correct assumption?

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6s Dev and its SPVs are the end-end-end borrowers. Those are the ones that would / could change. All other parts are static for this RWA001-A vault.

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This is the perfect ELI5 Greg! Thank you for taking time and writing this up. Truly appreciated.

Just a few question here.

Assuming one day 6S returns a successful $50M loan to Crestbridge — would it be possible for Crest to instruct Cayman Limited Company to freeze such assets and/or run away with such by transferring to an opaque entity? Trying to gauge the power of Cayman Limited Company

Also, would it make sense to have 3 Auth. Reps located in 3 different parts of the world?

Any downsides here? As an example—can a U.S. regulatory unit such as the IRS instruct the DE Statutory Trust to freeze assets?

Assuming I am a franchise developer/construction company named “ Dev of Properties” (DoP) who bids on O’Reilly development sites and I was approved by O’Reillys to build a franchise on Main Street, Oklahoma for Jose Martinez, a local businessman. What is the collateral I am providing to 6s Capital? Is it the piece of land, my construction equipment, etc. like what physical object (collateral) is consider a first position lean to the Lender? Please provide an example. Trying to understand how 6s recovers when/if bad loans are made.

If I understand this correctly, 6s approves a Construction Co. Client to build a UPS hub and will grant them a $10M loan—the closing documents are then reviewed by Delaware Trustee. Can the DE Trustee object to the loan? Or they’re just doing their due diligence and making sure everything is kosher?

Got it. I have a buddy who works at BofA and he told me that construction loans are done at debt-to-equity ratio of 45% because they’re extremely risky. so, some construction loans—that are just “dirt” (not retrofit/stabilized) will be done at a low debt-to-equity ratio, correct? Pretty much at 6s discretion.

These are the requirements needed by Construction companies borrowing from 6s?

Silly question—but can you provide the Community examples of the type of admin amendments that can be made by Cayman Limited Company?

So they can kick Maarten out and place John Doe as the Representative?

I was also told by my bud that default rates can be between 2% to 18% for construction loans—given the expectation of this scaling I think 2% is a good starting point, IMO.

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Not possible. Irrevocable transfer instructions in place.

Possible. But not needed. The Trust Agreement constrains the activities of the Trust Sponsor.

If a Court issues a lawful Order, the Trustee will comply. The better question is under what conditions would such an Order be issued when dollars in Delaware a being loaned in a lawful manner? That said, the Trust Agreement requires the Trust to file its tax returns and pay its taxes.

The underwriting requirements are all listed in the downstream documents. The collateral must be first position on the underlying real-estate, the assignment of rents and profits of the lease, architect and engineering work, and the GC contracts.

Summary: 6s starts the process with the assumption that there WILL BE a default and works backwards. We assume the borrower is gone. SO… with that mindset how will the project be completed. If ALL of that is not ready, we will NOT close. Further, 6s Capital has to get comfortable with the borrower’s ability to execute based on a proven track record. 6s Capital has equity at risk.

If it does not meet the requirements of “Collateral” per the Credit Agreement (e.g. it doesn’t fit in the box, the Trustee will NOT extend credit).

When projects have an executed credit tenant lease, they are done to 85% LTC or even higher with traditional lending banks. These are viewed as the “bread and butter” of a bank lending portfolio as the lending risk is so exceptionally low.

These are the items that qualify as equity for LendCo (eg. cash shouldn’t be discounted… but a UST should).

Change of address.

yes. they are a regulated service provider. they will only bring on representatives that they believe will act within the authority they grant (which is blanket constrained to what can and cannot be done via the trust agreement)

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It’s funny, a lot of the stuff you’re doing is the kind of stuff I wanted to do when I formed my Declaration of Intent MIP last summer.

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Are there good examples that you can lead me too? I would be interested in going down a rabbit hole…

I see three ways of scaling the above structure:

  1. More companies of the 6s type
  2. 6s grows into a fund
  3. lend directly to WSFS

Anything I am missing here?

yes please. We need more LendCOs. 20 more! From my lens, scaling off of regulated Trust companies with operating lending companies that must meet and maintain equity covenants where the community outsources the “brain damage” to economically incentivized parties is the way to go!

An operating lending business, but yes please.

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If I’m understanding your question… here is a very similar credit agreement being used by a public company (FedEx): EX-10.240

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The ideal situation would be the opposite direction, a public company issuing share on Eth and we would add them as a normal collateral.

Just note that even if they did this, you don’t have a way of liquidating those shares without a licensed intermediary that’s able to trade blockchain securities

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Of course, interesting I didn’t think about that.
So basically they probably can’t issue ERC20 either.

May be outside US, but then I guess regulating needs to be so low that is pointless.

Good point, thanks