[HTC-DROP] MIP6 Application: Harbor Trade Credit DROP: Short Term Trade Receivables

This is a MIP6 Proposal for the addition of Harbor Trade Credit’s Short Term Trade Receivables to MCD supported by Throttle Capital. Harbor Trade Credit originates and administers the asset collateralization using Centrifuge.

Much of how Centrifuge works has been covered in the previous MIP6 proposals [CF-DROP,PC-DROP]. In the following we have added a few links that go into more detail on the technical topics.

1. Who is the interested party for this collateral application?

Throttle Capital is supporting a portion of the DROP and/or TIN for Harbor Trade Credit. The main contact for Throttle Capital on this application is Blake Coler-Dark (@bcd, [email protected]) and Rana Mookherjee (username: rsm, [email protected])

Centrifuge is providing the technology and framework for bringing real-world assets to MCD. The main contact on Tinlake for the application is Lucas Vogelsang (@spin, [email protected]) of Centrifuge as well as Lea Schmitt (username: _LS, [email protected]).

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token

We will start with a brief summary of Harbor Trade Credit, the Asset Originator, and provide information on the Tinlake Protocol, the technology that Centrifuge has built, and how they interact with Maker later.

The asset type we are proposing for inclusion in MCD is slightly different to the majority of collateral applications: the Asset Originators will be using MCD directly as a line of credit to originate new loans. This means they will add large amounts of debt likely using up the assigned debt ceiling for the collateral type while paying a stability fee in return that is in par with industry-standard rates.

Throttle Capital is interested in supporting the asset by investing in either the DROP token, TIN, or both.

About Harbor Trade Credit

Founded in May 2018, Harbor is a FinTech firm focusing on Supply Chain Finance (SCF) and working capital solutions to improve the cash conversion cycle. Harbor’s programs allow for early payments to suppliers so that buyers can optimize their own liquidity through trade credit. These programs are administered on Harbor’s proprietary platform which not only injects liquidity into the supply chain, but it allows for better vendor and procurement management.

These assets have the following characteristics:

  • Collateral: Short term trade receivables
  • Average Loan Size: ~$250,000
  • Maturity: up to 60 days
  • Historic Loan Default Rate: <1%
  • Advance Rate: 90-100%
  • Interest Charged to Borrowers: 15%
  • Type of Advances: Trade financing

The following describes an exemplary use case


Overview of Tinlake Smart Contracts

Centrifuge is building a full stack of tools to bring real-world assets into DeFi:

  • Centrifuge provides the technology stack to tokenize real-world assets in the form of an NFT. Each NFT represents one unique real-world asset, a loan, with a unique default risk that is priced by an off-chain oracle.
  • Tinlake is our securitization protocol that handles the bundling of these individual loans and issues an interest bearing ERC20 token against the pool to allow investors with different risk profiles to invest in the pool. For the Harbor Trade Credit asset pool, these tokens will be called [HTC-TIN] and [HTC-DROP]
  • [HTC-TIN] represents the junior tranche and takes the first loss. For Harbor Trade Credit the ratio is set at 10%. Please find the documentation on our tranche structure here and the forum thread about how they work within MCD.
  • We propose [HTC-DROP] with an 11% stability fee for the MCD inclusion

Legal Setup

Along with the necessary technical infrastructure to bring these assets into DeFi, the Asset Originator sets up a legal structure that provides the necessary support to ensure that anyone that owns a DROP token has a legal claim to the underlying assets. This is done with a legal structure very commonly used in the traditional financial system: The collateral for the individual loans are assigned to a legal entity, the “special purpose vehicle” and lenders get an ownership interest in the entire portfolio of this entity (with this entity the assets are in a bankruptcy-remote structure that is not influenced by the Asset Originators).

3. Provide a brief history of the project

About Harbor Trade Credit

Harbor Trade Credit (“HTC”) is a procurement and import finance solution provider, which brings operational and working capital benefits for buyers and suppliers. Their programs allow for early payments to suppliers so that buyers can optimize their own liquidity through trade credit provided by HTC. Their focus is to fuel the growth of businesses involved in international trade by providing liquidity through trade credit in a way that enhances the client experience and offers investment opportunities for banks and investors.

HTC’s proprietary technology platform:

  • Reduces onboarding costs and ensures supplier participation
  • Simplifies workflows when dealing with small and medium-sized suppliers
  • Enables Vendor Management through supplier aggregation

These programs are administered on Harbor’s proprietary platform which not only injects liquidity into the supply chain, but it allows for better vendor and procurement management.

Background on founding team:

Bryan Maloney, President & Co-Founder: Domain expert in international trade finance and has held various senior positions with US and European trade finance companies including Tradewind and Stenn International.

Andy Suen, Lead Engineer, Product & Technology: Andy oversees and delivers the company’s fintech platform and products. Prior to entrepreneurship, Andy spent 13 years with HSBC managing technology initiatives in trade finance as the Group Trade and Supply Chain IT Program Lead. Andy holds an MBA degree in Management of Technology and a Bachelor’s degree in Computing Science from Simon Fraser University.

Joaquín Jiménez Krijgsman, Director of Business Development: Prior to joining Harbor, Joaquin spent 13 years at ING’s commercial banking arm, most recently as director of working capital solutions. He also served as head of supply chain finance, with roles based in Amsterdam and Moscow. Jiménez was also a sales director at Capital Chains, an Amsterdam-based consultancy firm that works with corporates, financial institutions, and fintech platforms on their SCF arrangements.

Katie Newton, Head of Marketing and Customer Success: Katie Newton is a graduate of Syracuse University with a B.A. in communications. She has held various roles in marketing and sales for the financial services industry most recently for Stenn International. Her focus at Harbor is client acquisition and retention.

Harbor currently has 4 full-time staff and 5 part-time contractors. Full-time staff includes Business Development, product & technology development, structuring, and deal execution. Part-time staff are DevOps, sales, and marketing.

Harbor Trade Credit plans to originate approximately $25mm over the next 12 months.

About Centrifuge

Centrifuge has been working on enabling businesses to borrow money using their assets in DeFi since the project was founded in 2017. It was founded by a team of experienced entrepreneurs who at their previous company, Taulia, built supply chain finance products for over 120 of the Global 2000 companies focusing on financing assets in the global supply chain. Centrifuge has received $8.2M in VC funding from a list of experienced & reputable investors and its core mission is to change the rules of global commerce by bringing fairer financing options to business around the world. With Tinlake we are building the tools to make these assets liquid and truly DeFi native.

Centrifuge shares Rune’s vision that real-world assets in MCD will be the essential driver to scale adoption to the masses while diversifying risk. We are closely working with the community on how real-world assets should be integrated into MCD and how we aim at minimizing trust as we bring these assets live.

Centrifuge and the Maker Foundation have collaborated on helping numerous asset originators prepare for bringing real-world assets into DeFi. Centrifuge is currently actively supporting the onboarding process of the two asset classes that have received the most votes of the Community Greenlight of the first MCD governance cycle (see CF-DROP,PC-DROP) and preparing more asset types to come.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

Harbor Trade Credits’s mainnet deployment is scheduled for August 19th and will be accessible via tinlake.centrifuge.io

Technical documentation about Tinlake can be found here:

5. Link any available audits of the project. Both procedural and smart contract focused audits.

Centrifuge has conducted several audits of its technology stack. The audits can be found here: https://github.com/centrifuge/security/tree/master/audits

6. Link to any active communities relating to your project.

  • Centrifuge Discourse Forum
  • Participating in Maker Community Calls [1], [2]
  • We are hosting Collateral Onboarding Calls with the Maker community; the recording of previous calls can be found here: [1], [2], [3], [4]

7. How is the applying collateral type currently used?

Centrifuge Tinlake has been in development since early 2018 and is evolving rapidly. We currently have three active pools spinning with three different Asset Originators and a total transaction volume of more than 1.6 million DAI. Find both active and closed pools on https://tinlake.centrifuge.io/.

Harbor Trade Credit DROP tokens in DeFi:

  • August 19th, 2020: We will deploy a Harbor Trade Credit pool with an initial pool size of DAI 300,000 on August 19th with an initial set of investors. The DROP token is projected to generate a 11% yield and TIN will make up 10% of the total asset pool. To manifest confidence in the asset pool Harbor Trade Credit will take up 50% of the TIN tranche and the rest will be split between Throttle Capital and Centrifuge.

  • Inclusion in MCD: Upon onboarding Harbor Trade Credit intends to open a Vault to use as an additional liquidity source for their loan offerings. Harbor Trade Credit anticipates to originate around $25mm in the next 12 months and intends to include MakerDAO in their investor portfolio for the DROP token / senior tranche.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

Harbor Trade Credit will incorporate a Series LLC, a Delaware (USA) limited liability company (the special purpose vehicle, “SPV”). This SPV will be formed to finance Harbor Trade Credit’s assets.
This SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by the parent’s financial, operational and/or legal health.

We are collaborating with OpenLaw to open-source these contracts in order to make it accessible to other Asset Originators and use their infrastructure to allow public review of the signed contracts by anyone.

9. Where does exchange for the asset occur?

The SPV enters into a subscription agreement with lenders who are receiving DROP from the SPV in turn for providing DAI. The DROP token can be redeemed against the cash flows of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and the primary way for interacting with these tokens.

10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

We do not have any materials we can provide at this time.

11. (Determined by Legal Domain Team) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

Determining the correct price of a real-world asset behaves differently from pricing Ethereum native collateral tokens. In order to adequately price a [asset]-backed loan several factors must be considered (please read our fundamentals of pricing real-world assets for additional information). Tinlake requires not just an accurate price of the overall pool but details on a loan by loan basis. As these form the basis as well for the DROP token, we will start outlining the pricing for those first:

In approving clients and determining a risk score, Harbor Trade Credit utilizes a strict process and prudent thresholds with respect to:

General Eligibility Criteria and knockout rules for Harbor Trade Credit

Credit Analysis and metrics:

  • The focus of Harbor’s analysis is determining the cash conversion cycle of our buyer and assessing debt service based on historical financial statements.
  • Depending on the jurisdiction and size of the buyer, we use audited financial statements, when no audit is available we assess tax return documents for validation of management accounts.
  • Knockout rules: Jurisdiction of the debtor, years in business, minimum spend/revenue, industry vertical
  • The key ratios assessed are Debt/Equity ratio, Debt/EBITDA ratio, Debt/Assets ratio, Current Ratio, Cash Ratio, Acid Test Ratio, Gross Margin (%), Net Margin (%), Liability Payback, Debtors days, Creditor days, Stock Turn days, Interest cover
  • Third party credit reports are available to validate qualitative and quantitative information provided by the buyer. These reports provide insight into payment incident ratings, liens, lawsuits, and negative news.

HTC works with Buyers to finance Suppliers. As a result, HTC minimizes Supplier invoice fraud by aligning with the Buyer. HTC has Buyer default risk, which is mitigated by the length of the relationship between Buyer and Supplier as well as HTC’s credit underwriting process on buyer counterparty risk. The historical industry average buyer default rate is less than 1%.

The risk score is calculated from these inputs is used to determine advance and interest rates. The Tinlake contracts then use these per NFT values to control how much money borrowers can withdraw.

To determine the value of the entire portfolio (simplified the sum of the market value of all loan NFTs) is usually by doing a net-asset-value (NAV) calculation across the portfolio. Centrifuge is implementing the NAV model in smart contracts that can calculate this information based on individual pricing information in real time based on the NFT price information.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

The way this collateral type is used varies from how standard vaults are opened: DROP tokens have a stable USD price and any small fluctuations in the loan portfolio performance should be covered by the insurance provided by the TIN tranche. This means that under normal operation, the Asset Originator would not see their Vault get liquidated. A liquidation would only occur if a large amount of defaults occur across the portfolio that the risk model did not calculate.

In case the Vault gets liquidated, the Tinlake contracts enforce a rebalancing of the pool to bring it back to its required collateralization ratio and will not allow issuing any new loans. Instead the Tinlake contracts are from this point on taking all of the cash flows generated by the borrowers and disbursing these to DROP token holders.

Harbor Trade Credit provides short term supply chain financing on accounts receivables with 60 to 120 day payback terms. So far Harbor Trade Credit did not have distressed assets in their portfolio due to following a strict offensive and proactive collection process to minimize non-payment. If required, however, the following companies have a longstanding history of buying distressed assets to name but a few: Garnett Capital Advisors, Capital Collection Management, PSI

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Hi @bcd,

Harbor Trade Credit DROP has been greenlit by the community so now the application needs to wait in line for the domain teams to do their work. If you look at the top of this list Collateral Status Index you can guess that the Maker domain teams have quite a workload at the moment.

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