This MIP6 Proposal provides exposure to a senior secured credit facility for Monachil Private Credit Fund (as defined below), which specializes in bespoke, secured lending to tech-enabled fintech platforms and specialty finance companies (“Asset Originators”). Transactions are typically secured by ring-fenced credit assets originated by the platforms in transactions containing tightly-constructed covenants.
Centrifuge will provide the technology and framework for bringing this asset to MakerDAO. This is the sixth MIP6 application to use Centrifuge’s model. The main contact from the Centrifuge team will be Jason Jones (@Jason) and Colin Cunningham (add handle)
Overview: Monachil Private Credit Fund LP, Monachil Private Credit Fund Offshore LP, Monachil Credit Partners Master Fund I LP, and Monachil Credit Partners Master Fund II LP (collectively, “Monachil Private Credit Fund”; Monachil Credit Partners Master Fund I LP and Monachil Credit Partners Master Fund II are collectively referred to as the “Master Funds”) was launched in August 2020 by Ali Meli, the Founder and Managing Partner of the Sponsor, which is the investment manager of Monachil Private Credit Fund. Mr. Meli committed $25mm of capital to the business, with $15mm allocated to Monachil Private Credit Fund and $10mm allocated to working capital and future strategies. Monachil Private Credit Fund currently has $11mm in assets under management and undrawn commitments of $7mm. The current pipeline of potential counterparties that the Sponsor has agreed to screen is in excess of $500mm. The Sponsor is based in Greenwich, CT and consists of a team of 9 people.
Mr. Meli spent over 14 years at Goldman Sachs & Co., most recently as a Partner responsible for the Structured Finance, Investing and Lending (“SFIL”) business, consistently one of Goldman Sachs & Co.’s most profitable businesses. A significant part of SFIL’s remit was structured, secured credit lending. During his tenure, Mr. Meli managed teams in Goldman Sachs & Co.’s New York, London and Hong Kong offices before his appointment to lead the group. Mr. Meli holds dual Majors in Electrical Engineering and Management Science from the Massachusetts Institute of Technology.
The Sponsor has recently hired Joseph McNeila as Chief Financial Officer and Chief Operating Officer. Prior to joining, Mr. McNeila spent over 20 years at Goldman Sachs & Co. as a Managing Director, the majority of which was based in London running SFIL’s European business and working alongside Mr. Meli. He holds a BA in Accountancy from Baruch College and an MBA in Finance from Columbia University.
Strategy: The Sponsor believes that traditional banks will continue to be disintermediated by non-bank lending platforms. Many planforms have high-quality technology and strong business models but limited access to funding for loan origination. The Sponsor takes a data driven approach to selecting Asset Originators to which it lends by using proprietary technology to consume real-time, raw data as well as using other Key Performance Indicators related to each candidate. Subsequently, this technology allows the Sponsor to use data generated from an Asset Originator’s underlying customers obtained during their asset creation process, providing the Sponsor with the ability to quickly identify potential or actual covenant breaches and to act to immediately remedy them, thus actively mitigating downside risk while seeking to maximize returns.
Deals done to date: Four deals have been done to date with a fifth committed but not yet funded:
A US-based merchant cash advance originator
A US-based near-prime auto lender
A Spanish consumer lender
A Colombian SME and consumer lender
Signed commitment with a consumer lender that originates cellphone-collateralized loans
The main contacts at the Sponsor:
Ali Meli ([email protected])
Joe McNeila ([email protected])
2. Provide a brief high-level overview of the project, with a focus on the applying collateral token
- Structural overview (TL;DR):
This will be the first time that Centrifuge structures a credit facility for a fund. After numerous discussions with the Maker Real World Asset Risk Team, we determined that a fund investment manager could provide outsourced risk management services and allow MakerDAO to scale real world asset allocation safely in an efficient manner.
The Sponsor will create a “Lender SPV” that will sign credit facility agreements (the “Credit Agreements”) with the Master Funds and will own security interests over the underlying assets (the “Underlying Assets”) held as collateral by the Master Funds. The Lender SPV will create and own non-fungible tokens (“NFTs”) that represent each Credit Agreement.
- Detailed Structural Overview:
Issuer: The Sponsor will create a special purpose vehicle (“Lender SPV” or the **“**Issuer”) to be domiciled in the Cayman Islands, that will provide senior secured credit facilities (the “Facilities”) to the Master Funds. It should be noted that the Master Funds were established for tax purposes and they invest on a pari passu basis.
Sponsor: The Sponsor has been operating since 2019 and its Founder and CEO, Ali Meli, has personally invested a substantial portion of his net worth. Monachil Private Credit Fund currently has $11 million in assets under management with an additional $7 million in commitments. Monachil Private Credit Fund has provided credit facilities to four Asset Originators. A complete track record of the Sponsor will be made available to the MakerDAO real world asset risk team under a non-disclosure agreement.
Asset Originators: Monachil Private Credit Fund participates in credit assets originated by Asset Originators. Assets created during the origination process include secured and unsecured consumer credit, small business credit, and secured receivables, and may also include other asset types which meet the Sponsor’s criteria. Transactions will benefit from recourse to Underlying Assets pledged by Asset Originators as well as from subordination. Monachil Private Credit Fund targets Asset Originators with robust platforms that are well managed and have strong, sustainable business models. The Sponsor aims to structure transactions to minimize downside risk by consuming real-time asset level data from each originator allowing it to constantly monitor asset performance as well as by using contractual terms which create an alignment of interests. Monachil Private Credit Fund has a stable source of capital, which is drawn down over a two-year investment period and committed for up to six years.
Underlying Assets: Loans and other assets originated from the Asset Originators’ platforms and pledged under terms of the transaction with Monachil Private Credit Fund are typically kept in a separate, bankruptcy remote trust or SPV.
Senior Secured Credit Facilities: The Lender SPV will sign credit facility agreements (“Credit Agreements”) with the Master Funds and will own security interests over the Underlying Assets held by the Master Funds. The Lender SPV will create and own NFTs that represent each Credit Agreement. The value of each Credit Agreement will equal the net asset value of the Master Funds.
Off-Chain Equity: The Sponsor is seeking a line of credit from MakerDAO to the Monachil Private Credit Fund, which raises capital from fiat investors and is denominated in USD. In lieu of a large TIN tranche, the DROP tranche is primarily secured by an off-chain equity tranche that is de facto owned by Monachil Private Credit Fund. This off-chain equity tranche is custodied by SS&C, the largest independent fund administrator, which functions to independently verify the existence of the Underlying Assets as well as to report on their value. In addition to the 60% of off-chain equity, an additional 1% TIN risk buffer will be taken by the Sponsor.
Investors in the Monachil Private Credit Fund expect assets to be held by this independent administrator to ensure they are custodied securely and that cash movements and asset valuations are reconciled with financial statements. Fund administrators generally do not, however, have the infrastructure and regulatory clarity to support on-chain equity.
The proposed structure provides MakerDAO with the security associated with a significant equity buffer while also enabling the Monachil Private Credit Fund to use a standard investment fund structure typically designed to provide financing to Asset Originators. Utilizing this approach could provide scalability by providing a mechanism to bring Asset Originators into the DAI eco-system.
Third Party Service Providers: The Master Funds further use SS&C to generate independent net asset value reports on a quarterly basis and the value of the NFT will change based on these appraisal values reported by SS&C. The Master Funds will be audited by Deloitte or Ernst & Young on an annual basis.
Finally, the Issuer will hire an independent director to ensure third party governance oversight who will also be responsible for maintaining the continuation of services of the Issuer in the event the Sponsor files for bankruptcy or suffers from a disruption that prevents the Sponsor from operating through its normal course of business. The independent director will be responsible for identifying and nominating a back-up servicer if required.
The Sponsor will create the Lender SPV which will be domiciled in the Cayman Islands to ensure bankruptcy remoteness (via a 3rd party director or other methods determined with legal counsel) to protect debt holders. The Lender SPV will be a Monachil entity. The Lender SPV will enter into an agreement with the Sponsor to finance Underlying Assets and will enter into a service agreement with Centrifuge to get support from Centrifuge while using their open and decentralized infrastructure. The Lender SPV will tokenize the underlying assets (a mix of credit assets) into NFTs and will add those NFTs into Tinlake as collateral. The Lender SPV will utilize Tinlake to issue MC-DROP and MC-TIN backed by the pool of NFTs that are locked in Tinlake. Find the documentation for the two-tranche structure here. 3
Please view section 1 for a brief overview of Monachil. The following will outline the key points of this deal proposal:
Why onboard Monachil to do this deal with us: Monachil wants to transact with Centrifuge and MakerDAO for two reasons:
- Banks typically require that investment funds to which they provide warehouse lines have a minimum of $50m in AUM, therefore Centrifuge and MakerDAO are an early-stage alternative.
- Monachil believes in DeFi and sees this as an opportunity to innovate.
Positive attributes of this MIP6 application:
Monachil is a professional team that can scale rapidly.
Monachil has put significant skin in the game in the form of the off-chain equity.
The transaction can be generally considered secure with 250% overcollateralization (40% advance rate)
By designing a line of credit for a fund, Centrifuge and Maker can scale safely and efficiently.
Monachil will bring their Asset Originators to us for co-investment funding going forward.
Issue with the deal:
Centrifuge and Maker are creating an NFT of a warehouse line, so it lacks transparency.
The transaction lacks a substantial TIN tranche, though this is remedied with the use of off-chain equity
Centrifuge provides the infrastructure to allow transparent and secure onboarding of RWAs to MCD. New Silver was the first asset originator to back DAI with RWA using the Centrifuge model. Monachil is one of many projects currently in the pipeline to help MakerDAO scale RWA backing to $300M by the end of 2021.
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.
Monachil’s Mainnet deployment is scheduled for [3Q 2021] and will be accessible via tinlake.centrifuge.io
Centrifuge has conducted several audits of its technology stack.
Centrifuge Discourse Forum
Monachil Private Credit Fund is currently operational and has invested in four Asset Originators to date.
8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?
Monachil Private Credit Fund is subject to custody rules and SS&C, as their independent third-party custodian, maintains custody of and has control over Monachil Private Credit Fund’s assets and cash. Cash is held in third party bank accounts and all movement of cash, including income generated, is subject to SS&C oversight.
Monachil Capital Partners LP (a Delaware limited partnership) is located in Greenwich, CT and is the Monachil Private Credit Fund’s investment manager; Monachil Credit Partners GP LLC (a Delaware limited liability company) is also located in Greenwich, CT and is the Monachil Private Credit Fund’s General Partner.
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.
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.
We intend to use the same iterative approach the Oracle Domain Team proposed for the Centrifuge RWA collateral onboardings. Cadence, and the extent of reporting, will be defined with the RWF Core Unit and the Oracle Domain team. The supply chain company is regularly audited by a third party and audit data can be shared with the RWF team.
13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.
Collections policy: In the event of a payment delinquency by the Master Funds to the Lender SPV, the Lender SPV is entitled to all cash flows generated by the Underlying Assets until the Lender SPV until the delinquency is cured. Since the Facilities are secured by Master Funds’ Underlying Assets (with security to be perfected through UCC filings), cash flows to the limited partners (“LPs”) of the Master Funds’ feeder funds will stop immediately upon enforcement. In addition, the Master Funds’ feeder funds will provide a guarantee for the benefit of the Lender SPV. The guarantee is theoretically redundant, but it provides “belts and suspenders” assurance to the investor in the Lender SPV that they are senior to the Master Funds’ feeder funds’ LP investors.