MIP6 Collateral Onboarding Application: Monetalis - Wholesale, Green Economy, Senior, Secure SME funding

Dear MakerDAO Community,

Monetalis hereby requests a DAI 400M vault. Monetalis wish to deploy the amount towards wholesale, green growth economy, senior secured credit originating from non-bank SME lenders in the UK.

We have presented the full case for this request, in detail, for your convenience, in this document.

As new documentation is added to the project, again for convenience, it will be aggregated on this website: https://monetalismip6.brick.do

We appreciate your kind consideration of this request.

Sincerely,
The Monetalis Team


MIP6 Q&A FOR MONETALIS

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

Ultimate interested parties are the founders of Monetalis:

Allan Pedersen - https://www.linkedin.com/in/allanio/

Alessio Marinelli - https://www.linkedin.com/in/marinellialessio/

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

Monetalis is a newly designed, from the ground up, wholesale lending business squarely focused on bringing the MakerDAO collateralization model into the traditional wholesale SME lending world, first in the UK and subsequently in the EU.

We have developed it to do so on an institutional-level scale, with a complete bond issuance and securitization model, and, importantly, with a strong green growth economy mission at the center of our business.

3/ Provide a brief history of the project

The project is the product of having followed the RWA MakerDAO Community for months and devising a business model we believe would serve the MakerDAO RWA strategy, as we understand it, well.

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.

Our principal documentation on the project is this document: and further documents on the project will be found here: https://monetalismip6.brick.do

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

A formal review of the legal structure is forthcoming and will be provided to the community when ready.

The IT system - in particular the interaction with MIP21 - will also have a third-party audit and will be provided when available to the community.

Lastly, on Green Economy and the Net Zero quest, we are undertaking a number of certifications and pledges, which will be shared also.

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

Not Applicable.

7/ How is the applying collateral type currently used?

Not Applicable.

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

Please read this section on our proposed legal structure.

9/ Where does exchange for the asset occur?

Not Applicable.

10/ (Optional) 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.

Not Applicable.

11/ (Optional) 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.

Not Applicable.

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

Oracle data will be automatically produced from our IT solution and generated from our raw lending data from lenders data-tape, bank account and account statements. We are working with a provider to secure the independence and validity of this datastream.

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

Not Applicable.

14/ Provide (a) proposed legal structure for transaction including, type of legal entities, (offshore/onshore, form (trust, corporate, other)) and jurisdiction(s) of legal entities, and (b) likely funds flow (DAI => Fiat => DAI).

Please read this section on our proposed legal structure

15/ Provide details on the organizational structure of the interested party, beneficial ownership, governance/control, key personnel, capital/funding resources and past financial performance.

a) Org structure and key personnel: Please read this section on our team.

b) Beneficial Ownership and Governance/Control: Please read this section on our proposed legal structure

c) Capital and funding for the setup of Monetalis is today provided by the founders and a set of private investors.

d) As this is a new setup, there is no past performance of Monetalis. However, the founders do have substantial positive experience with SME lending and Impact Investing.

16/ Provide detailed summary of the proposed economic terms of the transaction, including, without limitation, commitment term, principal amount, interest rate, frequency of principal and interest payments, disbursement schedule, equity amount, funding ratios (equity/debt pro rata, equity first, etc.), collateral security, coverage ratios, currency (if not DAI) and other material terms. The quality of the proposed economic terms will be a consideration for the prioritization process.

Please see this section on proposed financial design - and this section on Portfolio construction.

17/ Identify in reasonable detail the risks associated with this collateral application and the underlying asset(s) and proposed mitigants (if any). The risk summary should address, without limitation and to the extent relevant, market risks, commercial risks (e.g., diversification, credit, etc.), interest rate risks, legal and regulatory risks, general industry risks, competition, etc.

The various risk categories, we hope, are discussed within their relevant sections in the application document

We will shortly release further risk studies on our expected portfolio here: https://monetalismip6.brick.do

Generally speaking the business has been designed to be extremely low risk: from legal structure over underwriting process to core credit focus and collateral management.

18/ Outline the applicant’s underwriting guidelines/policies, origination strategy (marketing, sales, channels), servicing strategy (charge-offs, collections) and historical asset performance.

Please see this section on Portfolio construction and this appendix on Tactical Credit Guidelines.

19/ Outline the applicant’s risk monitoring and operations guidelines/policies (e.g. charge-offs, collection, recovery provisions, data collection and technology, etc)

Please see this appendix on Credit Operational Setup.

18/ Describe the regulatory regime applicable to the underlying asset (if any) and the applicant’s legal and compliance program relating thereto.

For all practical purposes wholesale lending to SME non-bank lenders in the UK is unregulated.

19/ Identify any 3rd party persons likely to be relied upon by applicant to implement the transaction (legal, accounting, servicers, trustees, etc.).

Today we principally work with Reed Smith as lead legal counsel and PWC on accounting/audit.

We are in the process of identifying appropriate trustees and servicers to match our legal structure, but do not expect to finally appoint these before they have been approved by the MakerDAO RWA team.

10 Likes

Endeavored to quick read the google document here MonetalisMIP6-V5-Final - Google Docs

My understanding here is that such a project would be funded by venture capital to bootstrap the liquidity process (i.e. someone has to have real skin in the game before other players, banks and other investors will buy-in). This is skipped with the view that MakerDAO can help bypass this step by providing initial financing.

My issue here is that the vc often takes a pretty sizable share in such companies either via an options contract, or some agreement strike of % ownership stakes should such a company finally go public etc.

You pretty much have all fees, and a .5% management fees going to the company and a 50/50 split of profits above the SF paid to the protocol. You then say that 100% of the founding stake would be held back to cover shortfalls in this.

My questions:

  1. Why wouldn’t Maker get a 50% ownership stake for effectively taking on the vc investment risk that can be properly structured to account for tax liabilities.?

  2. Bonds from an initial supplier tend to not have a lot of liquidity. You are asking for a pretty significant initial DC on a bond issue that probably isn’t going to have dink for volume and market depth. This will put Maker on the hook here for potentially quite a bit of bond issue where there is an uncertain market. How exactly are you guys going to handle this?

  3. It looks like Maker takes on ALL of the company risk and no-one at the company takes on any material risk here. Where is at least one deep pocket partner that is willing to put their money where the companies mouth is? And if Maker is going to take on the lions share of the risk why isn’t the DAO getting the lions share of the profits/ownership until the people involved prove themselves? (ala a kind of ownership vesting model that starts with MakerDAO owning most of Monetalis and dripping out rewards to the founders based on actual performance

There is a lot I like about this proposal.

  1. A focus on tangible reduction in GHG production etc.
  2. Desire to bootstrap markets and liquidity
  3. Ability to scale into a space that could be 10’s if not 100’s of B
  4. A strong view from inception on MakerDAO focus.

My final question is on DC, SF terms? Are you guys looking to basically get long term rates on this vault? Or a better question how will not just currency exposure be managed, but interest rate exposure.? I have already seen many articles suggesting serious inflation is on the horizon so we better get prepared for possibly significant rate hikes. I want to know how Monetalis expects to manage this with MakerDAO.

All in all an interesting proposal. Ambitious, and probably lean on the what Maker gets for the risk it takes on. I would prefer to see some other players have a financial stake here not just in Monetalis, but also in bonds - and some real company happening here. There is some distinct appeal in getting in on the ground floor with a larger player at inception, but I feel like Maker with this 50:50 profit option should at a minimum get a 50:50 stake at a minimum and probably hold a significant part of the founder stake in a vesting/slashable set of contracts to encourage founders to perform over the period. Point here is that both parties need to have real skin in this game and I don’t see the mechanic where the founders have put anything of substance in other than ‘future stake in the company’ which at inception has little real tangible market value.

Thank you for bringing this forward and I look forward to responses and discussion.

2 Likes

Hi @MakerMan

Thank you for reading the application and giving it thoughtful consideration - it is much appreciated. Let me try to answer your questions:

1/ Maker only providing credit capital - Monetalis is already VC/privately funded
I apologize for not having made this clear in the document: Monetalis is already funded by venture capital/private investors. That means we are paying for all the setup (team, IT building, legal setup and operations etc) and we are responsible for the continued operating cost of running the business - in fact several millions in private capital has been committed to the setup and running of Monetalis so far. Capital coming from Maker via the Vault is exclusively used for wholesale, green economy loans extended via non-bank lenders. Not to fund any startup cost or operating cost of Monetalis operations.

2/ Financial equation is built to truly share profit between Maker and Monetalis - not for Monetalis to make money on asset size related fees.
In respect of these wholesale loans we extend, we pay Maker, of course, any agreed stability fee AND a 50/50 profit share (to ensure both parties benefit from our ability to negotiate interest rates for the extended wholesale loans). And the profit share is calculated via a “waterfall” where we propose a 0.5% business operating allowance to us for operating cost AFTER Maker stability fees are paid AND any legal/admin fees to ensure the base legal/admin structures are paid. With the 0.5% we are to pay principal business runnings of Monetalis (i.e. 400M USD x 0.5% = 2M), which I can safely tell you is actually not a large annual budget for running a fully-fledged institutional level wholesale lender in the UK - particularly one that requires appropriate Green Economy underwriting and continued development to support a growing portfolio. In short, if we are to make a profit from Monetalis ever, it will have to be originating from the 50% profit-share - and certainly not from the 0.5% operational business allowance.

3/ Skin in the game/control: largest asset we have is being put up + substantive control mechanisms setup for Maker
In terms of ‘skin in the game’: firstly we are developing a business squarely focused on working with MakerDAO and spending substantive private capital on that. As such, we certainly from day one have material skin in the game as we of course would like to see a return on all those investments. And should (in a highly highly unlikely “blackswan” situation that I can’t even conjure up in my head - we are doing senior, secured with low LTV and we are widely diversified across classes, geography and lenders - and each portfolio have conservative default provisions build-up - and we have direct line of sight and control to the underlying assets for disposal - there is nothing synthetic in the credit design etc) we not see enough proceeds from the lending to cover a stability fee demand from Maker, we commit to selling shares in our business to pay for this. This is by far the largest asset we can provide as an underlying guarantee.

It is worth mentioning, I think, that we have developed the legal and operational structure such that actually Maker has quite direct access and controls to the operations of our company - in a true spirit of collaboration. The lending entity (the UK entity) has a representative from Maker on the board and will be granted traditional VC style covenants and protections. This, in practice, from my experience in private equity, has been a lot more effective in preventing any non-aligned risk-taking/exposures, than skin-in-the-game commitments/measures.

4/ Bond: a path to a traded listing - but for now a technical listing
The bond we are issuing is, for now, a technical listing/private placement and in place for tax planning purposes, ensuring a strong control framework for Maker - and establishing potential emergency liquidity mechanism from a Vault/MakerDAO blackswan event (i.e. easier to sell a well designed technical listed bond than a portfolio to an external party if absolutely needed fast).

As we grow - and we start having the size and performance - we can start doing external private placements of parts of the bond or the full bond - to start ‘mixing in’ other asset managers’ capital. Ultimately we might truly list the bond for actual trading etc - but that is quite some time away - and it is not a cheap operation to undertake - we need real scale to do so and should probably only be done if there is liquidity reasons to do so.

The bond will also be financed ‘step-by-step’ on an agreed cash flow plan between Maker and Monetalis - i.e. we don’t deploy 400M day one - it takes some months to do safely. I.e. there will never be a disconnect between end-loans issued and the bonds financed.

5/ DC & SF terms
We have built our portfolio pipeline to match a 24 to 36 months duration and so a vault with some stability in SF terms would be ideal and obviously some duration - 36 months or so. Also we have developed this portfolio to be as low risk as possible and so the SF can’t be too high - to compensate for this please do remember we have a 50/50 profit share on top - this also addresses some of the upward interest rate pressure potentially coming to the markets. On DC: we do believe a large vault makes sense for this type of operation - scale is important to make it work well. On the specifics of the terms we are engaging with the RWF unit to figure out what makes sense for all.

I hope this answered most of your questions? If I missed something or you need more details/clarifications, please do ask!

2 Likes

I noticed in the presentation where you ask for 400mm from MakerDAO, that there is no mention of your track record of putting together deals of this size or the viability of the legal structure proposed.

I am all for doing as many experiments as possible but I think the far more appropriate thing from a risk perspective would be to ask for a much much smaller amount of money, prove the model out, and then expand from there.

3 Likes

I do not believe that the skin in the game acts, as it should, as credit enhancement mechanism but merely as a incentive alignment facilitator. Why not providing junior exposure as originators in accordance with market best practice and Maker’s perceived risk profile? The mechanisms described (board sit, control of operations, etc.) seem more relevant for an equity, early-stage, investor rather than a super-senior lender such as Maker.

I’m sure the MIP requires extensive review but this crucial point is not satisfactory in my opinion as a mere community member.

3 Likes

Regarding manager economics here is some market data for private credit funds

  1. In 2017 average management fees for private debt funds were %1.5.
    This is provided by Preqin, a standard data source in the PE and hedge fund world. Maker could purchase more recent data and info on carry from them.
  1. Carlyle’s private credit fund is charging 1% management fee with 17.5% carry that kicks in after a 6% preferred return to investors.
  1. Blackstone’s private credit fund charges a 1.25% management fee with a 12.5% carry that kicks in after a 5% preferred return to investors

https://www.bcred.com/wp-content/uploads/sites/11/2021/07/BCRED-Fact-Card.pdf?v=1635338059

Given this private credit fund fee structure data, it
appears that the market is doing established private credit funds in the following fee range:

Manage Fee : 1% to 1.75%

Carry/Profits: 12.5% to 17.5% after a preferred return to the investor.

QUESTION: is the is reasonable benchmark to begin fee structure discussions? And if not, what are reasonable benchmarks?

2 Likes

Hi @chris

Thanks for reading the application and let me try to respond to your well-taken comments:

1/ Track-record of key people

I asked our key people to put together some more details on their relevant experience base.

Allan Pedersen, CEO and founder
I have about 25 years of experience in the financial services industry in mainly Europe and Asia. I have founded a good number in Asia and Scandinavia - and sold a good part of them also. Of main interest to this situation probably are the following roles:

  • I worked for TPG on financial services investments in Asia Pacific. USD 100M+ private equity growth/buyout deals. And have thereafter worked as advisor for several other private equity companies on similar sized deals - as deal advisor as well as in value creation and executing an exit.
  • I set-up and managed, with 2 partners, an Impact (increasing financial inclusion) private equity company in Singapore, Triple P Capital, to invest in financial services in South East Asia. It’s investor-base was 3 development financial institutions: KfW DEG (Germany), Proparco (France), BIO (Belgium), LGT, and professional family offices . The first fund was closed at USD 51M in 2017.
  • Recently, in the UK, I have had a brief stint (6 months) as CEO for a Credit fund manager focused on the SME wholesale lending industry - until I started focusing on this opportunity of Monetalis.

If I had stayed with private equity my next “step up” fund for own steam would probably have been raising a USD 200M+ private equity fund - and given it is credit (and senior secured at that), a USD 400M, I’d venture is not a stretch.

Alessio Marinelli, Head of Credit and founder:
Having started my career in the space industry, specialising in predictive modelling, I have worked in Financial Services for over 20 years.

  • I worked for over 10 years in Management consulting with 2 of the Fours providing services to FS clients. My last role was Head of the Data Analytics practice at KPMG for HK and China
  • Following a successful career in consulting, I joined one of my clients, a lender operating in The Philippines, Hong Kong, Singapore and the UK, as Group CTO where I designed and implemented an end-to-end platform centred around proprietary credit technology
  • I founded my own alternative lender in the UK providing short term unsecured loans to UK SMEs. In this role I have raised an managed eight different institutional funding facilities, including Block Discounts and RCFs
  • I am in the process of completing a PhD in Machine Learning-driven credit risk modelling for SMEs

“Mr H”, Head of Portfolio Management
(cannot disclose name as person is in the process of resigning)

  • Over 15 years of experience in the UK’s wholesale lending market working with top tier UK banks.
  • Developed and managed whole-sale lending portfolios in the UK of over GBP250m.

Dr. Julian Frede, Head of ESG/Green Economy

  • Spent 8 years with KfW DEG (Germany’s development finance institution) heading up a number of ESG efforts
  • Developed KfW DEG’s Development effectiveness Rating model and numerous impact and ESG studies

In combination, we feel we have a strong core team to deploy USD 400M++ on this particular business model.

2/ Viability of legal structure
The legal structure is a plain vanilla securitization structure used for many years in the UK. We had our legal counsel write his views on this also for your reference here

We have added some elements to the model to give MakerDAO even further controls and participation in governance than would usually be given to an institutional investor, but again done so in the spirit of collaboration and transparency.

Of course the devil is in the detail and when we start developing the actual documentation (company formation, AofA, Trust Agreements etc) underlying the structure, we will work through it with the RWF team.

3/ Smaller amount and scale out
The proposed business model is industry-standard for a small/medium size senior funder in the UK - and generally the EU.

The Vault funds will be used to originate senior, secured credit facilities of GBP10m to GBP30m to non-bank lenders with a proven track record. And not many that are GBP10M.

Realistically speaking there is, unfortunately, no investable, high-grade, larger set of senior, secured positions below these sizes in this market. Going below would adversely affect credit quality - and cost (due diligence, audit and monitoring costs remain constant per lender portfolio).

So reducing the scale of the vault materially (and staying with high-quality lenders) would not allow us to achieve the portfolio diversification (in # of lenders) we would like to attain to manage risk appropriately (less than 10% of overall portfolio per lender).

Also beyond risk and cost, I also want to mention ‘attractiveness’ as a key benefit of size.

I don’t know if you have tried convincing high-quality lenders/institutions to take senior secure positions from a structure that has a stablecoin as funding end-point, but it is not as easy as it might seem - even with a strong interest rate/terms offering. General media has not recently been kind to stablecoins and crypto - nor has many regulatory and government statements. So to counter this we…:

  • Have a team they can trust and have seen before in the industry
  • We use legal structures and agreements common to industry
  • Our underwriting guidelines are proprietary, but still certainly in-line with industry
  • Our due diligence, monitoring audit etc are all in-line with industry

…and very importantly, we want to show, through the size of commitment, that this is not just a “dabble”, but a commitment from us and Maker to building a long-term, green economy focused, senior secured wholesale lending business. The non-bank lenders of substance that we want to work with, are looking for long-term partnerships and would broadly stay away from any funders that have a ‘we are just testing the waters’ kind of feel to them.

The USD 400M vault, in our view, shows exactly the right level of strength in commitment. Not so small it can be considered a dabbling/test, and not so big that it would be considered half-hazard, but a strong, measured, entry into the market, with enough strength to have competitive cost and appropriately sized infrastructure to work with non-bank lenders of substance.

4/ Proof of business model working
As probably you might have worked out from above, we are not innovating a lot in this particular wholesale lending business model - for now at least. Adding stable-coin as funding end-point and implementing a green economy screening into the credit underwriting is more than enough of ‘business model changes’ we can realistically implement and still be able to acquire senior secure positions with high quality lenders.

To a large degree we are just executing an industry-standard proven whole-sale lending business model and the fact that we have a large pipeline signed up, we think, shows we are successfully overcoming the 2 business model adjustments above.

5/In practice: MakerDAO is in control
Perhaps good to remember also, that in practice, given the legal and technical setup, MakerDAO is ultimately in control of funds irrespective of the size of the vault. Also as we scale and build out the portfolio over a 6 months period.

I hope this provides you some colour and context to the issues you raise in your comments?

Please let us know any other questions or clarifications you might need.

2 Likes

Hi @luca_pro ,

Thank you for your comments.

Now, your comments, make me think perhaps we haven’t made our business model entirely clear. Allow me to present an example so we are completely sure we are on the same page in what we are talking about (numbers are for illustration!):

1/ End-borrower <-> Non-bank lender
A business wants to grow their business via certain investments, and so wants to take out a loan for 100 USD over 2 years for this purpose, and secure it against one of their properties. The non-bank lender would require a LTV of 70% (and a lot of other things we won’t go into for this example), so to get the loan of 100 USD, the non-bank lender would need a lien/pledge/first charge on their property and it would have to be valued independently at more than 133 USD. Let’s say it is actually valued at 150 USD to keep round numbers. Let’s say 8% interest for this loan. So let’s say borrower and non-bank lender agrees on a 2 year loan @8% of 100 USD secured against a 150 USD property

2/ Non-bank lender <-> funding via Monetalis and Junior funder
Next step is for the non-bank lender to fund this 100 USD loan. The structure we would support is a junior/senior funder. I.e. a junior funder would take 25% of the loan and the senior funder would take 75% of the loan. Monetalis would be the senior funder. The junior funder could be a credit fund (many in the UK), a private office or in fact sometimes equity capital from the non-bank lender (not uncommon for the larger and stronger lenders). So Monetalis checks the underwriting and documentation of the loan and, given it fits with the agreed facility with the non-bank lender, Monetalis then funds the 75 USD of the 100 USD loan. The junior funder funds the 25 USD. The important part is, of course, that Monetalis has waterfall cashflow preference and direct access to the lien/first-charge on the property. Let’s say Monetalis charges 4% and Junior funder charge 12%. 0.75x4% + 0.25x12% = 6% is thus the cost of funding for the non-bank lender - and so there is a 8%-6%=2% margin for the non-bank lender. But this is not a paid-out monthly margin (as interest payments are made and principal repaid), because Monetalis and the Junior lender would require the proceeds arriving monthly from the borrower (the 8% + principal) to be locked up until a realistic reserve fund has been built up. Usually this would be something like 5% of the outstanding portfolio amount. We would further require the lender to re-invest part of their waterfall margin through the term of their facility (generally three years). This will promote the growth of the assets under management and promote a compounded growth of the collateralisation rate.

3/ Monetalis <-> Maker
Last step to resolve is between Monetalis and Maker. Monetalis puts up the senior loan as collateral on a ~1:1 basis, vault mints dai, we exchange DAI to GBP and pay the to the non-bank lender so he can complete the loan to the end borrower. (simplified version!). Let’s say the vault has a 2.5% stability fee. We have 4%-2.5%=1.5% margin of which to charge 0.5%, pay legal/structural fees and ultimately share 50/50 in profit.

So - at Maker level - we fundamentally have a USD 75 loan @ 2.5% stability fee + profit share protected by many factors - including, but not limited to:

  • First charge on USD 150 property that is enforceable
  • Reserve build up and reinvesting conditions
  • Ultimate USD 100 loan @ 8% available for pursuit
  • Company Guarantees provided by Non-bank lender available for pursuit
  • Waterfall cashflow preference across all parties easily enforced
  • Profit-share build-up
  • Certain portfolio protection terms to keep a portfolio healthy (such as the requirement that non-performing loans must be replaced by performing loans by the non-bank lender)

Worth here remembering also that the above described exposure is aggregated across many loans, many assets, many geographies and many lenders.

In sum, the Maker Vault-loans are quite heavily protected from multiple sources. It would require a very substantive black swan event across the portfolio to penetrate into the Maker principal + stability fee aggregate portfolio amount.

Specifically I hope you can see that with Monetalis all Maker vault-based loans are protected by junior capital (and a lot of other mechanisms including access to actual physical assets). I do apologize that this isn’t clear from the document.

Our share pledge is to cover any - exceptionally unlikely - losses that burn through all the protection factors mentioned above, including the junior capital. Our share pledge is another layer on top of the usual junior capital protection - not instead of. Again I apologise that this wasn’t clear in the documents.

So clearly we are not going to force a board seat and/or additional controls on MakerDAO, if it is felt out of scope or not necessary. The suggestion is purely made to show we wish to operate transparently (i.e. Maker representative on board), collaboratively (i.e. Maker voting on the board) and respect Maker’s, in our view, basic right to steer capital deployment even after vault terms are agreed (via VC style governance rights and covenants).

I hope this provides some context and potentially addresses your concerns?

Any other questions/clarifications etc please do let us know.

Thank you for your reply @Allan_Pedersen,

I am not involved in the risk underwriting process but will obviously analysis this MIP6 in great detail for my personal interest as community member.

Will provide questions, if any, following a detailed review, hoping that this will help the community.

Luca

3 Likes

Hi Allen,

Thanks for sharing this Legal Memo and your responses. I guess what I was driving at with my snarky comment is that you’re asking for discretion over a substantial part of the MakerDAO balance sheet and the devil is indeed in the details.

Imo governance should study this aspect of the monetails proposal closely:

As pitched, its not clear to me how MakerDAO would go about standing on its rights if things went wrong after the vault was approved. Do I understand correctly that a majority of the Board of Directors is in control of the UK SPV? How would the Board of Directors go about instructing the BVI SPV to liquidate the bonds that it will be bagholding from looking at this chart:

image

How does the Share Trustee governance work? How would the ST get fired if things aren’t working out?

Is the purpose of this vault to just do two bond offerings? (“Green Transition Bond” and the “Green Economy Bond”). Could we see a representative example of each class of loan (and any associated marketing materials) that’s backing in these bonds? I take your Greenwashing point to heart and I think we do need to know that the financing is actually going to be used to address averting climate catastrophe instead of underwriting risky car loans that have discovered some loophole in what constitutes and “eligible project” per the Green Loan Principals:

image

I’ll keep thinking abt it though!

4 Likes

Hi @chris

Glad to see you digging into the material! A few answers to your questions:

1/ Liquidation question?
You are correct that the UK SPV is managed by a majority vote, excepting, of course, the set of covenants and rights that MakerDAO are given. Basically the UK entity is the ‘operating unit’ that extends the wholesale loans and issues bonds on these loans. The BVI entity buys the bonds and the BVI entity is entirely controlled by a trustee instructed by MakerDAO.

Whatever sort of liquidation you might be thinking about, MakerDAO will be able to achieve this via a BVI trustee instruction and/or exercising a right provided to MakerDAO under the Boardseat & right set provided in the UK SPV.

MakerDAO will also be able to replace the share trustee if necessary. Also the case for the collateral and asset trustee for that matter. We will later release a note on the various trustees’ roles and what parties we suggest appointing, so please allow me to explain this complex of trustees in that note. You are right to suggest we explain this in a bit more detail.

2/ Bonds
The Bonds are issued on the pools of loans the UK SPV is extending to lenders. We will split into two bonds in the beginning (transition and green) to fit with our strategy of indeed providing wholesale lender funding to “pure” green assets and green transition assets. We expect, at least, the bond issued on the ‘pure’ green assets will be certified green (we are finding the right certification scheme we believe in) - potentially also the transition assets, but it is more opaque and we need to take a bit more time on figuring that out. The loans underlying these bonds are exactly those fitting under the strategic credit guidelines in the document - just split into two.

In the long-run I hope we get to issue more green bonds and hope we can invite other funders into the bonds also (global asset managers etc) - true green bonds are in demand everywhere. I believe that would be a great way of further integrating with TradFi and giving more weight to ‘a MakerDAO Greening of the world approach’. In a longer run I hope these bonds can be listed for direct trading such that we can have the bonds being entirely liquid.

3/ Error…will correct
Well spotted - we certainly didn’t mean motor vehicles - it should say electrical & hybrid vehicles - but perhaps more appropriately we should say clean transportation assets. I will edit the application directly also. Thanks!

4/ Balance sheet effect
Agree that with USD 400M we are asking for a large vault and a chunk of the current balance sheet. My thinking, though, is that by adding assets/operations such as Monetalis to the balance sheet of MakerDAO you should see an expansion of the balance sheet rather than a reallocation ultimately. I am of the mind that there is an ever growing demand for DAI to “lubricate” the ever growing DeFi economy and integrating DeFi/TradFi. I think the demand is so big that billions upon billions of high-quality RWA could be on-boarded - and there’d still be unmet demand. But I am here only speculating of course.

Please do keep thinking about it!

We will shortly also organise an AMA video conference to answer questions and have discussions more directly.

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Dear @Eumenes ,

Very good question indeed.

If we compare Monetalis to a credit fund (‘CF’)/investment vehicle, then I’d suggest Honeycomb Investment Trust Plc as probably the best possible comparable. The scope of what they invest in/lend to is well aligned with what we are doing. Please do have a look at their material - they have a lot of details.

As far as I can tell, they have a 1% mgmt fee and a 10% performance fee with a 5% return hurdle. They seem to be targeting a yield of about 8% to investors.

We’d actually be very happy to form a similar CF vehicle, use market standard agreements and work under these terms, but we actually think what we propose is better aligned with MakerDAO in terms of structure and financial alignment.

With the Monetalis structure, compared to a standard CF type structure, I guess one could say that MakerDAO is trading away upside for down-side protection, low risk investing motivation, transparency and more controls (I might personally add the bond structure as well as a positive, because I think it has some very interesting long-term perspectives and options for Maker and Monetalis).

In a bit more detail (and we’re just, for simplicity, comparing Monetalis to the numbers of Honeycomb and sort of a common CF structure), one could probably compare this way:

1/ Management fee

  • Monetalis: 0.5%, but subordinate to paying Maker principal + stability fee and legal/admin cost necessary for the structures to persist. (if Maker doesn’t get paid, we don’t get paid)

  • CF: 1% - fixed - irrespective of return or capital preservation situation.

2/ Profit-share vs Carry/performance fee

  • Monetalis: 50/50 above stability fee + legal/admin cost + 0.5% Monetalis mgmt fee. (we don’t have to push portfolio risk very high, as we get good profit-share - and hurdle is defined by realities of stability fee and cost rather than some set more or less arbitrary rate)

  • CF: 10% above 5% return hurdle

3/ Governance/Transparency

  • Monetalis: Deep involvement, very strong governance rights - and a strong reporting package

  • CF: arms-length (usually).

5/ Bond structure issuance

  • Monetalis: Opens up a new avenue for integrating TradFi and getting additional leverage - and longer term options for liquidity.

  • CF: No particular structural “upside” (usually)

6/ Legal structure/admin cost & ‘licensing’

  • Monetalis: comparatively low cost standardized securitization structure with easy movement of Maker integration points as regulations might change (i.e. from BVI to elsewhere). (we think this is fairly essential in a rather moving regulatory world for crypto currencies)

  • CF: Heavier cost and larger burden on licensing, regulatory reporting etc. Relatively more difficult to establish and move around as regulation may change.

The basic “motivational”/alignment concept we have tried to embed in the Monetalis design is:

  • We must with great certainty ensure we get MakerDAO their principal and stability fee “plus a bit”- or we won’t have capital to pay operations! (the subordination of our payment)

  • …but we only need ‘a bit’, as we have a strong portion of the upside (50/50) so we don’t have to push the riskiness of our assets to create very high yields.

This way we are motivated to definitely get MakerDAO paid and not “push out” the risks of our assets. We believe this is the right way to motivate Monetalis to build a solid and secure lending asset-base with low risk.

I hope that makes some sense of our thinking behind the design?

Thanks, Alan, for the thoughtful and detailed reply.

I dont have a strong view on structure specifics but think this is a key issue for the proposed Arranger framework: how does Maker structure deals with Arrangers that align them to Maker’s goals and also provide a reasonable market-based, risk/return to both parties? The Honeycomb structure provides some guidance but to your point it isnt a perfect comparable.

I expect that Maker wants the Arrangers to
(1) Originate high quality credit investments backed by high quality Green assets
(2) Be able to orginate significant volume of Green assets fairly quickly
(3) Provide high quality servicing and management of 3rd party servicers overseeing the credit investments and underlying assets
(4) Provide high quality reporting, controls & transparency on the investments and underlying assets

Lets keep this key issue in mind as the RWA team reviews your proposal in greater depth and community discussions continue.

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Hi @chris

Reed Smith, our legal counsel, have now updated the note to include some more detail about the trustee’s in the structure - as promised. You can find it here

I hope that helps clarify. Any questions please do let us know.

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This proposal will be up for a Greenlight Poll on Monday (2021-11-15). Voting will last for two weeks, with all votes impacting the privatization score for this RWA proposal.

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