[NCP01-DROP] MIP6 Application: European Point-of-Sales Consumer Finance Portfolio

This is the MIP6 Proposal for the senior tranche of a tokenized granular consumer credit portfolio originated by a European FinTech lender. Nebula Capital Partners LTD (“NCP”; www.nebula-capital.com) acts as originator and investment advisor of the transaction (the “Sponsor”). The TIN Tranche will be held by NCP as well as the FinTech lender that originated the underlying consumer loans (the “Asset Originator”). Markus Hunold is the main contact at NCP [[email protected]]

Centrifuge will provide the technology and framework for bringing this asset to MakerDAO. The main contact from the Centrifuge team will be Lea Schmitt [[email protected]] and Colin Cunningham [[email protected]]

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

Nebula Capital Partners LTD (“NCP”) is a UK based investment advisor that was established to focus on investments in portfolios of granular credit assets originated by Western-European FinTech lending platforms (i.e. credit assets originated by technology enabled non-bank specialty finance credit origination, underwriting and servicing platforms). FinTech lending is an expanding asset class in developed markets, which is benefitting from ongoing technological innovation and disruption that provides FinTech lenders with the ability to profitably address underserved and/or niche credit demand of the “real economy”.

NCP’s targeted sub-segments span the entire spectrum of the real economy - lending to consumers and SMEs, property finance and niche sectors such as digital ship and litigation finance. It is NCP’s conviction that the attractive unlevered returns achievable in these sectors via FinTech lending are the result of (i) excess demand for small(er)-ticket loans, especially in niche sectors combined with (ii) superior, technology-driven sourcing, underwriting and servicing processes of FinTech lenders.

NCP considers that these pools of FinTech lender-originated credit assets are ideally suited for token-based securitization structures. The granularity of the portfolios provides an inherent diversification benefit and creates a certain predictability of investment outcomes (statistical outcomes vs. idiosyncratic individual counterparty risks). Furthermore, the high deployment/repayment rate and hence cash flow velocity of the underlying portfolios allow for structural features that create “quasi-liquidity” for token investors via continuous redemption/redeployment opportunities.

A key aspect of NCP’s investment approach and value proposition is to combine the innovative aspects of a token-based securitization vehicle with institutional-grade quality underlying assets. Accordingly, NCP intends to partner with Tinka B.V. (“Tinka”) for the first asset pool / token-based securitization structure:

  • Tinka is a Zwolle (NL) based non-bank and digital-centric deferred payments and consumer lending company. Tinka is owned by Apax Partners (https://www.apax.com), a leading global private equity advisory firm with more than 35 years of investing experience. Tinka is the clear market leader in revolving Point-of-Sale credit in the Netherlands and has approximately 60 years of experience in originating, underwriting, and servicing various consumer loan products. Tinka is audited annually by PwC Netherlands.

  • Please refer to the website of Tinka for more information: https://www.tinka.nl/

  • Tinka’s loan portfolio is currently (re-)financed by an asset-backed-lending facility provided by ING Group (https://www.ing.com/). Tinka considers the anticipated transaction with MakerDAO as an innovative alternative to a traditional capital markets based securitization structure, to which Tinka will also continue to have access.

  • Following a successful completion of an initial, smaller transaction with MakerDAO, Tinka would be prepared – depending on terms and conditions – to significantly scale the anticipated tokenized securitization structure and make it a key element of its overall (re-)financing strategy.

The various portfolios will be monitored and curated by NCP as part of its Sponsor role. NCP (and/or an affiliate of NCP) will also make material investments in TIN Tranches of sponsored transactions.

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Initially it is intended to securitize portfolios with a net asset value in the range of EUR 1 million to EUR 50 million. However, given the size of the underlying market opportunity (the FinTech lending market in Europe accounts for approximately EUR 25 billion of annual origination volume and is growing by 50%+ annually) and the demand for attractive fixed income investment opportunities, it is the medium-term goal to eventually grow pool sizes to amounts of several hundred million Euros.

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

NCP and Tinka have agreed to launch the token-based securitization with an initial pool of credit assets with the following characteristics:

  • Underlying Assets will be consumer loans originated/drawn-down at the Point-of-Sale (the “PoS Financings”), with a contractual claim over the purchased item (similar to the “buy-now-pay-later” business models / offerings of Klarna in Europe and Affirm in the US – however, Tinka itself and its business model operate in a fully regulated consumer credit environment vs. the (currently) unregulated activities carried out by the new wave of “buy-now-pay-later” invoice finance players).

  • 100% of the borrowers are Netherlands-based.

  • The anticipated pool size at launch will be approximately EUR 8,200,000 / USD 10,000,000 and consist of more than 25,000 individual consumer loan exposures.

  • Average maturity of the underlying loans is approximately 30 months (ranging from 0 to 72 months).

  • Over the last twelve months, Tinka has originated ~EUR 100 million of comparable PoS Financings and a long successful track-record is available for NCP’s / MakerDAO’s due diligence.

  • NCP and Tinka are looking for an initial debt ceiling (the “DC”) of USD 50,000,000 for the pool.

  • Given Tinka’s ongoing origination volumes and its existing balance sheet holdings, it is expected that the initial USD 10m pool can grow to USD 50m within 6 months. NCP and Tinka are prepared to discuss further DC increase(s) after that and thus make MakerDAO one of Tinka’s key (re-)financing sources.

Economically the transaction can be characterized as a revolving securitization and the transaction structure and documents will be set-up accordingly and will also include a set of eligibility criteria.

  • Eligibility criteria will allow proceeds from the Underlying Assets and/or additional token issuance(s) to be used for the acquisition of additional assets from Tinka.

  • The eligibility criteria for such re-investment(s) will (i) be included in the tokens’ subscription agreement(s), (ii) mirror the characteristics of the initial pool of credit assets and (iii) include a finite investment period before which the pool is put into “run-off”, i.e. a date after which all proceeds from the Underlying Assets will need to be used for redemptions of tokens and cannot be reinvested.

  • The initial as well as any subsequent asset transfers from Tinka to the securitization SPV will be implemented via a “true sale” transaction documented in a Sales and Purchase Agreement (the “SPA”). The SPA will include, amongst others, customers representations and warranties by Tinka (e.g. title, capacity, validity of claim, etc.) with regards to the Underlying Assets.

  • NCP and Tinka intend to also include a “substitution right” in the documentation of the transaction which would provide Tinka with the option (but not the obligation) to substitute underperforming assets with performing ones on a like-for-like basis to maintain certain performance characteristics of the overall pool.

The securitization SPV will own the underlying consumer finance loans.

  • The SPV will enter into a service agreement with Centrifuge to get support from Centrifuge while using Centrifuge’s open and decentralized infrastructure.

  • The SPV will tokenize the underlying consumer finance loans into NFTs and will add those NFTs to Tinlake as collateral.

  • The SPV will utilize Tinlake to issue DROP and TIN backed by the pool of NFTs that are locked in Tinlake.

  • NPC and Tinka will purchase the TIN tokens.

The SPV will enter into (i) a servicing agreement with the Asset Originator (Tinka for the first pool) as well as (ii) an investment advisory agreement with NCP.

NCP envisages that subsequent tokenization transactions will feature a diverse set of asset originators but will always follow the principle of institutional-grade quality of the underlying assets combined with a clear alignment of interests between NCP, the asset originator and token holders.

3. Provide a brief history of the project

Please view Section 1 & 2 for a brief overview of NCP and the Tinka pool transaction. The following will outline the key points of this transaction proposal.

Positive attributes of this MIP6 application:

  • NCP is a professional investment advisor that can scale rapidly. NCP intends to become a frequent issuer of token-based securitisation instruments and wishes to establish a long-term strategic partnership with MakerDAO.

  • NCP and its team have significant skin in the game in the form of (i) investments in structuring and set-up costs as well as (ii) a material participation in each TIN Tranche.

  • The proposed Tinka pool transaction can be considered as secure:

    Tinka has a long and successful track-record (60+ years) in the Dutch consumer finance market.

    Tinka has access to traditional (re-)financing sources (private as well as public securitization structures) and is fully (re-)financed for its existing and future business opportunities. However, Tinka acknowledges the disruptive nature of the DeFi ecosystem and would strategically like to be amongst the first movers in the space and at the same time further diversify its funding sources. In case the MakerDAO transaction does not materialize, Tinka will place the underlying exposure(s) with its existing (re-)financing sources.

    Similar structured consumer finance transactions are frequently (re-)financed in the public ABS market and have a long history of resilient performance.

  • By partnering with NCP, which intends to source, underwrite and structure a multitude of suitable transactions, Centrifuge and MakerDAO can scale safely and efficiently.

About NCP

NCP was established by Markus Hunold (100% ownership) in 2021 with the aim of bridging the funding gap between non-bank FinTech lending platforms and the decentralized finance ecosystem.

Markus resides in London (UK) and has more than 14 years of relevant experience in the financial services and investment management industry covering private credit, private equity and investment banking. His experience include roles at KKR & Co Inc. (more than 8 years; www.kkr.com), Goldman Sachs Group, Inc. (3 years; Private Equity & Private Credit / Merchant Banking; www.goldmansachs.com) and Citigroup Inc. (3 years; Mergers & Acquisitions; www.citigroup.com).

Most recently and up until January 2021, Markus was a Director in the KKR Credit team in London, leading KKR’s private credit efforts in the DACH region (Germany, Austria and Switzerland). His responsibilities included sourcing, underwriting and monitoring activities covering the whole spectrum of private credit products: direct lending (senior / opportunistic), structured credit as well as special situations. Furthermore, he acted as Staffer for the broader KKR Credit team in London and as Special Situations sector-lead in KKR’s global valuation committee.

Markus graduated from European Business School Oestrich-Winkel (Dipl.-Kfm.; Germany) and the University of Hong Kong (MScRE).

About Centrifuge

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.

NCP is one of many projects currently in the pipeline to help MakerDAO scale RWA backing to USD 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.

NCP’s Mainnet deployment will be accessible via tinlake.centrifuge.io

Technical documentation about Tinlake can be found here: GitHub - centrifuge/tinlake: bringing individual, non-fungible assets to DeFi and the MakerDAO specific implementation here: https://github.com/tinlake-maker-lib

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

Centrifuge has conducted several audits of its technology stack.

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

Centrifuge Discourse Forum.

7. How is the applying collateral type currently used?

Tinka’s loan portfolio is currently (re-)financed by TradFi asset-backed-lending (“ABL”) facilities. Tinka has also access to capital markets-based securitization structures.

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

The SPV will be structured as a bankruptcy-remote Incorporated Cell Company (the “ICC”) with one ring-fenced cell incorporated for each securitisation (initial / Tinka pool: “Cell 01”).

It is proposed that the 100% shareholder of the SPV will be NCP.

  • NCP will provide investment advice to the ICC / Cell 01 as Investment Adviser, and as such will act as the authorised representative of RQC Group, an FCA (UK) authorised entity.

  • RQC Group is a specialist UK regulatory hosting and outsourced compliance business which provides appointed representative services. By providing appointed representative services they assume the regulatory oversight of the Appointed Representative (in this case NCP). RQC Group is comprised of Robert Quinn Advisory LLP and Robert Quinn Consulting Ltd. RQC Group was founded in 2007 and currently services clients with Asset under Management in excess of USD 580 billion.

  • Please refer to the website of RQC Group for more information: https://rqcgroup.com

It is the intention that IQ-EQ will be appointed as corporate services provider to the SPV. IQ-EQ is a leading investor services group employing 3,400+ people across 23 jurisdictions worldwide.

  • IQ-EQ’s professional team has a vast experience of dealing with asset backed and collateralised transactions and will provide transaction, governance and accounting support, including entity formation, corporate secretarial services as well as financial accounting and reporting to ensure compliance with local regulations and reporting requirements.

  • Please refer to the website of IQ-EQ for more information: http://www.iqeq.com

Each cell of the ICC will appoint (at least) two directors to its board:

  • A representative of the corporate service provider.

  • A Non Executive Director (the “NED”) with relevant experience in the crypto / blockchain ecosystem.

Simmons & Simmons LLP will act as lead legal counsel to the ICC / Cell 01 and NCP providing multi-jurisdictional advice which extends to, amongst others, drafting the relevant transaction documents.

9. Where does exchange for the asset occur?

Not applicable.

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.

In order to be an attractive partner to institutional-grade European asset originators and to be able to efficiently implement transactions at scale, NCP wishes to (i) engage best-in-class advisors and service providers and (ii) leverage a well-established regulatory securitization framework in an international recognised financial centre in Europe.

The underlying structure and economics of the transaction are alike to those of a revolving securitization, which is a tried-and-tested asset-backed financing structure that is frequently implemented by various speciality finance originators and is therefore nothing new in the traditional finance ecosystem.

An involvement, directly or indirectly, in initial coin offerings or crypto exchanges or providing other services relating to cryptocurrencies, however, is a “sensitive activity” for most European regulators.

NCP has therefore entered into direct discussions with several regulatory / market oversight authorities in Europe to ensure that when a formal application is made for consent to the issuance of the tokens in a chosen jurisdiction, such consent will be forthcoming in a timely manner and not be subject to delay.

It is the intention that before implementing the transaction, a respective local regulator will have officially signed off specifically on the terms and conditions as well as the securitization / tokenization structure, including the underlying documentation and all involved parties.

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.

Please view Section 10.

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

It is intended 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.

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

Granular consumer finance portfolios are a well-established asset class, both in a public (ABS market) and a private (bilateral portfolio transfers) transaction context.

Whilst the underlying portfolio will not be held in a security-form that is readily marketable in a liquid secondary market, it can be assumed that there will be interested parties to either acquire the (NCP01-DROP) tokens and/or the underlying assets if offered / marketed.

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Sounds like a top-quality borrower/collateral is being onboarded. I would like to see securitizations scale DAI moving forward.

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@MH_NCP Great to see the application coming through. This will now go into the normal community greenlight process. In the meantime, feel free to reach out if you have any questions about the process.

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Super exciting to read this, as “buy now, pay later” companies are making some serious news headlines:

Square to buy Australia’s Afterpay in $29 billion deal

How is Tinka different from someone like “Affirm” who has gained massive traction in the U.S.? Are there any competitors in the Netherlands? Not sure if Affirm is available in NL.

Wondering if this :point_up: sets you apart from others—if so, can you please elaborate?

Also, nice to see you have “skin in the game” via the TIN tranche. For how long will you stay committed to supporting such?

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Will NCP be receiving advisory fees from the SPV? If so, how will those fees be structured — flat fee or based upon a metric such as volume or investment performance?

Thanks!

Tinka is the market leader in revolving online Point of Sale (“PoS”) credit in the Netherlands (Tinka’s credit book amounts to several hundred million Euros and it processes >1.2 million credit requests per year). Other players in the Dutch BNPL market include AfterPay (NL-based company, not the same as the Australian business afterpay bought by Square) and Klarna (SWE). Affirm is currently not active in the Netherlands. In terms of technology, PoS / check-out integration and benefits to the merchants’ sales process, etc, Tinka’s product offering (and its benefits) can indeed be compared to offerings of companies like Affirm. Tinka, however, differentiates itself from a position of societal and consumer responsibility and offers a broader suite of deferred payments products (incl. invoiced payments, term credit, etc; see below for additional background). Tinka has been lending to consumers for 60 years and has transformed over the last two years to be a ‘challenger to the challengers’ in combining cutting-edge automated onboarding with decades of lending knowledge.

Two key differentiators that set Tinka apart vis-à-vis other players in the market:

  1. Regualtory / business model: the “new wave” of BNPL providers usually approach the market by providing unregulated “B2C invoice discounting facilities” to merchants. Tinka, on the other hand, leverages its status and experience as fully regulated consumer lender to extend PoS financings to consumers based on affordability and responsibility. This consumer lender DNA also explains why Tinka’s main focus is the consumer and being a responsible lender vs. a merchant-focussed BNPL provider. As an example of this differentiated approach one can point to the 15-30% share of late payment fees that usually contribute to the overall revenues of a “new wave” BNPL player (ie fees paid by consumers on “interest free credit products” that have been offered to them). Tinka pursues a more transparent credit origination process (esp with regards to costs to the consumer) and also approaches any potential debt collection requirements in-line with its responsibilities as a regulated consumer lender (and late payment fees do not constitute a material portion of Tinka’s revenues). Tinka not only believes the BNPL market will come to be regulated, it is actively driving regulation to reduce the type of predatory practices seen in the “new wave” BNPL operators around late-payment fees.
  2. Experience in the Dutch market: Tinka has been active in this market for over 60 years, providing it with (i) an extensive dataset for its internal credit scoring processes as well as (ii) the benefit of a vast set of existing consumer relationships (returning borrowers, ie Tinka has often actual precedent with regards to lending to a specific individual).
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It is currnelty envisaged that NCP will be receiving an Investment Advisory Fee (“IA Fee”) from the SPV in the amount of 0.5% pa (paid quarterly) based on the gross asset value of the SPV (ie “Assets under Advisory”). The fee will be confirmed as part of the next phase of the due diligence / structuring process once the final pool economics and administrative costs are known. An incentive mechanism is implemented via NCP’s investment in the TIN Tranche, which captures the residual cash-flows of the underlying asset pool(s) after (i) the SPV’s operating costs (incl. NCP’s IA Fee), (ii) the DROP principal and (iii) the DROP interest have been paid (ie NCP’s Advisory Fee will come out of the TIN Tranche return and only impact the DROP economics in case of a TIN Tranche impairment event).

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Great to see high-quality originators like this from Europe!

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The collateral onboarding call for the application is now scheduled for this Wednesday (11th) at 4pm UTC:

NCP+Tinka: Maker Collateral Onboarding Call

We will use the time to provide an intro to NCP, Tinka and run through the anticipated transaction itself. The CEO of Tinka will join the call as well.

We will also leave time for Q&A - please let us know if there are any specific points you would like us to focus on / any questions that came up in the meantime.

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Hey Markus! Impressive and thank you for that great presentation this afternoon.

I wanted to ask–( 2-part question) should the Maker Community expected to get more MIP6 applications ONLY based in EU–and since you mentioned a range of AO opportunities for things like Lit Finance, Shipping, etc., are you looking at the Income Share Agreements (ISA) space? Again, not sure if you’ll focus on this side of the pond–or if ISAs are a “thing” in Europe.

Thanks in advanced.

Thank you – also very much enjoyed the discussion and the thoughtful questions.

That is correct, NCP’s focus is on Western Europe, with an emphasize on the DACH, BeNe and Nordic regions as well as the UK.

Re ISAs: we do have these constructs in Europe. NCP will be targeting credit assets though, ie our interest would depend on whether the specific ISAs include a downside-protection / debt-like element. An example (and an AO we are looking at) is revenue-based financing, whereby a debt instrument’s principal + interest don’t have a predetermined (re)payment schedule but are paid back from a fixed percentage of ongoing revenues.

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Please see post above for the reply, accidentally replied to the whole thread.

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Hey Markus, Congrats on this thought-out and well-prepared project! I really like the quality of it. Stay the course!
G

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Hey Markus,

I love the MIP6 application and I am excited to see you launch with MakerDAO and Centrifuge.

The buy now pay later space is white hot right now after the deals from Square-Afterpay and PayPal-Paidy in addition the Affirm’s recent partnership with Amazon and their amazing quarterly earnings. Things seem to be going really well. However, I saw this study from Credit Karma that is somewhat concerning regarding recent delinquency trends in BNPL. I am curious is Tinka has seen and uptick in delinquencies?

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Thanks Jason – equally excited about working together with Maker and Centrifuge, hopefully much more to come.

Regarding Tinka’s delinquencies: the company has not seen an uptick and the last three vintage cohorts have actually seen sequential declines in terms of % of defaults. This is the continuation of a trend which started in 2015 and which led to a reduction in number of customers in arrears by 80%. This decline is the result of process improvements that Tinka has implemented with regards to scoring, affordability, etc.

More broadly and compared to other BNPL providers: Tinka has been active in the consumer lending space for the last 60 years and considers the introduction of BNPL offerings as a technical innovation with regards to “product distribution” (vs. other way round for a lot of the newly launched BNPL “technology” players). One of the key pillars underpinning Tinka’s strategy is its focus on responsible lending – a point Charly, Tinka’s CEO, is very passionate about and which he spend a lot of time talking about on the Maker intro call. Reason for this focus is (a) it results in high customer (merchant) and consumer satisfaction (increase in repeat “known” customers and lower customer acquisition costs) as well as (b) it anticipates the introduction of a more stringent regulatory environment (BNPL is currnelty unregulated in most countries; Tinka on the other hand is a fully regulated consumer lender and expectation is that once regulators introduce requirements re affordability checks and/or caps on late payment fees, the business model of a lot of the “new” BNPL players will become unsustainable).

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Great answer Markus, you said a lot of important things here.

  1. Tinka has experienced a decline in defaults since 2015 due to credit modeling and other process improvements
  2. Tinka has a 60 year track record of consumer lending
  3. They are a lender first, who uses technology as a means of distribution
  4. The CEO is passionate about responsible lending, which is evident in the long term track record of success
  5. Customer’s (merchants) have high satisfaction
  6. Tinka is fully regulated and ready for more stringent regulation

My take on your answer: stability wins long term

I suspect that the increase in delinquencies in the US by BNPL may have to due with the massively accelerated BNPL origination curve over the past few years. Any borderline credit candidates may be approved for the sake of growth. In general periods of explosive growth in lending origination are red flags for the maintenance of consistent standards in credit quality.

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