Real-world assets are more complex than crypto-vaults based only on an on-chain price, some information is off-chain (at least for now) and discretionary judgment is needed. You can see more details in the covenant forum post and poll.
This is the first batch. We are still figuring out some details.
You can find the covenants definitions in the risk assessment.
As you can see most covenants are checked except the state exposure. There was a significant deal flow in Florida lately. We set a 30% for no reason except it seemed clever at the time. Since then, we are in the process of maybe onboarding SolarX which is for 100M DAI invested only in NY or farmlands all located in Iowa.
Moreover, the Citigroup Mortgage Loan Trust 2020-EXP1 RMBS is located at 62% in California and that didn’t prevent credit rating agencies to make the senior tranche AAA (the highest grade).
We had discussed the matter with @prankstr25 and there is plenty of opportunities to resolve the matter:
1- avoid Florida loan origination: This will slow the increase of the exposure or even remove it completely.
2- change the risk assessment: It is our perception that increasing state exposure is not significantly risky (investing in non-vibrant states is way riskier). Nevertheless, having such sensible covenants allows raising awareness.
3- New Silver has some origination from Massachusetts and NY but they are too big to fit the pool covenant at this stage (1-1.5M). Some of those borrowers are repeat customers from New Silver which feels safer. With the expected origination trend, those loans will be covenant-friendly in a few months.
4- New Silver is also expanding in California. This will take a few months, but this might increase geographical diversification as well.
Therefore there are plenty of options. It is probably not important enough to take significant governance bandwidth. At the same time, it’s always good to have a discussion with a diverse group.
This problem seems well fitted for a MIP46 Parameter Proposition Group with a mandate to make suggestions based on RWF inputs.
Happy to get feedback on the idea.