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Debt Ceiling: $21,000,000 equivalent in Dai (21,200,000 DAI in order to have a buffer)
Stability Fees: 5.8%
Min SPV CR: 133%
Min Vault CR: 100%
Min Vault Underlying CR: 133%
Liquidation Process: MIP21
A proposal to finance the acquisition of 34 acres of existing farmland located in Mattituck, Suffolk County, New York and the construction of a 10 MW photovoltaic solar farm with associated battery storage (“Solar Farm”).
Solar X Group, Inc. (“Solar X Group”) will form Solar X Group Mattituck, LLC (“Project Co”) to acquire the 34 acres and to own, operate and maintain the Solar Farm.
Solar X Group and third party investors (high net worth and businesses and potentially the seller of the 34 acres to ProjectCo) will be the owners of Project Co. These third party investors typically invest in solar and renewable projects to benefit from the federal investment tax credit. Solar X Group will maintain economic and management control over Project Co.
The proposal does not contemplate a REIT structure. This will be a direct loan to a single project.
Project Co will use the proceeds of the first disbursement ($3,285,000) to purchase the site and undertake 3rd party engineering work and pre-development expenses. (See “Implementation Details” below)
Power Purchase Agreement
Once Project Co completes the 3rd party engineering work, Project Co will apply for a 20 year power purchase agreement (“‘PPA”) with Long Island Electric Utility Servco LLC (“LI ServCo”), acting as agent of and on behalf of the Long Island Power Authority (“LIPA”), which is a corporate municipality and political subdivision of the State of New York.
LI ServCo is the buyer under the PPA and LIPA, as principal, has ultimate and full liability for the obligations under the PPA (including payment obligations). LIPA is rated A2 (Stable) by Moody’s and A (Stable) by Standard and Poor’s. https://www.lipower.org/wp-content/uploads/2021/08/LIPA-June-2021-unaudited-financial-statements.pdf
PSEG Long Island, a wholly-owned affiliate of Public Service Enterprise Group (NYSE: PSEG), has managerial responsibility for the day-to-day operational maintenance of, and capital investment to, the transmission and distribution system owned by LIPA.
The PPA will have two tariff rates:
A “Full Requirement Period” rate for the hours of 1 pm to 9 pm on all days.
A “Dispatchable Period” rate for all other hours of the day.
Solar X Group anticipates that the “Full Requirement Period” tariff will be between $55.96/MWh to $83.94/MWh. Solar X Group used a conservative $44.77 (a discount of 20% from $55.96/MWh) as an input in its model.
Solar X Group anticipates that the “Dispatchable Period” tariff will be between $13.99/MWh to $16.49/MWh as of the first half of 2021. Solar X Group used a conservative $13.99/MWh tariff as an input in its model.
Solar X Group blended the Full Requirement Period tariff and the Dispatchable Period tariff inputs to arrive at a final tariff rate of $21.69/MWh for purposes of the model.
Solar X Group will co-locate 6MW of lithium-ion battery storage to enhance the Solar Farm’s revenue stream. The lithium-ion storage will allow Project Co to store excess electrical energy generated during daytime hours for sale during other parts of the day.
The table below shows the annual electricity production (including battery storage) that Solar X Group anticipates Project Co will sell to LI ServCo under the PPA. This includes a degradation factor of three quarters of one percent (0.75%).
Solar Farm Construction
Solar X Group anticipates that it will have a construction contract with AECOM. AECOM (NYSE: ACM) is an American multinational engineering company. AECOM’s senior secured bank credit is rated Baa3 by Moody’s and its Corporate Family Rating is Ba2. AECOM has extensive experience in the design, engineering, and construction of hydrocarbon, wind and solar power generation projects.
Specifically, AECOM has helped deliver more than 15 GW of solar projects globally.
Solar X Group will engage Koch Engineering to serve as “owner’s engineer” to supervise and advise on matters during the construction of the Solar Farm. The engineering, procurement and construction contract should provide for a standard allocation of risks and mitigations.
Solar X Group partners with the Cornell University Department of Engineering to support its environmental management of the project site.
MRWA Lending Company, LLC (“MRWA LendCo”), a Delaware limited liability company whose sole member will be MRWA Foundation Company (“Foundation Co”), a Cayman Islands foundation company, will purchase from Uprets US LLC, an unfunded construction and term loan agreement (“Construction Loan Agreement”), outstanding principal and interest owed by Project Co under such Construction Loan Agreement, and related collateral security interests (collectively, the “Financing Agreements”).
It is presently expected that MRWA LendCo will receive a true sale opinion from Uprets US LLC’s external legal counsel. The receipt of the true sale opinion will be a key condition precedent to the disbursement of any funds from the escrow account to Project Co (see “Implementation Details” below).
The true sale opinion represents a qualified attorney’s conclusion that the transferred financial assets (in this case, the Financing Agreements) have been sold and are beyond the reach of the transferor’s (Uprets US LLC) creditors. MRWA LendCo’s receipt of the true sale opinion is important given the weakened financial condition of Uprets US LLC’s ultimate parent company, Xinyuan Real Estate Co., Ltd. (see “Asset Originator Analysis” below).
Upon the acquisition, Uprets US LLC will not retain an interest in the loan or have any further involvement in the finance or the Financing Agreements. MRWA LendCo will be the sole lender to Project Co under the Financing Agreements.
The Construction Loan Agreement will provide for the following:
The loan proceeds will be disbursed in two stages: first, from MRWA LendCo into an escrow account at US Bank, and second, in accordance with a defined disbursement schedule, from the escrow account to Project Co. The disbursement schedule will be as follows:
Draw on the Construction Loan Agreement at its execution and fund $21,000,000 into escrow. This amount will accrue interest upon deposit into the escrow account. The $21,000,000 includes a budgeted 12 months of principal and interest (“Debt Service Funds”) that will be used to pay principal and interest on a monthly basis during the construction period.
The Escrow Agent will release funds to Project Co in accordance with the following schedule (subject to other conditions precedent to be negotiated with Solar X):
Month 0 - $3,285,000 to finance a portion of (1) Month 0-3 pre-development expenses and (2) acquisition of the project site ($3,000,000 acquisition cost). MWRA LendCo will have security over existing Project Co assets, which will principally consist of the site (value of $3,000,000).
Month 4 - 50% of remaining funds in escrow (excluding the remaining Debt Service Funds) upon execution of the PPA and issuance of the Notice to Proceed to the EPC contractor.
About Month 6/7 - 25% of remaining funds in escrow excluding the remaining Debt Service Funds) for outstanding construction costs.
Project Completion - 25% of the remaining funds in escrow (excluding the remaining Debt Service Funds).
Solar X has provided an estimated breakdown for the use of funds:
Solar X Group anticipates a 9 month project schedule, which includes 6 months from the notice to proceed for the construction of the Solar Farm to grid connection and commercial operation. The chart below is indicative as of July 2021.
The Solar X transaction presents a number of risks. Broadly, the risks fall in the following categories:
Risk that PSEG Long Island does not approve Project Co’s PPA application
Construction Risks associated with an unconstructed solar farm
Operational risks associated with the operation of the Solar Farm
Loan administration risks
Single Project Concentration Risk
Project Co’s PPA Application
Project Co will borrow approximately $3,285,000 to fund the acquisition of the 34 acres and fund 3rd party engineering and development costs. The 3rd party engineering and development work is necessary for Project Co to submit a PPA application to PSEG Long Island. There is a risk that Project Co does not make a satisfactory application to PSEG Long Island for the PPA and/or PSEG Long Island does not approve the application. In the event that PSEG Long Island does not approve the PPA application (even after resubmissions), Solar X will not be able to develop the Solar Farm.
Solar X Group has mitigated this risk by assembling a team of consultants with solar design, engineering and planning experience.
For MRWA LendCo, it will have a security interest over the land in the form of a mortgage. Without the PPA, Project Co will be unable to access any additional funds from the Escrow Account and, if MRWA LendCo accelerates the loan, it will have the ability to sell the land to a third party and potentially recover all or a portion of the $3,285,000.
RWA LendCo will receive a broker price opinion in respect of the project site prior to the initial advance. The broker price opinion will opine on the value of the project site.
The Solar X financing is for an as-yet constructed and pre-operational solar farm. As a result, MRWA LendCo and FoundationCo will have exposure to construction-related risks.
Broadly, Project Co, as a reasonable and prudent operator, should seek to mitigate construction related risks through its contractual relationships. Typically, in similar transactions, contracting parties will endeavor to allocate risks and the associated mitigations to the party best able to mitigate the particular risk. Project Co and MRWA LendCo will be aligned in respect of risk identification and mitigation. Schedule delay and/or increased costs are the two key adverse impacts of risks arising during the construction stage.
Solar farm projects will have exposure to a common set of technical and non-technical risks during the construction period.
Technical risks, include, as an illustration:
PV equipment performance that is below the guaranteed performance parameters
Accelerated degradation of the PV equipment
The actual solar resource is less than the estimated solar resource
Poor system design
Site characterization and access risks
Delays in manufacturing, transport and/or installation of PV equipment
Non-technical risks, include, as an illustration:
The delay in the acquisition of permits and/or other regulatory authorizations
The EPC contractor does not have the necessary construction and installation experience
The negotiation and execution of the interconnection and power purchase agreement is delayed or not on commercial terms
Higher costs and/or lack of availability of insurance (general liability, property risk, environmental risk, and/or business interruption)
General events of force majeure
Solar X Group models an installed cost of $2.55 watt/DC. The modeled cost is on the higher range of the installed price for similarly sized solar farms.
Source: Lawrence Berkeley National Laboratory, Utility Scale Solar Update: 2020 Edition, Nov. 2020.
Solar X Group has indicated that the Construction Contract will include the following terms to address common construction related risks:
- A fixed completion price
- A fixed completion date
- Restrictions on the ability of AECOM to claim extensions of time and additional cost
- Solar Farm output and performance guarantees
- Liquidated damages for schedule delays
- Liquidated damages for performance deficiencies
- Procedures for change orders
- Allocation of permitting responsibility between AECOM and Project Co
- Security and guarantees from AECOM
- Termination rights
- Single, point responsibility of AECOM as contractor
While we have not reviewed the Construction Contract, the points above are typical in construction contracts for power generation facilities.
Once the Solar Farm achieves commercial operation, MRWA LendCo and FoundationCo will have exposure to operational risks.
As with the construction period, Project Co, as a reasonable and prudent operator, should seek to mitigate operations related risks through its contractual relationships and allocate risks and the associated mitigations to the party best able to mitigate the particular risk. Project Co and MRWA LendCo will be aligned in respect of risk identification and mitigation.
Solar farm projects will have exposure to a common set of technical and non-technical risks during the operational period.
Technical risks, include, without limitation:
PV equipment failures or defects that result in higher maintenance costs and/or lower electrical production
Solar resource inadequacy that results in lower electrical production
Inadequate operations and maintenance budgets that result in actual costs being higher than the modelled assumptions
Delays in PSEG Long Island’s integration of the solar electricity into the grid
Non-Technical risks, include, without limitation:
LI ServCo’s non-performance under the PPA
Power price risk
General events of force majeure
At the present time, Solar X Group has not finalized its power purchase agreement with LI ServCo. Solar X Group has indicated that it anticipates that LI ServCo will use the standard power purchase agreement found at https://www.psegliny.com/aboutpseglongisland/ratesandtariffs/tariffs/-/media/FA416619D4A34149A7B4E28FA9413777.ashx
The average annual solar radiation for the area surrounding the Solar Farm site is 4.07 kWh/m2/day. Solar X Group provided the monthly average of solar radiation, anticipated kWh production associated with such solar radiation, and the estimated value based on a per kilowatt tariff of $0.2168 per kWh. The table below includes revenue associated with kWh production made available under the PPA as a result of the availability of battery storage.
The map below graphically represents the solar radiation for the part of Suffolk County where the Solar X Farm will be located.
Solar X Group models operational and maintenance costs of $32.40/kW. While this figure may be higher than the national average, the figure does include a measure of contingency and, in the event that actual amounts are lower, will improve the cash available for debt service.
Source: Ryan Wiser, Mark Bolinger, and Joachim Seel, “Benchmarking Utility-Scale PV Operational Expenses and Project Lifetimes:Results from a Survey of U.S. Solar Industry Professionals” Lawrence Berkeley National Laboratory, June 2020
Loan Administration Risks
MRWA LendCo will rely on a 3rd party service company for the general administration of the Financing Agreements. MRWA LendCo will not be responsible for the day-to-day administration of the Financing Agreements.
Uprets US LLC has not yet selected the servicer. To mitigate against any risks associated with the administration of the Financing Agreements, the 3rd party servicer contract will specify, among others, the exact rights and responsibilities of the servicer, on-going monitoring of the servicer, and MRWA LendCo’s right to terminate and replace the servicer. Uprets US LLC and the RWA Core Unit have reviewed several potential candidates but have not yet aligned on the servicer. The servicer should have sufficient experience, loans under management, and a willingness to service a $21 million loan (considered to be on the small size for many established servicer companies).
MRWA LendCo may elect to retain certain authorities and/or require the servicer to confirm in advance certain actions prior to taking such actions (e.g., satisfaction of disbursement conditions, amendments, waivers, notices of default and events of default, acceleration of the loan under the Financing Agreements).
Single Project Concentration Risk
The proposed financing will be made to Project Co. Project Co will not have any additional sources of revenue other than the PPA. As a consequence, there is concentrated risk in a single borrower and project. In the event that Solar X Group and Project Co are unable to successfully develop, operate, and/or maintain the Project, there is a material risk that Project Co will be unable to repay the Loan. The proposed 12 month debt service funding will provide assurance of repayment during the pre-development and construction stages. Further, RWA LendCo will have a mortgage on the 34 acres as collateral security.
Notwithstanding the general public support for solar farm development in New York and its benefits in producing carbon-free electricity, there is a risk of environmental protest against the conversion of existing farmland for solar development. This risk is mitigated by New York State’s preference to develop solar electrical generation.
- Industry analysis
The State of New York seeks to accelerate the development of solar power throughout the state. New York’s Climate Leadership and Community Protection Act (2019) calls for installing 6,000 megawatts of solar by 2025 and 3,000 megawatts of energy storage by 2030. New York has established an extensive legal, regulatory and financial framework to support the overall development of solar power generation.
The Solar Farm will be located in the Town of Mattituck, Suffolk County, New York. As of March 31, 2021, Suffolk County has 539.7 MW of installed solar production capacity across 35,364 projects. See Statewide Solar Projects - NYSERDA
The US National Renewable Laboratory identifies the following industry challenges and opportunities in its “H2 2020 Solar Industry Update” released in April 2021:
- Asset originator analysis
UPRETS originated the Solar X Group loan. UPRETS is a DeFi CRE lender and a wholly-owned subsidiary of Xinyuan Real Estate Co., Ltd. (“Xinyuan”), a NYSE-listed real estate developer and property manager primarily in China and recently in other countries. In China, Xinyuan develops and manages large scale, high quality real estate projects in over ten tier one and tier two cities, including Beijing, Shanghai, Tianjin, Zhengzhou, Jinan, Qingdao, Chengdu, Xi’an, Suzhou, Dalian, Zhuhai and Foshan. Xinyuan was one of the first Chinese real estate developers to enter the U.S. market and over the past few years has been active in real estate development in New York. Xinyuan aims to provide comfortable and convenient real estate related products and services to middle-class consumers.
UPRETS is focused on simplifying investment in real estate using Blockchain.
Currently, Xinyuan has a high bankruptcy risk due to its outstanding debt obligations.
Further, in April 2021, Xinyuan delayed the filing of its 2020 audited financials (20-F) as Xinyuan’s audit committee, with the assistance of external advisors, was conducting an independent review of certain transactions to assess their potential impact on the Xinyuan’s 2020 financial statements. As of August 20, 2021, Xinyuan had not yet filed its 20-F with the Securities Exchange Commission.
To address the bankruptcy and insolvency risk of Xinyuan (and indirectly, Uprets US LLC), MRWA LendCo will receive a true sale opinion from Uprets US LLC’s external legal counsel (see Highlights: Financing above).
Solar X Group will control and manage Project Co.
Solar X Group management includes the following:
Andy Strott - Founder/Managing Partner: Andy has 25 years experience in finance, including as senior executive with top-tier investment managers, Blackrock, Alliance Bernstein and MFS Investment Management. He has worked on the European continent, with responsibility to lead new initiatives. Andy has a strong and diverse background in real estate having structured real estate funds and joint venture opportunities as well as performing underwriting for investment in new development, multi-family development, net lease investment, non-performing loans, bridge and mezzanine financing. Andy holds an MBA from Columbia Business School.
John Cuneo - Founder/Managing Partner: John is a 30 year professional in real estate capital markets and lending markets. As well as extensive construction managerial and supervisory experience. He has brod efficiency in real estate acquisition and development financing, holding senior management positions at: JPMorgan Chase, where he was the Real Estate Department Head, Barclays Bank, where he was the Commercial Real Estate Lending Team Leader. John holds a Master of Science in Real Estate Finance from New York University, and a Master of Public Administration from Fairfield University.
Michaela Dibernardo - Managing Partner: Michaela has more than 20 years experience as a senior executive in institutional finance and investment. With an in-depth understanding of investment strategies, as well as brokerage and capital markets, she has worked with some of the largest mutual funds, pension funds, and hedge funds in the US and Canada. As a licensed professional at Alliance Bernstein and on the NYSE, Michaela followed banks, energy, biotech and fintech. She holds a B.A. from Rutgers University. She also holds a pending patent related to a residential renewable investment strategy.
Chris Koch, P.E. - Managing Partner: Chris is Principal Engineer and owner of Koch Engineering, P.C., which provides construction management engineering, construction support services and construction oversight for clients in the NYC metropolitan area. With more than 30 years of engineering experience, his areas of practice include: Plan & Cost REview, Construction Estimates, Construction Schedule Review, Scope of Work Development and Review, Construction Monitoring, Construction Budget Assessment, Construction Requisition Review and Project Equity Rebalance. He is a graduate of Manhattan College.
Robert Penney - Partner: Bob has a solar company that specializes in commercial installations, solar farms, car ports and residential homes. Bob installed a ground mount system of solar arrays (3 MW) on a farm in Virginia. He also installed 796 solar panels on the rooftop of a building in Brooklyn, New York.
Nick Grgas - Partner: Nick has a 20+ year career as a project manager in the construction sector. He has supervised over $600 million in general construction projects.
- Token issuer analysis
Provide an overview of the industry where the SPV asset will be, especially what are the risk, benchmark, and historical behavior. A market comparison with other lenders can be useful as well.
How do those assets respond in the event of a particular major economic event?
Solar projects that have long-term power purchase agreements and credit worthy offtakers can be considered very stable. As the solar farm does not have any moving parts (unlike a natural gas fired or nuclear power station), the operational and maintenance risks may be considered lower than other forms of power generation. The most material economic event to impact Project Co and the Solar Farm would be: (1) a material credit event for LI ServCo, LIPA, PSEG Long Island, and/or PSEG (i.e., bankruptcy), and (2) a material and negative change to New York’s current policies in favor of solar electricity.
What remedial measures might be undertaken?
In the event of a material credit event for LI ServCo, LIPA, PSEG Long Island and/or PSEG during the term of the power purchase agreement, it will be important to assess LI ServCo and LIPA’s willingness, as offtaker, to continue to purchase solar electric power from the Solar X Farm. In the event of a LI ServCo or LIPA credit event, there is a legal and commercial risk that LI ServCo or LIPA might determine that the power purchase agreement is out of market and “reject” (as permitted in bankruptcy) the power purchase agreement. The risk that either LI ServCo or LIPA, as instrumentalities of the State of New York, file for bankruptcy may be considered low.
A PSEG Long Island material credit event, as operator for the transmission and distribution system in Suffolk County, may have a material impact on the operations under the PPA. PSEG Long Island credit risk is mitigated by the fact that LI ServCo and LIPA are the contractual counterparties under the PPA.
A material and negative change to New York’s current policies in favor of solar electricity is unlikely to require any specific actions unless LI ServCo or LIPA defaults under the PPA.
What are the historical default rates in this industry?
No public information on aggregate historical default rates for solar developers is available.
Focus on the asset originator and the kind of business that will be conducted in the SPV.
When was the asset originator incorporated?
May 13, 2019 and Project Co will be formed proximate to the execution of any necessary project and/or financing agreements…
What is the background of the asset originator managers?
See “Asset originator analysis” in paragraph 2 under “Outline”.
Solar X Group has engaged the following external advisors to support its development and financing of the Solar Farm:
- Gregory Lavigne, Partner - Allen & Overy (New York)
- Brendan Keene and Dennis Mensi, Partners - McGuire Woods (New York)
Legal (Corporate, Real Estate, Regulatory)
- Andrew Auerbach, US Regional Leader - Bryan Cave Leighton Paisner (New York)
- Jay Yamamoto, Partner - Sichenzia Ross Ference (New York)
- Steve Kirschner, Founder & COO - Principals Direct Group
- Koch Engineering P.C.
- Fluence (a Siemens and AES company)
- K. Max Zhang, Professor - Cornell University - Engineering Department
Further, Uprets US LLC, as originator, engaged the law firm Gilmore & Bell, P.C. to prepare the underlying Financing Agreements.
How many deals has the asset originator already done? What is the notional amount?
Solar X Group management members and partners have been involved in the installation and operation of over 1,000 acres of solar panels at sites in Brooklyn, NY, Warren, PA, Mt. Olive, NC, Palmer, MA, Jetersville, VA, Wantagh, NY, and Hicksville, NY.
Has the asset originator experienced a default? What is the plan in case of default?
No. Uprets US LLC will sell the Financing Agreements to MRWA LendCo. From the date of such sale, Uprets US LLC will not be involved in the transaction and MRWA LendCo will not have any credit exposure to Uprets US LLC.
What is the due diligence they use to accept an asset?
Solar X Group will undertake an extensive due diligence prior to commencement of a solar project development. Solar X Group provided its internal due diligence checklist / workflow which addresses the following:
- Regulatory support and tariffs, especially the duration and timeline for any incentives for solar power.
- Suitable site identified taking account of site constraints.
- Grid access (proximity, capacity, and policy provisions for access).
- Identification of off-taker and available infrastructure to take the power generated.
- Assessment of the site and boundary areas including access permissions and restrictions.
- Approximate costs for land, equipment, delivery, construc- tion, and operation identified along with predicted revenue.
- Indicative energy yield completed.
- Identification of anticipated electricity tariff to be received, and review of expected terms/conditions of PPAs in the relevant market.
- High-level financial analysis completed.
- Cost and likelihood of achieving grid connection in the required timescales identified.
- Main environmental constraints identified along with other potential “deal breakers.”
- Assessment of current and potential future regulatory environment completed.
- An initial concept of the project’s legal/corporate structure.
- Solutions to project challenges.
- Permitting requirements/costs identified.
- Preliminary project timeline/workflow showing spacing of key activities drafted.
- Solar resource assessed including assessment of shading.
- Identify environmental characteristics that may affect performance.
- Detailed review of environmental and social considerations conducted.
- Detailed review of required permits and licences undertaken.
- Assessment of Capex for technology and supplier options; cost/benefit for options and project location completed.
- Pre-application discussions with relevant consenting authority undertaken. Initial consultations with key stakeholders including from the community completed.
- Grid connection assessment completed.
- Predicted energy yields established.
- Further assessment of anticipated electricity tariff undertaken. Financial analysis carried out.
- Preliminary financing planned.
- Project implementation plan developed.
- Options agreements for land access (where required) secured.
- Evaluation and concept of the commercial structure of the project and project company(s) carried out.
What is the valuation model used?
EPC Phase: Market Valuation Model - Regression analysis of 279 solar farm transactions (globally) by Deloitte. https://www2.deloitte.com/content/dam/Deloitte/dk/Documents/pardot-downloads/Deloitte_Valuing_Solar_PV_Farm_Assets_Global_Mar2018.pdf
Operating Phase: Discounted cash flow model.
What is the nature of asset defaults for the originator, and the possible solutions?
The loan will be secured by a first priority security interest on all of the Project Co’s assets, including the land, improvements and the Solar X Farm equipment.
What are the historical default rates of the originator?
What explains the difference in default rates between the asset originator and the industry?
The assets remain fully off-chain and there is no on-chain issuance platform used.
Some details on the implementation are still worked on and some changes may occur until the closing of the transaction.
The implementation will follow MIP58 RWA Foundations (still in RFC). A Cayman Foundation (“Foundation Co”) will be created which will have a member-managed Delaware LLC (“MRWA LendCo”). MRWA LendCo will hold the construction and term loan note from Project Co. Further, MRWA LendCo will be the secured party under the security agreements.
The RWF Core Unit is using the help of Ogier, a Tier 1 law firm for Trusts in the Caymans, to set up the Cayman Foundation. It is designed so MakerDAO can keep much flexibility. There is nevertheless a provision so the Foundation Co can continue to operate even if MakerDAO goes “dark” (governance attack, smart contract issue, Emergency Shutdown, …). A STAR Trust structure was also analyzed but was offering less flexibility for no additional benefit. A comparison between some Real-World Asset legal structures can be found here.
Foundation Co documents:
The director role will be filled by a global firm (~600 employees). The director will have a fiduciary duty to the Foundation.
The supervisor role and secretary position will be filled by a smaller Cayman Island firm. The Secretary is a qualified person under Cayman law.
Foundation Co will establish MRWA LendCo, a member managed Delaware limited liability company to hold the asset (the Financing Agreement). It will be member managed by Foundation Co, thus inheriting the same security level as set forth in the FoundationCo organizational documents.
MWRA LendCo will retain an independent third party servicing firm to service the Solar X financing and manage the day-by-day operations associated with the financing (below is a non exhaustive list of duties for the Servicer):
- Send invoices to the Borrower for payments due under the Financing Agreements
- Review tax, insurance and replacement reserve escrows on an annual basis and adjust required monthly escrow payments
- Confirm satisfaction of the conditions precedent to each disbursement from the Escrow Account
- Send notices of default and events of default (subject to a DAO Resolution)
- Coordinate, on MWRA LendCo’s behalf, modifications, work-outs and restructuring of Loans as may from time to time be required (in case of default)
Subject to FoundationCo and MRWA LendCo’s satisfactory completion of KYC, it is anticipated that US Bank, a subsidiary of US Bankcorp (NYSE: USB, $82.55 billion market cap) will serve as the escrow agent.
The escrow agreement will identify the conditions precedent required for each disbursement (including the initial disbursement into the escrow account).
The more general conditions precedent will likely include, without limitation, the following:
Project Co has received its required equity contributions to ensure the contractually agreed debt-to-equity ratio.
No default or event of default exists or is continuing.
Project Co’s representations and warranties are, as of the date of the disbursement request and the date of the disbursement, true and accurate in all respects.
Each of the Financing Agreements executed as of such date are the legal, valid, binding and enforceable obligation of Project Co.
Project Co does not have knowledge of the breach of any covenant.
All Financing Agreements required to be executed at that time, have been executed, and all security interests intended to be created by such time have been perfected.
The servicer will have received each of the legal opinions required by the Financing Agreements, which will include opinions from Project Co’s counsel.
Project Co will have delivered such documents to the escrow agent as required by the Construction Loan Agreement, including, a zoning report and a broker’s price opinion.
Each disbursement may include, in addition to the above, such other conditions precedent appropriate for the relevant disbursement date (i.e., execution of the PPA and issuance of the notice to proceed to the EPC contractor).
The Servicer will review and confirm satisfaction of each of the conditions precedent required for disbursements from the escrow account. The servicer will instruct the escrow agent when the servicer is satisfied that Project Co has satisfied each of the conditions precedent to the disbursement.
A broker will be used for the DAI (MIP21 conduit) <-> USD (US Bank escrow account). Either Foundation Co or MRWA LendCo will be the named account holder with the broker. To address any leakage from the broker account, there are a few protective measures to be discussed with the broker, including, one or all of the following:
The dollar account number and DAI wallet address will be specifically referred to in the broker account agreement.
The broker agreement will expressly provide that upon receipt of any dollars to the account of Foundation Co or MRWA LendCo (as appropriate), the broker shall automatically, without further instruction, convert such dollars into DAI and direct the DAI to the DAI wallet address.
The Foundation Co or MRWA LendCo organizational documents will expressly provide that no director, supervisor, officer, secretary or other authorized person may amend the broker account agreement without an affirmative DAO Resolution.
Foundation Co or MRWA LendCo (depending on the account holder) will provide the broker with the organizational documents referred to above together with a certification to the broker that no director, supervisor, officer, secretary or other authorized person is authorized to make amendments to the broker account agreement.
The express references to the dollar account account number and DAI wallet address, the requirement for automatic exchange and transfer of DAI to the DAI wallet address, the contractual restrictions on amendment of the broker agreement, the express limitation of authority in the organizational documents, and the certification delivered to the broker, will ensure that the broker only follows the terms of the broker agreement and that dollars are converted into DAI and sent to the DAI wallet address. Any amendment to the broker account agreement will require a DAO resolution.
Based on the above, it is our view that control by third parties over the cashflow (including DAI) is quite limited. The destination wallet address is under control of MakerDAO. Any change of the broker agreement would need a MakerDAO Resolution. The escrow account will be under supervision of the escrow agent.
In addition to concluding whether Project Co has (or has not) satisfied each of the conditions precedent to disbursement from the escrow account, the Construction Loan Agreement will require MRWA LendCo to administer the loan. Thus, even though MRWA LendCo will engage a service company to undertake non-commercial tasks in respect of loan administration, it is anticipated that commercial decisions in respect of the Construction Loan Agreement (waivers, amendments, defaults, and the like) will require MWRA LendCo to make a decision.
Acting through DAO Resolution is one solution but Governance might delegate such decisions to a RWA-focused Parameter Proposal Group or a RWA Core Unit specialized in RWA management. That will lead to a fully autonomous vehicle and keeping MakerDAO remote from the management. MakerDAO, through a DAO Resolution, will retain the ability to step in when/if needed.
The types of decisions that Governance might delegate to a RWA-focused Parameter Proposal Group or a RWA Core Unit include:
- Notifying the borrower of a default
- Authority to take time sensitive measures to project lender rights
- Immaterial (non-monetary) waivers under the finance agreements
- Immaterial (non-monetary) amendments of the finance agreements
- Administrative matters to maintain MWRA LendCo’s security interests
- Authorize payments of administrative fees, costs and expenses for loan management
More importantly, Governance might retain certain decisions for a DAO Resolution:
- Approving MWRA LendSo’s execution of finance agreements
- Notifying the borrower of a event of default
- All other measures to protect MWRA LendCo’s rights
- All other waivers and amendments under the finance agreements
- Initiate and enforce rights and remedies under any finance agreement (e.g., loan acceleration, collateral enforcement, etc.)
The Construction Loan Agreement will set forth affirmative and negative covenants customary for transactions of this type, including limitations on change orders under the EPC Contract. The Construction Loan Agreement will also set forth events of default and cure periods customary for transactions of this type.
At this stage, only one investment is contemplated as detailed in this risk assessment. Additional investment in a similar SolarX project will require a Maker Governance action (increasing the Debt Ceiling).
For this section, the SPV is “Project Co”. At MRWA LendCo level, there will be a security interest in the assets of the SPV.
This project use the loan to cost metric (LTC):
Loan to cost = loan principal amount / expenses & investments at cost
This formula will be inverted in order to obtain a collateralization ratio (collateral being evaluated at cost).
133% (equivalent to a 75% LTC)
The vault CR is 100% as there will be no overcollateralization at the token level.
This is the result of SPV CR * Vault CR if all the SPV debt is used as Vault Collateral. Check the RWA Documentation for more information.
133% (100% for Vault CR ratio and 133% for SPV CR.
There is only one investment so the concentration risk is high.
There is only one direct loan so there are no stakeholders.