MakerDAO Focus On, 20 Apr 2022

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From YouTube: Focus On #10 | MIP6 vs. TradFi

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Forum Post: https://forum.makerdao.com/t/focus-on-10-mip6-vs-tradfi/14628

Focus On hosted Eric Rapp @Eumenes from @Real-World-Finance and Christian Petersen @christiancdpetersen from the incubating Legal & Transaction Services Core Unit to discuss the MIP6 process vs. TradFi deal assessments.

The team first discussed the MIP6 process by reviewing the framework for fact-based assessments and the role of RWF core unit(s). The team then explored comparable aspects of TradFi Structured Finance Transactions and how the roles of borrowers & lenders translate to MakerDAO’s MIP6 framework.

A

And hopefully yeah my voice isn't getting a lot of feedback.

B

No, no you're sounding good christian.

A

Okay good because I'm getting feedback on my side um anyway, good afternoon, thanks for uh taking the time to speak with us, I'm christian peterson, I'm here at christian stevie peterson on on the forum here with eric wrap, who is eu menaced on the forum and we're here to discuss the differences between trentfi and the mipsex process.

A

C

I'm getting some kind of feedback on you. I wonder if anyone else is.

B

This sounds good to me: okay. Well, let's.

A

Just keep going sure so, if you could move to the next slide retro, uh so just an outline of the presentation just to review the myth, 6 process, the role of world finance and we're incubating legal and transactional services core unit, a discussion about traffic and a little discussion about the current self-contained mix that had been submitted to the forum with the concept of right, prioritization next slide, so just to discuss myth, 6 and just to kind of set up some facts for the community to understand.

A

First and foremost, no myth 6 application is the same, and what that means is the nip six proponent, the underlying asset, the credit quality jurisdiction, post economics, etc, are going to vary from six application to mid-sixth application.

A

We try to address that diversity and that diversity is great. um It just makes things a bit more complicated. We try to address some of the complication that arose from that diversity by publishing in mid-january, a methodology for structured finance, and that was to identify some general principles that six applicants could try to follow when submitting an application again, trying to homogenize a little bit.

A

The process which goes to my next point, which is finance agreements themselves, are not homogenous, and what I mean is we don't prepare the initial terms and conditions, and that means that the terms and conditions are going to vary between six applications. Unfortunately, finance agreements, even in the real world, let alone in t5, are not like.

B

A

Where it's fairly standardized, you know, applicants use different forms, different language draft things in their favor in the first draft, leave things out, so you know we have to end up spending a lot of time, actually reviewing what the finance agreements say.

A

Some of the applications are many of uh not that we're getting better many uh knit six and self-contained mip applications actually do not provide a fully defined transaction structure, although none of them actually provide a strath transaction documents or even a term sheet to facilitate a comprehensive and mean meaningful review and you'll see why this is important in the next few slides. So next slide.

A

So what is the role of the rural finance team and the legal and transactional services team? So let me just to give you an example. So mipsix applicate applicant proposes a commercial term, so I've identified this.

B

A

By the way, there's hundreds of terms in a transaction, but just for example, you have term one. So the first thing we do is determine whether that term is quote acceptable. Okay, what does acceptable mean acceptable means that we look at that term based on reasonable market standards. So if it's a real estate deal, we kind of try to understand what the real estate market has for that particular standard.

A

If it's a solar financing deal, we look at what solar financing does in that particular market. If it's a green hydrogen transaction, we tried to and there's not a lot of green hydrogen transactions out there. So we would try to do a comparable.

A

Like you know, for instance, liquefied natural gas would be a comparison to green hydrogen or natural gas because they're both gases, energy types. So we try to determine what would be a reasonable market standard based on the asset class.

A

So then, what do we do? So we look at it and say: okay? Is the term acceptable based on reasonable market standards? And if it is we move on to the next term? Well, what? If it's? Not? Okay? So could the term be acceptable if it is modified to be term one plus a?

A

Is it okay for us to propose an adjustment to the term? Is that a negotiation?

A

Well, what if term one is better, it's actually better. So it's not just acceptable, but it would be better for maker if the term is modified to include b. So it's now term, one plus b, is that okay, you know is, is our role to look out for the best interests of maker by proposing a term that may be better for maker than just term or term one plus a you know what, if the term isn't acceptable at all, you know: can we counter propose?

A

Can we propose term 1a? Can we counter propose term 1b? Is that something that we, as the real world finance core unit and legal and transactional services core unit? Are we authorized to do so moving on to the next slide?

A

So what is reasonable? What is market, whose market standard and are any of the counter proposals in examples? Two three or four, where we are quote countering, is that a private entanglement, the term private entanglement seems to be thrown a lot around a lot of the community. Are we engaged in private entanglement because we are proposing a term that may be more beneficial to maker?

A

Are we negotiating? There seems to be some concern within the community that we are negotiating. Well, you know if, if an applicant proposes a term- and it's not acceptable, is our role just to say? Well, that's not acceptable, we'll just let you know that's the.

B

A

Of the story, we move on to the next next point and then give a response to the community on a point by point basis that this term is not acceptable or you know. Are we at that point exceeding our role as assassin you know in in the real world? You would negotiate, you would say: okay. Well, I get term one but yeah term, one a is better or term one b is better for maker.

A

I don't necessarily assess as a lawyer. I don't necessarily view that as being privately entangled, or certainly it is negotiating or trying to get better terms from maker. Is that okay, so uh next slide retro.

A

And- and it really all comes down to a little bit of a debate regarding decentralization and centralization, and the role of the real world finance and transaction and services core units in this process. Now, as a lawyer to me, everything is on the spectrum and I can find a point all along that spectrum.

A

But first and foremost, I want to make sure everybody understands. We are very, very clear abundantly clear that we do not approve reject, or you know that basically maker governance approves rejects or modifies transactions in all cases, all we can do is in some sense, try to get the best deal for maker and make a recommendation.

A

So when you, when you look along the spectrum of decentralization and centralization, you know on the extreme of decentralization.

A

We would basically quote accept whatever the mips six applicant proposes and only do an assessment. We would not go back to the mid-sixth applicant and say hey. You know this term might be more acceptable if it was one plus a rather than just a that's the extreme of decent centralization.

A

There's an extremist centralization where we prepare the underlying agreements, we control the entire process and then, frankly, in the real world. Most lenders are on this side of central organization. Now, even even as much as whose council prepares the documents, typically typically lender's counsel will prepare the documents. That means we would in theory, if we were the lender, control the entire process. You know we've taken the you that we that's perhaps too much centralization.

A

You know we will allow and you know, encourage the borrowers to prepare the documents, because the person who controls the pen controls the process so to us that kind of leans towards leans towards decentralization.

A

So it's really a question of where, in our role, do we fit in that spectrum and.

B

A

Think one of the things that is, as we've seen more mip applications we've seen more self-containment applications. You know, honestly, we are trying to find our way where we are an inspector and it moves and have people coming from a traditional finance background like eric and myself.

A

Our natural inclination may be for more centralization, just because that's what we've spent decades doing, but we also recognize that that maker and d5 is different and that we need to slide towards this side of decent centralization, and it's really just finding where, along that spectrum is the best fit to ensure that one deals get get done and two deals can get done that are beneficial for maker.

C

The christian can I give an example on that christian's point. um Let's say it's a term that really matters in the uh perspective borrower comes and they want 100 advance rate. You know I wanted to you know so you know essentially when they make a loan to someone else. We give them. You know 100 cents on the dollar, so they have really no equity, no skin in the game, and you know perhaps the real in the real world market.

C

Maybe they ought to begin 80 advance rate typically and they come to us and ask maker and ask for 100. You know I mean it's really a fundamental question of how is maker going to think about that one. It's it's! It's way off market. You know if the real world's saying it's 80 and they want 20 more advance rate. What they're really saying is hey. We want to be cheap and not you have to spend the equity out of our pockets. You know.

C

Normally you need to raise equity, you know to help build your business and you know give the lender some cushion some. You know first loss position and they're, basically telling maker hey. We don't want to do that. You know we want to, you, know, have all the upside and you get all the downside, and so how do you? How is maker supposed to you know make a decision on that I mean to some of us who've been in the business a long time.

C

I mean it's kind of absurd, you know, but we do get these asks. You know, and it's really I guess we want to ask maker as a community. You know how do you want to think about these things and respond to them? You know I mean, because I can tell you yeah, it looks stupid or it looks ridiculously off-market, uh but you know it's not my place to say no, I mean I'll just say: hey it's ridiculously off-market.

C

No one in you know no real world lender would do that, but you know make her want to do it. God bless him, but I think it think about things like that, because we get some way way way aggressive asks.

C

You know that um no smart lender from my perspective in this business 20 years would do they'd, laugh at you and say: leave okay next slide, please all right so when in the traditional world, let's talk about how they do a structured finance transaction, you know what's the process, you know how do they do things? What do they look for? First? You know, let's think about what are the lender and the borrower looking for what are their priorities, then we're going to talk, you know. Typically, you know the borrower.

C

You know it's going to be seeking financing. You know, then the borrower is going to prepare and propose some type of offering you know to potential lenders, and usually you don't go to just one lender. You know I'm having been on the other side of this. You know we probably start out with 10 or 15 potential lenders and you funnel it down. uh You know you typically want to go, get a few different offers and have some idea of getting.

C

You know the best terms out there you know so in a sense, I get a little worried when lenders come only to us, you know and we seem to be their only target to get funds. You know it puts us in a weird spot, but, assuming like the borrower, presents something that that makes ballpark sense. You know they will engage with the lender the potential lender. You know, I call this an initial engagement uh and you know then the we'll talk about these steps. More then they'll go on. You know if they both agree.

C

Roughly on here's a deal, you will call that a term sheet. You know it's a written agreement that that isn't binding but in a sense both sides you're saying here's, the rough terms. We think a deal can be done at and let's do a lot more work and make sure it works and I'd say, probably more often than not. The term sheets actually go on and closes, but sometimes particularly you'll find lenders may back out because they'll find what they were told by the borrower. You know in the early stages. It isn't really quite true.

C

You know they've made things a little more rosy and it turns out. You know the reality is messier all right. Then, let's talk about you know, post term sheet, to closing you know, once you get the term sheet, how do you actually go from this initial guidance document to a binding deal or not?

C

uh Then let's talk a bit about. You know the kind of key terms and there's many of them and then also, let's talk about trad five versus the defy on boarding process. You know just to step back and think of some of these points. uh There's definitely some uh there's. Definitely some key points to think about. So uh next slide, please all right. So what are the priorities?

C

Well, as a lender, you know you want quality collateral right, that's very highly repaid likely to repay the loan. You know you're, not in the business of losing money, and if your typical lender, you know stuff we're looking at, is probably getting two to four percent interest rate a year. You you, you can have very few losses. You don't even break even just think about that.

C

If you get a two percent annual interest rate and you suffer a five percent loss a year on average you're giving away three cents out of your pocket a year right, you know that just doesn't work. So, if you're, if you're going to have a low single digit interest rate, that's telling you your interest. Rate's gotta, I mean your risk levels got to be low, um and so the lender wants to have people that repay them. They also want an efficient, transparent and consistent review process. Why do you want this?

C

It's not just you're a good person, though I think this is fair. You want to attract quality borrowers. You know good borrowers want to work with. You know good, reasonable lenders. You know you don't expect the uh the borrowers. Don't expect the lender to be your friend, but you want to know where they're coming from you know and think, like it's a reasonable process, you know where both parties are engaging in good faith and trying to get to a good result, I.e a transaction um and what are the borrower priorities?

C

Well, of course you know they want a good, predictable review process. They want to engage with lenders. You know that they think they have a good chance of doing business with um the borrower wants to have someone that once they agree kind of on key terms or come to a term sheet that the lender has a reputation, that's earned that they, actually you know they they will close on the uh kind of term sheet uh they they close at most of their term sheets.

C

You know they don't walk away in the middle of transactions unless there's a really good reason, um yup and so, and when you think about once the term sheets agreed to that's when you start spending a lot of legal bills, actually documenting things, and typically the borrower pays this. So again, they only want to start working on legal documents with lenders that are, you know, have a good reputation and it's earned for following through once they say they like a transaction next slide. Please.

C

So how does it start well? The borrower, for some reason needs financing and how do they do this um they're going to prepare a financing proposal for potential lenders? You know essentially, like a memorandum saying you know, here's who we are, here's, why we want financing here's, what it's going to be used for and then typically they'll make it kind of a term sheet proposal. You know maybe a five to ten page document outlining key terms. You know a number of the key terms. They might leave the specifics blank.

C

You know, but they're just trying to show the lender roughly what they're, looking for? Typically a borrower may invest, engage in investment bank kind of think of this as a structuring agent to guide them. When would they engage in investment bank because you know investment banks, it's not cheap you'll, probably charge you at least one percent of the transaction. So it's a hundred million dollars to go charge you a million dollars. Well, if it's the inexperienced borrower who's not used to this. You know the investment bank typically will be an expert.

C

You know in this asset class, and so not only do they know the asset class, but they know a whole bunch of potential lenders. So they're going to you, know kind of take you out and introduce you to maybe 15 20 lenders that they think are relevant to what you want to do and they also help you put together. You know your proposal, uh two, it's a very complex, complex transaction.

C

You know, even if you know, you've done transactions before, if you're, adding something really sophisticated. Often you want to get these hired experts. They just know how to do these things really. Well, I mean that's their expertise, they live on it. I mean it's like kid with christian there's, a reason like one of the lawyers we've used is sherman sterling he's a great lawyer. He lives in a 5 million house. Why did you live in a 5 million dollar house because he's exceptionally good at what he does and people want his advice?

C

You know- and I I don't begrudge him his money- he's really good and finally, um if you're reaching, if you're, not just looking for one lender, if you're looking, maybe more securitization where you're you're gonna have dozens of more public bond investors buying your deal or investing in your deal, then you probably are gonna want an investment banker, because they're gonna know the the investor base to reach out to you know. If it's public bond uh securitization, they could be reaching out to 100 investors, you know and they have a whole sales distribution arm.

C

You know that's very valuable. You know most companies don't have their own bond sales distribution, and so what are investment? Bankers good at I pretty said said this thing, so let me just kind of highlight it: um they they know asset finance, capital markets. This is what they do. um They know where the potential lenders are.

C

They know what reasonable terms are for transactions. You know when you think about. If I'm like an auto lender, you're looking to go, you'll get a bank line against my portfolio of auto loans. I might not know roughly what the terms are. The investment bankers go say: look, you know you probably will get 75 to 80 leverage. You know kind of outline the whole range of what's reasonable and help guide you in the negotiations, and you know if you want to push one point in the negotiations.

C

They'll probably say okay, but maybe you ought to give up something else. If you really want that one point so they're just experts in kind of knowing where the market does things and they're very good at kind of backdoor channeling with lenders, you know to be kind of a middle person in the negotiations.

C

It helps keep things get from kind of too tense when the lenders like I want this and the borrower's like is no it's good to have that middle guy kind of keep. You know things calm um they're also, as I said, very good, at structuring and negotiating deals, and, finally, I think it's underappreciated, but they're very good at managing a transition from beginning to end. You know it's not easy to do. You know, there's lots of commercial terms, legal terms.

C

All these different things have to be done and part of what they do is just manage the whole process, which is very valuable, next slide, please, um so how does it go? Well? The borrower starts by preparing and proposing they put together this financing uh proposal to potential lenders. What is it going to cover? You know their origination platform? You know they just goes like what do they need the money for you know who are they owned by who's? Who are their management? How do they originate assets? You know loans, how do they underwrite them?

C

What's their credit process? How do they serve them? I'm service them. You know you monetize monetize, the payments uh they're going to want to um also prepare how's their assets performed. Historically, you know when lenders look at borrowers, what's your best predictor of how their portfolio of assets will perform, probably how they've done over the last four or five years uh and then it'll also have some. You know uh commercial terms and legal structure proposed.

C

You know what are they looking for, roughly not down to the last detail, but the you know lender wants a rough sense. What are you after so they can decide whether they care enough to look more uh and this again.

C

This is important to have like this level of kind of expertise in putting this together, it's typically very difficult when a lender who doesn't really I mean a borrower, doesn't know it doesn't know the market and don't know what to look for, and they just show up and say we want money and if you as a lender, you're like uh okay but there's just dozens of things to be addressed.

C

So if there, if the borrower doesn't know much, you typically would expect a borrower to have a smart legal counsel to guide them on legal structure and then some kind of asset finance banker who can guide them on how this is done. You know it's a complex series of things to be done and if the borrower really doesn't have a good idea, what they're doing it's very very time consuming and difficult to close a transaction. You know with inexperienced borrowers without the right counsel.

C

I mean a number of lenders will probably just choose not to engage it's just too difficult uh next slide. Please all right: the initial engagement, the borrower approaches the lender. You know with their proposal the lender is going to have an initial discussion review with the borrower. So what is the lender going to do? I mean I've been more in the lending seat than the borrowing seat, but so and since the lender wants to say, hey, does this asset and proposal meet my risk appetite?

C

If I only want short duration assets or only investment grade assets, you know, does it check those boxes? At the end of the day, when you're a lender, you're really looking to to throw everything out really quickly, that doesn't mean your key hurdles. You don't want to spend any more time than you have to on stuff. That's not going to make it so does it meet your risk appetite and then also you're, going to look at what what the proposal terms are.

C

You know if it meets your risk appetite is: is the borrower asking for kind of ballpark terms that seem reasonable to you? You know if you like, auto loans, but they want a 95 ltv and you know 85 percent about as high as the market goes. It's probably not worth spending a lot of time on them and once you tell them that and if they don't change your view, you probably want to move on, um and then the lenders go. Assuming the the lender says.

C

This is in my risk appetite and the borrower is asking terms that seem reasonable enough. Ballpark that they're going to do the lender will do some initial diligence on the borrower and the proposal. You know looking at the key issues and cheap key risks and terms, then the negotiate. The lender will negotiate the key commercial terms in legal structure. This is going to go into a term sheet which again it's signed by both parties, but it's more just an indication of serious interest. It's it's not really legally binding. But again it's a reputational thing.

C

When you're a lender, you don't want to be known for breaking term sheets unless there's a very good reason or people just don't trust you uh next next term. Please slide next slide all right. So the lender typically will propose uh the term sheet. Though I mean it can be a back and forth.

C

Let's go document the key commercial and legal terms, it's probably typically three to 20 pages, so there can be a fair amount of depth in it. If both parties, you know, agree to it, and you know you're, typically not going to produce one unless you think you're going to get there, then it's accepted in essence, most parties sign it. The lender then begins to do confirmatory diligence, which is basically just trying to confirm all the points. You know that they think is true.

C

You know the borrowers presented a lot of things and said: hey, you know. Our annual loss rates are four percent and maybe you've seen some high-level data, but typically say the lender. You know, might actually go in and look at the underlying data or actually might probably will you know, maybe even get it audited. So if the borrower says it's a four percent loss rate and the audit shows it's a 12 loss rate, you could lose a deal like that right, but both sides are usually professional and try to be.

C

You know, open and up front, because that's a bad outcome for everyone. um Then the lenders council typically starts drafting legal documents. This is expensive right, so you don't want to start this step until you think you're close to getting there. Then the parties are going to negotiate the remaining items in the legal documents. You know with counsel on both sides and even though the term sheet might be 20 pages by the time you're done with these transactions.

C

I would christian, there's probably at least gonna, be four or five documents and hundreds and hundreds of pages, so there's lots of other points and some of them material that still have to be discussed. Is that fair, correct, yeah? And so there's a lot there, and usually it's going to be aimed to be closing this within 90 days. You know it's just you you want to drive to a close. You want a sense of urgency.

C

You know sometimes people will have to extend it, but the goal is you know to really get this thing done and then typically, a borrower in the real world will agree to an exclusive negotiation period with the lender, because if you're a lender- and you say, look if everything you told me is true I'll do this deal at these proposed terms. You don't want the borrower, then doing that with three other lenders and then they finally get to the last minute. You know and they say. Oh sorry, we have a better deal.

C

So it's typically a lender's gonna want that kind of exclusive period for say three months and again it's really a question of operating in good faith. You know and there's some games going on around here, but I I typically find that it's just better to work party with parties that are transparent and really kind of follow this rough process. So you know they're reliable. You know and kind of a game. Theory sense. It's not just one transaction. If it's just one transaction, maybe someone's going to try to screw you as much as they can.

C

But if this is, if you're, probably working with them over the years, you know you understand that both sides need to have something to make sense, and you really should treat each other well, because you want to preserve a valuable long-term relationship uh next, one, please all right, post term sheet to closing. So we've already started talking about this. Now, how do you get to closing a transaction from the term sheet? um You know the lender.

C

Does the confirmatory diligence uh the parties complete the remaining negotiating items, and this can be a fair amount in the legal documents? The lender's counts. Typically, will be the one drafting it. You know the lender in the real world. This is centralized likes to be in control of drafting the documents. Why? Because, then they uh they get to be written just the way they want them.

C

That really, you know, addresses the risk in the tightest manner they you know, they're comfortable with you know you can have the borrower doing the documents, but it just it makes it harder if you're the lander, because the borrower potentially will write dozens of points to his advantage, and you know you might have to go back to all many many many points and say no, no, no, no, no, um and that can be a mess, and this again, needless to say, presents issues and decentralized finance. uh Whether this could be negotiation or not.

C

You know from my own perspective and experience a borrower writing their own documents without really an active kind of oversight from the lender is just a it's a train wreck waiting to happen. You know, there's a reason why it's not done in the traditional world. I personally think it's an exceptionally good way to lose money and then transactions once they get to term sheet. I'd say more often than not close, but they still might not. Why and as I've already hinted, the lender's diligence might discover some important undisclosed risk.

C

You know say the uh one of the owners of the company you know has, uh like you know some criminal conditions on fraud. I've seen this there's lots of little ways. Things can go sideways um or the borrower and the lender cannot agree on some open points. You know they weren't specified in the term sheet. There are still other points to matter and you try to get those up front at the beginning of the term sheet, but you don't always cover everything. You know it's just it's the nature of the process.

C

uh Next slide. Please.

C

I just threw down like off the top of my head, some of the key terms and transactions, and this is by no means everything. This is probably maybe five percent. I don't know these are key ones, but there's so many more so so I really want people just to think when you do a structured finance transaction.

C

There's many many important terms. You know with that or material. If you will, let me give you a quick list of some of these. You know how big is the loan? How long is the loan? What's the advance rate, you know? What's the interest rate, you know those are all kind of obvious. What's the credit policy, you know, how did they decide on making their loans to uh if it's auto lender, you know, how do they underwrite people um are they allowed to approve or change the credit policy with without your approval?

C

That would be a big problem, because you know you signed up to them doing this historically and they say oh, we certainly want to do a whole lot more risk too. You know, so you don't want them to be able to change it. Materially without your approval, what's the servicing policy, you know how: how do they service uh delinquent assets? You know, do they have to get your approval to amend the servicing policy?

C

um Do they need a backup servicer? um How need how does the underlying loans need to perform? Are there triggers? You know if things aren't going well well, where are the triggers what levels and then, if the triggers are hit or other things are, you know, go wrong like you know what are the events of default to? Let the lender come in and shut down the situation?

C

You know these are very important. You know when things go sideways, you know you need you as a lender want to be able to come in and get control of the collateral, and you know if needed, shut things down and liquidate. um There's a whole lot going into this and then also what are the priority of payments.

C

You know who gets paid when in your typical monthly waterfall, uh you know if so, every month, all the cash from the loans outstanding comes into an account you know and who's getting paid when very important um does the originator. You know uh write reps and warranties as to you know like all of the underlying asset loans they make, are actually done in accordance with their credit policy. You know, for instance, if they do some sloppy things that are out of policy, they should be expected to require required to buy them back at par.

C

You know I could go on and on and all these things I think my just. I want to make the point that there's there's so many important elements you know to deal with here and I I kind of say this is a joke. But, let's say maker, you know made a loan to christian and I and christian- and I aren't special we're just experienced the maker- got his top 20 or 30 terms, and we got to uh figure out the rest of the terms say it's a billion dollar loan.

C

The loan would perform. You'd, never see a penny back, but we wouldn't have broken it. We just have our own islands and be very comfortable, not because we're that smart, we just we've been in this long enough. You know how to carve things out so there's so many ways to carve out risk and reallocate it. You know so it just don't. When you look at these things, don't think the top 15 or 20 key terms are enough.

C

You know, usually, if you stay on market, that's enough, but someone's got to be there to say, hey the rest of the terms are on market. You know, don't assume they are it's kind of trust but verified.

A

And eric, I would just add on this particular point- I mean these go to the discussion I had at the beginning in terms of negotiation right there there are, you know tens of dozens, hundreds of these points and we in our review will need to determine whether, for instance, the events of default are the market which ones are missing, which ones maybe should we have given that the borrower is borrowed or x? What are the peer periods? Are there any cure periods? Are they too long?

A

You know priority of payments, reps and warranties. Are there reps and warranties that are missing you'd, be surprised in some of the agreements that we've seen that reps and warranties are missing? What about the covenant package?

A

These are all things that we need to look at line by line yeah covenant, rep section by section just to determine whether that particular clause is a there and if it is, there is a market. If it's not market, is it fixable or not, and then finally, do we want.

C

The other thing I'd say is like again think of my auto you're, an auto lender. We think of making a loan. You know, 100 million dollars maker does to the auto lender and they give us 100. You know 120 million of auto loans, the kind of the thought experiment. How I look at this is they give us 120 million of auto loans, and we put a corral or a fence around it.

C

Then the question is think of every way we could lose money with that collateral, deteriorating or slipping out of the fence. So most of what's going on here is: how do you make sure the collateral in that fence is what they tell you? It is, and how do you make sure it's well maintained and it doesn't leave the fence, you know and all the cash from it goes to you if needed and on one hand that's pretty intellectually easy. On the other hand, there's a lot of moving parts to make sure that happens.

C

That's really kind of probably the essence of the structured finance game. You know how do you kind of identify and control the collateral? That's backing your loan, you know it's so much more complicated than in uh crypto lending. You know, crypto lending, you know, there's a real beauty of being able to take wrapped uh rap btc. You know into our vault, you know liquidate if needed. You know we just you, don't have that in the real world, um so yeah next slide. Please!

C

uh Here's just! I want to give a rough sense and here's some off-market transaction examples with some of the points I've made. You know and then just think about how should maker be dealing with these potential situations, because all of these things under borrower proposal we could get maker could get asked you know, and how does it want to be able to decision or negotiate these? You know what if they propose a billion dollar loan, you know and typically the market might give them 100 million because they never, you know, done more than 50 million.

C

You know their books, you know maybe 60 million and they could grow to 100 million in 18 months. You know, no sane lender would give them a billion, but they can ask. um You know what about advance rate, as I've talked about early on. Maybe they asked for 100 advance rate where the market's more 80, you know and there's good reasons, the market's 80.. You know they need to have a first loss position. You know we're not their equity, typically as a lender. How does maker want to address that?

C

um What if they have a very loose credit policy, you know and you're not really comfortable with what they're doing or the market would want it to be. You know more controlled, you know maybe like only fico's above 650, you know not below 650..

C

um What about approving changes to the credit policy uh where the market would say? Yes, the lender has to approve the borrower changing their credit policy, but they don't want to approve. It won't want us to have approval. We got deals. This has been asked what, if the asset performance triggers, are pretty loose so think about this. You got all your loans in the fence, but they start going really bad before the lender can do anything. You know. Tighter triggers means you step in sooner yeah. We certainly get proposed weak performance triggers.

C

uh I could go on and on about all these, but there's just many things. They can propose that are think not only off market but underneath off market. What does it mean too? It typically means there's a higher level of risk there you know, and if the market wouldn't do it or if there's a higher level of risk, it'd be priced differently.

C

You know in a sense there could be a price for everything, but it might be a much higher price. You know so they're asking for the low price, with the high risk, um with the high risk structure. Basically, all right next slide, please!

C

Oh hey christian! You want me to defer to you on this one. This is kind of getting near our summary.

A

Yeah, so this is really just a slide to, I think summarize, um in a way how traffic and defy on board an asset and we've covered a little bit of it, but I want to make maybe make it a more pointed comparison. um You know, trap by institutions have a structure, very well-defined collateral, onboarding process. We have a mid-6 which is is developing into a structured collateral, onboarding process, but yeah frankly we haven't.

A

You know: we've had a number of applications, some within the lipstick, some outside the mipsics, so we're working on defining a structure creating that structure most trapped by institutions know what they want to lend to and have a risk tolerance.

A

We sort of do right. I mean there's this theory for cleaning. There's a you know, theory for clean money, but even that is fairly broad. What is clean money? You know what is the risk tolerance that we're prepared to accept in clean money? You know, would clean money, for instance, and then I spent my career in energy. So does clean money, you know, involve liquefied natural gas because it will reduce coal consumption in europe. Well, gases and methane.

A

You know is clean. Money would clearly include green hydrogen, but you know: there's not been a green hydrogen project implemented on a project finance spaces to date. So there's a whole bunch of technology and commercial risk is that a risk that maker would be prepared to accept most traffic institutions will have a benchmark in which they can review transactions.

A

They would have a separate business development team that initiates the engagements. They would have a deal team that performs the the structuring and the negotiation of the transaction and then ultimately, they'll have an investment committee that has kind of the ultimate decision power and that investment committee is comprised typically of senior experienced professionals within the institution.

A

So how are we you know? How do we look at it? So you know we're continuing to define our onboarding process. It's not structured, yet we're working on it. It's do. We have a focus. uh Do we have a focus on preferred assets? You know there's been discussion regarding investment grade uh short duration.

A

We have the clean money thesis there's a question as dsg. What is the esg? It's the brainwashing and like we seem to be investing or having applicants that are proposing assets and highly committed highly competitive markets like the us, so we're competing against commercial banks, particularly in such areas of solar financing and another green financing.

A

um You know we want to use market uh type of structures and pricing as a benchmark. You know, I think what is clear is the growth core unit is, is undertaking the business development role and we have been working closely with the growth core unit to really give them an idea of okay. You know you guys are the business development folks, here's kind of some of the things you need to be looking at, because that has typically not been the function of growth or unit to be onboarding real world assets.

A

But you know we're beginning that communication that collaboration with them, so that, when they're out in the market, they can kind of have an idea. What are some of the benchmarks and standards that we're looking to bring on board?

A

I think there's still an open issue as to the role of real world finance and the incubating legal transaction services core unit now is the assessment role. Output for incomplete map commits to you know often structuring a negotiation as needed is that okay is the community on board that the real world, finance and lts core units will be delegated some level of authority to structure and negotiate transactions?

A

You know, I think, we're still learning uh both at the core unit level and at the delegate level and the community. Frankly, you know how we are best to support their decision process.

A

We are using sessions like this to really be able to find a way to communicate with the community find a way to communicate with delegates. Do it through multiple means again, some people adopt information or absorb information better. If it's in writing some people absorb information better. If it's in a presentation, if it's in writing, is it a memo? Is it a slide?

A

You know we're trying to find our way to really be able to support the delegates and the community and the decision making process. So it's it's a continued. um It's a continual process, uh we're not perfect, but we recognize that we want to get to a place that has a little more structure and give the community and delegates confidence that there is a structure that we're following next slide.

A

So then, what I'd like to discuss is the self-contained mips that have been proposed because, frankly, these are outside of the process that we have been actually directly contrary to the process, we've been trying to establish, there's nothing wrong with a self-contained myth, but for people to recognize when you're seeking to develop a process that is transparent. That is efficient. That is understood, albeit not perfect, yet having self-contained met with a prioritization built into them kind of throws that endeavor a bit into doubt.

A

So several of the recent myths have sought to skip to step five of the caudal onboarding process and there's a link specifically there to what step 5 says and step. 5 says here that you know: domain collateral assessments are created and published in the maker forum, while awaiting the posting of a governance poll in the following monday.

A

We are, then, the various teams we need to provide an in-depth evaluation of the collateral type, with the goal of the assessment to provide information to help inform the maker dog or in its community. So you know when these mips come in to maker. You know unless they ident address the standards that we've identified in the methodology for structured finance transactions and, frankly, include the full suite of drafted transaction documents, and what I mean by that is they send us a loan agreement.

A

They send us the security to pledge agreements, the collateral account agreements, the cash waterfall everything fully drafted in a document.

A

It's very going to be very difficult for us to say to the community. Yes, this transaction looks good, because what happens is you know once once the myth is approved? We're then asked to provide an in-depth evaluation, but unless we have a very complete set of documents- and it next excess a very complete package, we fall back into the it kind of been where we are now in the mid process. Where you end up having to have a discussion, you know. Are these terms?

A

Are these terms uh market standard? If they're not market standard, can we propose something? Well, it's unclear to us what our role is and what happens after a self-contained has been approved, and you know to the extent that there is a self-containment really. The the only way that we can provide a very meaningful and thoughtfully responded to assessment is, if there's a full suite of agreements, because then we have the full package that we can review.

A

A

You know between, but you know, if an applicant doesn't provide us the full suite of documents, then you know they need to then go off and prepare the documents after this has been approved and that could potentially delay our review of other assessments because of this prioritization concept that has been included in some of the mips, so they give us a application, that's not complete.

A

It has a prioritization language in it they get prioritization and kind of a focus on their mip. If it's been approved, and then we can't do anything until they actually provide us draft agreements. Well, it's going to take them time to prepare the draft agreements, so we basically sit on our hands doing nothing with respect to all other assets, while the borrower controls the pace of the document, and that doesn't seem right and that's why we say.

A

Actually, if you're going to do the mipsticks application, you need to have a full suite of drafted transaction documents, because that's really the only way we can review the entire transaction in its entirety and be able to be responsive more quickly in a way. That's not, then delaying every other mip that is in front of the uh the coordinates uh eric. I think that's I think. That's the last slide pressure.

A

Are there any questions.

C

If we have questions.

B

Yeah I haven't seen too many questions get dropped in to the chat yet, but if you have them, please uh fire away and we'll be happy to answer them. uh I wanted to kick things off by revisiting the mip 67. That's currently up for a vote. How much of the challenges that you guys just described is addressed or isn't addressed in in mip 67 in its current version.

A

I think on my 67 we're trying to address nearly all of the nearly all the issues, and you know ever ever since january. What we've sought to do is really provide guidance in the forum proposal in the forum so that the community and potential borrowers knew the process that we thought was best for maker that was structured so that we got received applications that were as comprehensive as possible.

A

So if you look at the methodology for uh structured finance transactions which we published in january, it's very very detailed as to some of the criteria, some of the criteria we're going to be looking at now.

B

Every transaction.

A

Is going to be different, a project finance transaction is not going to be the same as a structured finance transaction. I get it, but you should be able to address any way in some form or fashion in your application. All of those issues, because those are all the questions we're going to be asking you so I mean we're giving potential borrowers a pathway, a roadmap to how to get their their. You know efficiently reviewed and that's the key.

A

You know the community could decide it just wants to accept. Whatever that comes in the door, that's fine or if the community could decide who wants a different set of standards. Maybe maker wants to be more equity-like rather than more debt like well, that's a completely different risk profile and, as eric said, you know, you're not taking equity risk for that related return.

A

So it's no longer one or two percent. It's maybe 15 or 20, and you know farmers will always want and with an inexperienced lender, borrowers will certainly try to pass equity risk.

A

Why? Wouldn't they? Okay? I can give you a two percent return and you can take more equity risk. Well, that's not what farmers tend to want to do.

C

That's the other thing is um to potential borrowers. When you look at our that structured finance uh methodology, we we published that's probably six or eight pages or maybe even more. I think what I would say is look. These are the the issues you need to be able to engage with, engage with us thoughtfully with or with maker.

C

Any lender is gonna want these, and, if you're not pretty fairly well versed in these issues, you probably should get you know good legal counsel and um probably like some kind of financial like advisor investment banker, you know who does know these things. I mean, there's just there's a whole lot of stuff there and getting to a yes and finishing. A transaction requires a level of fluency in those issues and if you just don't have that fluency and if you don't have the help, it's going to be a mess.

A

So if you like.

C

Prioritize your transaction honestly because it becomes a huge time suck for us yeah.

A

C

A

A question about the current prioritization list and which mips are in which order. um So there is um so I'm speaking off of the top of my head, so we're working on softgen and trying to get sapchip across the finish line. That is probably the first prioritization it changes week to week in terms of what follows next, you know we we've had over the last two weeks.

A

I think five self-contained mips uh and perhaps two that were unclear as to whether they were self-contained mips and because of these self-contained myths were going up to a vote and the vote was then binding on the community. We felt that we had to address those first.

A

So for the last two weeks, we have been working to provide comments to the various self-contained myths that were um on board that posted a couple weeks ago and, as monkey irish has said, there will be a new uh collateral status index uh which is going to be providing details on all the collateral. I think one of the things you'll have seen is that you know I know. I know one of the previous withdrew their application today.

A

So we're trying to clean up that prioritization list so right now, first and foremost, the asset that has been approved by the community and is in the implementation stage of soccer.

B

It looks like we have another question here from david david asks for the most part, or for most of the mips that I have seen. I believe the fundamental question we need to be asking is why maker, especially as most of the deals I have seen, require the additions of new intermediaries over and above the trade phi intermediaries raising the cost of managing these funds. What is the motivation of using maker as a funding source shouldn't? We ask this question first, to even ensure that the transaction makes sense for maker.

C

It's a great question: um let me let me give a few thoughts. um Besides just a great question: there's some folks, you know that want to do business with us. They see it as strategic. You know to start building, uh perhaps like they're in the real world and there's a lot of real world firms. Circling around uh defy and they'd like to establish a presence and we've been approached by a few.

C

You know: billion dollar credit hedge funds that are interested in working with us, and I think they see that as kind of adding to what they're doing- and- let's be honest, it probably makes them look more sexy when they raise money from their limited partners to their investment fund. I mean that's great, uh you know, there's just there's a lot of interest coming, but I think and also say we're. Hopefully almost here on deal and sock gen, where they see it is kind of showing a proof of concept.

C

So I think it's fair to say when we're looking for people who want to work with us, we do want to understand why, because it's not as easy to do a deal with us. Is it or, if you're, a big, sophisticated borrower, it's easier to go to jpmorgan bank and do a deal you know? Why would you come to us at least initially, as we we start building the pipes to get it done? It's harder, there's more brain damage.

C

Hopefully, as we do more deals, it's gonna get a lot easier, but initially you're right, it's more headache. So it's we're typically looking for people that see some strategic value in working with maker. You know like sock, gen,.

A

And I would say like for somebody like hvd bank, I think they have viewed the opportunity as as as what they have been doing in the us say. You know, through the um you know, through the various coveted relief programs and in terms of you know, being able to access quote the federal reserve, they kind of see how they have been interacting with the us government in a way similar to the same type of funding for maker and to them it's.

A

I think, a similar concept which is they're able to- and this is where maker can really help right, because it can work with a bank like hpv or others to actually open up more access to markets, because we're going to be able to provide hpv the ability to make more loans because they would, for instance, be you know, selling us participation which would reduce their family sheet exposure. So for them it's again it's a very strategic.

C

I guess the other thing I'd say: is it's not our call, but I think we would recommend for some of these earlier deals to get going that maybe make her. You know, give people a little better than typical market terms that they want to do business with, because we want to get these first deals done and show that we have a good footprint in the real world. We can do lots more deals, you know, and sometimes to get the first credible customers in the door.

C

You know you give them a better deal than you're going to. You know down the road. You know that gets like once. We do a few big deals that are well known in the space. My senses really have dozens of people lining up.

A

And I think the question on the intermediaries- I don't know necessarily that we have more intermediaries than a traditional deal, because if you look at a traditional structure, finance deal, you know the lender's not going to be just lending money to the borrower and saying hey, you know, send me a check whenever, whenever you get around to it, I mean there's, definitely going to be very tight and established controls in that process, whether it's through you know, through working through an indentured trust working through a delaware, statutory trust. I mean they're very well defined processes.

C

A

Trying to we're just trying to build on top of that.

C

Christian in a structured and more like a securitization, you could have a third party service or a third party, backup servicer, a trustee, a collateral agent, a custodian I mean there could be a whole lot of different third parties making sure this whole thing works.

B

Yeah perfect context as a quick follow-up to eli's uh question about prioritization, I want to make sure that, uh for the recording, uh robert johnson uh monkey irish from uh ces uh said that, before the g r car call tomorrow, uh he'll be publishing the new collateral status index, which will provide details on the collateral moving through the onboarding process. So definitely keep an eye out for that with that, I believe we're at the top of the hour and there are no other questions in chat.

B

So I want to thank christian and eric and then also highlight that I believe you guys have office hours coming up as well uh in about an hour if I'm not mistaken, so there are more opportunities to engage with the team, uh especially on a more one-on-one basis uh in office hours in about an hour check out the maker dial public calendar. For that, the recording of this call will be hosted on the maker, dow youtube and uh shared in the forums uh with the focus on post. So uh christian eric.

B

If there's any final words you'd like to say to wrap this up, the floor is yours.

C

I've said enough: thanks.

B

To everybody perfect, thank you appreciate it guys lots of lots of good context today. So thank you. Everyone for joining and uh we'll see you in the forums.

C