POP Review Report
Report Author: Cynthia Zhang, Member of the Centrifuge Credit Group
OVERVIEW
New Silver Pool 3 (“NS3”) represents an opportunity to prospective investors to gain on-chain exposure to real estate backed loans originated directly by New Silver Lending LLC and/or its subsidiaries. The income generated from the NS3 is largely driven by the performance and liquidity of the pool’s underlying assets. The Pool Onboarding Proposal [POP] can be found here from the public Centrifuge forum.
Strengths & Weaknesses
Strengths:
• New Silver utilizes a few different risk management and mitigation strategies when selecting and managing new counterparties and pool assets.
• New Silver intends to fully fund the Junior tranche (NS3JR), which represents 20% of the total offering, aligning incentives and creating a buffer for senior lenders in case of asset write-downs. The remaining Senior tranche, accounting for 80% of the total offering, will be fully funded on-chain. Furthermore, the issuer has the option and willingness to buy ‘noisy’ assets out of the pool at par to support its overall performance. This can further enhance the credit enhancement beyond that implied purely by the subordinate tranche.
• Experienced issuer with a track record of low default rate, which is evidenced by the default rate of 0.0% of the existing NS2 Tinlake pool. The industry average is approximately 1-2%. Since 2019, New Silver has maintained an above-average track record with no losses of principal on its’ loans.
• Creation of the Trust. Governed by a Pooling and Servicing Agreement, this primary agreement governs the trust after the pool is funded/closed. Ankura Trust Company serves as the indenture trustee, with its primary duty being to safeguard the interests of investors who purchase the securities issued pursuant to the securitization. The nature of the trustee’s duties is specifically set forth in the Indenture. For instance, if an Event of Default of which a Responsible Officer of the Indenture Trustee has actual knowledge or has received written notice has occurred and is continuing, the Indenture Trustee shall exercise the rights and powers vested in it by the Indenture and use the same degree of care and skill in its exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person’s own affairs; provided that such standard shall not be deemed to require the Indenture Trustee to take any action if the terms of this Indenture provide that the Indenture Trustee acts at the direction of another Person, including any Tokenholder, and such Person has not provided such direction.
• The proposed pool may be used as a short-term warehouse financing facility, even though New Silver intends to hold loans in the pool until maturity. Warehouse lending is a low-risk and efficient line of business due to its nature, such as being short-term, collateralized, diversified, strong risk management, and liquid market.
Weaknesses:
• Credit risk: The primary risk is borrowers defaulting on their mortgage. How much of the loan will investors receive back once the property is foreclosed upon and sold. This risk is mitigated by the experienced team and the reported low default rate of NS2 Tinlake pool.
• Interest rate risk: This risk is mitigated by relatively short loan terms.
• Reinvestment risk: This risk is mitigated by current high interest rates environment, which is expected to remain higher for longer.
(Interest rates - Short-term interest rates forecast - OECD Data).
• Relatively high LTC: This risk is mitigated by debt service escrow and the satisfactory net worth and liquidity of the borrower. Furthermore, the issuer has the option and willingness to buy ‘noisy’ assets out of the pool at par to support its overall performance.
OPPORTUNITY DETAILS
Fix and Flip Loans Overview
Proceeds of this offering will be used to finance commercial purpose, fix and flip loans (also referred to as bridge or ground up loans, collectively, the “Underlying Assets”). Fix and flip loans allow real estate investors to finance both the purchase and the construction, or in some cases, refinance an existing investment property with sufficient equity. When a borrower submits a loan request via New Silver’s online platform, New Silver makes use of its proprietary technology and data to underwrite the loan in real time, and offers the borrower conditional approval, terms and rates on its web platform. Upon final approval, a real estate closing with a partner attorney or settlement agent is initiated. The closing company reviews the title and puts together the closing package as required by state regulations. The loan is always in a first lien position,. In most cases, the total loan amount is split into an upfront purchase and a construction reserve. The purchase amount is used to finance the purchase of the property and is advanced at the closing. The construction reserve is held in escrow by the Asset Manager and is used to reimburse the construction costs. At loan maturity or loan refinance, the loan is paid off in full (principal and any outstanding interest).
Underlying Asset
• A review of the historical loan tape for the Tinlake pool was conducted.
New Silver was the first and is one of the largest real world (RWA) vaults on Maker DAO, having securitized over 90mm DAI in aggregate volume with senior backing from MakerDAO. New Silver has over 1.5 years of history with the MakerDAO with no defaults. Over the past three years, NS has originated over 400 loans, totaling $120.93MM. A total of 264 loans, with a combined loan amount of $83.82MM, have been paid off, accounting for approximately 50% of the total unpaid balance.
• The issuer aims to adhere to the following criteria for the underlying asset.
Key Transaction Parties
• Asset Originator/Issuer: New Silver Lending LLC (“New Silver”)
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Founded in 2018, New Silver is a technology enabled non-bank lender primarily focused on providing commercial purpose, real estate-backed financing for the United States “fix and flip” sector with a concentration on single-family residential assets. New Silver was the first, and is one of the largest real world (RWA) vaults on Maker DAO, having securitized over 90mm DAI in aggregate volume with senior backing from MakerDAO. New Silver has over 1.5 years of history with the MakerDAO with no defaults. To date, the company originated over $175mm loans. The company currently manages ~$50mm in its active loan portfolio. (https://newsilver.com)
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Key team members
o Kirill Bensonoff - Co-founder and CEO. Kirill is a technologist and a serial entrepreneur, having built and sold successful companies in the enterprise IT space prior to New Silver. Kirill is responsible for overseeing the business direction and technology development.
o Alex Shvayetsky - Co-founder and Chief Risk Officer. Alex’s career spans over 25 years in commercial real estate management and operations. Alex is responsible for overseeing risk and lending practices.
o Alexey Shevchenko - CTO. Alexey holds a master’s degree in computer science and has been building software for over a decade. Alexey oversees the company’s software engineering efforts.
o Landon Mizuguchi – CFO. Landon advises the team on planning, analysis, and related matters. Landon’s career has encompassed experience with firms such as PayPal (Strategic Finance), Goldman Sachs (Investment Banking) & EY (Transaction Advisory).
o John Coury - Head of Capital Markets. John has over 15 years of experience in real estate capital markets and investment banking, having spent his career in private equity houses such as Axiom Capital. John is responsible for helping the company raise capital.
• Loan Servicer: FCI Servicing, Inc., a California corporation
• Seller/Issuer Accounting: Why Blue, LLC
• Seller/Issuer Legal: Polsinelli, PC
• Custodian: N/A
• Indenture Trustee: Ankura Trust Company, LLC, a New Hampshire limited liability company and chartered non-depository trust company
• Broker: Circle
• Exchange Agent: New Silver Lending LLC, a Delaware limited liability company
• Bank: Needham Bank
• Centrifuge Protocol
• Centrifuge provides infrastructure that facilitates the decentralized financing of real-world assets natively on-chain, creating a transparent market which allows borrowers and lenders to transact without intermediaries. Asset pools on Centrifuge are fully collateralized and liquidity providers have legal recourse. Pools for assets on the protocol include mortgages, invoices, microlending and consumer finance. Centrifuge Protocol utilizes smart contracts, epochs and various systems and software to manage the investment and redemption process. For more information and technical details about Centrifuge, see here.
Transaction/ Flow of Funds
Ankura Trust will take actions as directed by a representative of the tokenholders on terms set forth in the Indenture. Below are three flowcharts illustrating the flow of funds, representing on-chain/off-chain transactions, the normal scenario, and the default scenario.
Structure
• Legal analysis was not conducted on investor subscription agreements as their final form may change prior to pool launch.
• A draft of the Indenture was provided and has been reviewed. As the final document is still in progress, no conclusion has been drawn yet.
• Consideration should be taken to the key investor protections and remedies – which may positively or negatively impact the ability to service debt obligations - including but not limited to:
- Performance-based maintenance covenants.
- Payment-based events of default and their respective triggers, cure periods and remedies.
- Termination provisions either initiated by borrower or lender.
FINANCIAL ANALYSIS
• Financial analysis of the Issuer/Asset Originator was conducted. The net worth and liquidity are satisfactory.
• The financial health of the issuer and its ability to access capital markets may impact the ability to service debt obligations, either positively or negatively.
Disclaimer: This report is for informational purposes only, is not an offer, solicitation, recommendation, or commitment for any transaction or to buy or sell any security or other financial product named or described in this report, and is not intended as equity research, investment advice or as a confirmation of any transaction. Interested parties are advised to contact the entity with which they deal, should they desire further information. Any market price, indicative value, or yield, estimate, view, opinion, data, or other information herein is not warranted as to completeness or accuracy, is subject to change without notice, and Centrifuge DAO Credit Group accepts no liability for its use or to update or keep it current.