Summary : The Warbler Labs team proposes bringing a new loan structure to the Goldfinch protocol — a callable loan, which gives Backers the right to “call back” their invested capital. Borrowers are required to return 100% of this “called capital” at the end of a “call period.” For the initial design, call periods will occur every three months and call requests must be submitted at minimum 60 days before the end of the call period.
Motivation : Liquidity is essential to crypto investors and callable loans allow investors to redeem their investments early, if they so choose. Based on interviews with existing and potential Goldfinch lenders we have learned that many investors have a strong preference/requirement for quarterly liquidity in their investments. Callable loans are an existing structure in traditional finance that achieves the outcome desired of our investors by giving them the right to “call back” their capital at regular intervals.
How do callable loans work?
Callable loans are a suitable option for borrowers with short-term assets that can be liquidated when investors want to redeem their capital. Callable loans are used in traditional finance, but their structure and terms are usually customized to match the capital structure of the borrower.
As an example deal:
- Borrower: Fintech X, who provides buy-now-pay-later (BNPL) loans to customers with a maximum tenor of 30 days
- Goldfinch Deal Terms: 2 year loan with a quarterly call period where investors must serve their call notice at least 60 days in advance
Fintech X borrows from Goldfinch in order to offer more BNPL loans. If an investor calls back their position early, Fintech X will know at least 60 days in advance. So they wait to get repaid on their 30 day BNPL loans and use that cash to repay investors’ called capital.
What are the benefits to investors?
Callable loans give investors the option to exit investments early. Some lenders need this flexibility in order to meet their investors’ redemption requests. Others simply prefer the flexibility to reallocate their capital if personal or market conditions change.
Why is now a good time to launch callable loans on GF?
The right to call back capital is a tough sell for most borrowers, who often either refuse such terms or demand a significantly cheaper cost of capital in return. However, credit markets today are incredibly tight and lenders have more negotiating power. Given the conditions, borrowers are willing to offer more investor-friendly structures, like callable loans, while still paying high yields (e.g. 12% or higher).
Specification & Requirements
- Lenders with UID can submit call requests to recall their principal at any point in time
- Repayment of call requests happens once every three months on a set date
- Call requests must be received at least two months prior to a repayment date. Any calls that occur less than two months before the closest upcoming repayment date will be paid on the second closest upcoming repayment date. Depending on the time of the request, borrowers will receive their capital back within two to five months
- The illustration below shows a sample deal that demonstrates how the two to five month payback period works. For example, lenders who want to be repaid at the end-September call event will need to have submitted their call during May, June or July. If you submit a call on the earliest possible date in the window (May 1), the time-to-repayment is five months; if you submit on the last possible day of the period (July 31), the time-to-repayment is two months
- Lenders’ called capital becomes withdrawable once the due date of the call requested capital has been reached and the borrower has repaid the called capital. Lenders may withdraw their pro rata portion of any repaid called capital after the due date, and they do not need to wait for the entirety of the called capital to be repaid.
- Once a lender submits a call request, they continue to receive interest on their capital until it is withdrawable by the lender.
- Lenders can call any portion of their principal when they submit their request.
- If a borrower is late on any payments, the ability to submit call requests will remain active
Borrower Repayments Waterfall Mechanics
- Borrower repayments are applied pro-rata to outstanding balances in the following order:
→ (1) All existing interest obligations
→ (2) All existing call request principal obligations which have been locked in, in order of the call request period they were submitted in.
→ (3) All accrued interest up until now
→ (4) Remaining principal balance
- Since initial Callable loans will be bullet loans, in most cases only (1), (2) & (3) apply
- In the case of early principal repayments, the full waterfall applies, including (4)
- The addition of (2) in the repayment waterfall differs from our current deals.
- Goldfinch investors will have the ability to fully exit their positions prior to maturity
- The right to call capital aligns with the demands of crypto investors, who have a strong preference for liquidity. Some investors are restricted from investing in long-term assets and this product feature will allow them to join the Goldfinch ecosystem
- Many borrowers have never issued callable loans before, so lenders must be confident in borrowers’ ability to administer the new structure
- Yes Vote: Enable callable loans as a structure on Goldfinch
- No Vote: No change