In order to address losses incurred by the Tugende loan default, we propose that the community allocate $1M USDC from the protocol’s treasury to directly cover losses. The resulting floor (ie. worst case) for the recovery will thus be 20% of Tugende’s borrowed amount.
The result of this allocation, combined with the loan restructuring described in this update, could recover a material amount for the Goldfinch Senior Pool, potentially resulting in a net positive 0.47% increase to the NAV of the senior pool over the write down period, rather than the worst case scenario of a -3.95% loss described in the first Tugende update post. (See more detailed calculations below).
Since the APY on the Senior Pool has been 7.81% for the past year, this means the overall trailing 12-month APY (assuming the restructuring plus response plan go through as planned) could be a net positive 5.91% APY (excluding GFI). These numbers are approximate and assume the restructuring plan is successful, and all other borrowers on Goldfinch continue to perform.
We have been focused on pursuing all paths to help recover losses for the community incurred by the Tugende loan. In fact, we just recently announced that a term sheet has been signed which may create significant principal recovery. Based on the current facts and circumstances, including legal work and any necessary regulatory approvals, the restructuring is expected to close prior to the end of 2023. In the mean time, however, we believe the best use of the community’s treasury is to augment that recovery and provide immediate help to Goldfinch LPs. This $1M (representing 20% of the $5M loan principal) will significantly reduce whatever losses remain.
It is also worth noting that while we believe this is appropriate for this particular situation, we are not proposing that the treasury should be generally viewed as responsible for covering defaults. The community cannot always be viewed as a safety net because that is unsustainable, but in this situation there are substantial resources in the treasury and the community is in a good position to help.
It is important that as part of this proposal, the community be able to continue covering all other expected costs.
The community’s two primary costs are community management and bug bounties. Community management is currently just under $80K per year. Since the bug bounty was created two years ago, there have been about $125K in bug bounties paid out. The annual cost for the community is therefore roughly 80+125/2 = $142.5K. In addition, the community treasury is receiving about $45K per month in fees.
To ensure the treasury always has enough to cover expected fees, there should always be at least $150K USDC in the treasury, more than one year’s worth of estimated costs. Therefore, the $1M should be funded in multiple transactions such that at least $150K is always remaining in the treasury. E.g. given the treasury has $1.0M now, that would mean $850K upfront, and then ~$45K per month for ~3 months. If the community pays for other things in the meantime, the additional payments would wait until the treasury reaches $150K again.
- Allocate $1M of the community’s treasury toward losses on the Tugende loan. Do so in multiple transactions such that there is always $150K remaining in the treasury.
For everyone’s benefit, see below for how we arrived at the net APY numbers.
- By 10/22, absent any restructuring or new payments from other borrowers, the Senior Pool NAV would have decreased by a total of 6.31% (eg. $5M out of $79.256M, representing the sum of the Tugende principal amount)
- Over the same period, the Senior Pool will continue to receive interest from the other loans, which are expected to total 2.36%. So the net decrease in NAV during this 120-day period will be ~3.95%
Now, we can add in the restructuring, and response plan
- The restructuring, if successful, could allow the Tugende loss to go from 6.31% to 3.15%
- The response plan would add $1M, which is $1M / 79.25M = 1.26%
- The other borrowers are still expected to pay 2.36% during the 4 month write-down period.
- Hence, -3.15 + 1.26 + 2.36 = 0.47% increase to the NAV during the writedown period.
- To reiterate, these numbers are approxmiate and subject to change based on the final success of the restructuring plan, as well as the performance of all other Goldfinch borrowers.
- Significantly helps cover losses incurred by senior pool participants.
- Uses up almost the entirety of the current USDC in the treasury.
“Yes” - Allocate $1M to cover losses
“No” - Do nothing.