GIP-52: Tugende Response Plan

Proposals
1

Authors: @mikesall and @blakewest

Summary

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.

Motivation

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.

Budgeting & Timing Approach

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.

Specification and Requirements

Specifics

  • 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.

Calculations

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.

Benefits

  • Significantly helps cover losses incurred by senior pool participants.

Downside

  • Uses up almost the entirety of the current USDC in the treasury.

Voting

“Yes” - Allocate $1M to cover losses

“No” - Do nothing.

4 Likes
2

Yes i like this proposal

3

Thank you for this proposal. I think it makes great use of the community treasury, as it will reinforce Goldfinch’s commitment to minimize losses incurred by senior pool participants.

As everyone is able to observe, the senior pool position is trading in liquid markets at a significant discount, which can be attributed to the opportunity cost of its illiquidity, but probably also to the lack of confidence most investors have in the ability of Goldfinch’s borrowers to reimburse their principal. We have seen a steep increase in the discount to NAV of FIDU on liquid markets since the announcement of the Tugende loan default.

I, therefore, support this proposal that will reinforce the confidence of investors and demonstrate Goldfinch’s commitment to its mission.

1 Like
4

Definitely a good signal, shows commitment.

5

I fully support @Wiz comment, nothing to add. My vote will be «Yes»!

6

I agree that at this stage it makes sense to use the treasury to cover part of the debt. It is important to be able to attract more capital to the senior pool

7

I definitely support this proposal not only because it will soften the consequences of Tugende case, but because it shows commitment and ultimate belief of the Goldfinch community into the protocol.

The only thing I would like to echo is that this proposal should be an exception. Community Treasury should not be regarded as a safety net to cover substantial losses.

My vote will be “YES” on the snapshot.

8

I have one question.
Does helping tugende mean that the Community Treasury will help the senior pool even if the same thing happens next time?

9

@wakiyamap No, it will not. I’m quoting some part of the proposal here: “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.”

10

So, Shouldn’t this proposal also be rejected?
If this proposal is approved, we can expect a guarantee from the Community Treasury if the same thing occurs permanently in the future.
If we want to pass this proposal, I think we should create some kind of standards.

11

@wakiyamap I don’t think that the Community Treasury should be considered as an anti-default tool. It wasn’t designed for this purpose. However, it’s good to use its help once as said in the proposal.

12

I support the proposal as it reiterates the commitment of Goldfinch community in reducing losses to LPs as well as creates confidence in prospective investors.

13

Yes, I support this proposal

14

@RP2743 If it is as described in the document, the responsibility lies with the borrower and the auditor.

But, GFI staking has not been implemented yet.
So I understand using community treasury for that reason.

However, if we pass this as is, 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** . will be written in the proposal when the next event occurs.

15

@wakiyamap I don’t think that our community will support an idea to move funds from the Community Treasury next time in case another default happens.

Anyway, once on the snapshot everyone can vote either in favor or against the current proposal.

16

I don’t think it’s necessary to use all the current USDC in the treasury. I will vote against the proposal

1 Like
17

@obscar it won’t happen! This proposal doesn’t suppose to use all USDC from the Treasury. On the contrary it proposes to do multiple transactions such that there is always $150K remaining in the treasury!
In addition, the community treasury is receiving about $45K per month in fees. Hence, the community treasury will recover quite soon!

1 Like
18

Some thoughts and questions:

For those who are ineligible to participate in being a LP/backer and get yield exposure, the next best thing is to become a GFI token holder. Since fees incurred from withdrawing from pools, accrue to the treasury.

I understand the treasury can be used for anything deemed fit through governance vote. However, in theory most governance token holders would like to somehow be a beneficiary of some treasury funds.

Now these are emerging markets with substantially higher default risk. I may have missed it but what went wrong with the DD for this loan? How many backers underwrote this loan? As I understand it the covenant breach wasn’t just a missed payment but a misappropriation of funds?

I may be misunderstanding but shouldn’t the default exposure be limited to the backers via snapshot of Tugende? I believe this was a backer only deal? Please correct me if I’m mistaken, I think the unitranche/multi tranche updates may have changed the process but should there be some kind of waterfall payment that hits Senior/Junior tranche if funds are used?

I’m late to the show and unsure of what’s been discussed with treasury funds but it seems now (separate thread) is a good time to discuss if USDC in the treasury should be sitting idle moving forward or if it should be deployed strategically in yield bearing vaults?

Considering the restructuring of debt and recovery is expected to be favorable ( who is paying for the restructuring costs?) I feel that if there was a distribution of USDC from the treasury, it should be based on the progress of the recovery. Instead of just a mostly lump sum distribution, maybe quarterly?

Also at the rate of 45k a month, it’ll take nearly ~19 months to recover the treasury balance.

Apologies for the brain dump but wanted to share some thoughts.

19

No, this was not a backer-only deal, but rather the opposite - all of Tugende’s funds in this pool were transferred from the senior pool with no backers involved in the deal

20

Hey Seanbutta,
I’ll respond with a few points…

In theory, most governance holders would like to somehow be a beneficiary of some treasury funds

I agree. And in fact, almost all Senior Pool investors are also GFI holders. Basically every Senior Pool investor participated in liquidity mining, meaning they got GFI tokens. So they can vote on this and would benefit from it if it passed.

I believe this was a backer only deal?

No, in fact there were zero backers. This was the only legacy deal in the Senior Pool that did not have Backers. In fact, this deal would have been refinanced out (with Backers) back in 2022 when Cauris was raising, but because that pool never completed, it never happened. So I think a really nice consequence of the $1M injection is that it perfectly matches what would have been the 20% Backer protection

I’m late to the show and unsure of what’s been discussed with treasury funds but it seems now (separate thread) is a good time to discuss if USDC in the treasury should be sitting idle moving forward or if it should be deployed strategically in yield bearing vaults?

Yeah this should be a separate post.

I feel that if there was a distribution of USDC from the treasury, it should be based on the progress of the recovery. Instead of just a mostly lump sum distribution, maybe quarterly?

I’m not sure I understand, why should the payment be based on the progress of the recovery? Whether there is recovery or not, the payment would help all Senior Pool LPs. Plus even if the recovery goes as planned, there would still be a > $1M gap.

Also at the rate of 45k a month, it’ll take nearly ~19 months to recover the treasury balance.

Yes, but the treasury does not really need $1M in it at all times to handle it’s costs. But that’s why the proposal includes some accounting of the general costs for the treasury, and ensures that 1 year of expenses (~$150k) is always available. We will not let the balance dip below this amount.

Hope that helps! Thanks!

1 Like