Update on Stratos Pool

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Authors: @mikesall and @blakewest

Summary

Warbler Labs has become aware of performance issues in the underlying loans on the Stratos pool, due to potential writeoffs on investments Stratos made in REZI and POKT. For reasons we go into below, Warbler Labs will backstop all losses related to these investments for the Senior Pool and Backers.

What happened

In Feb 2022, the Goldfinch protocol made a $20M loan to Stratos, a U.S. based credit fund. As they shared in their borrower profile, the Stratos partners have decades of credit experience, and at the time, the Stratos fund had a 5-year track record of $250M in investments with no late payments and 18%+ annualized returns. As part of the loan, both Warbler Labs and Stratos management participated as junior first-loss Backers.

Even before the loan, the Warbler Labs team knew the Stratos team. As Stratos shared in the above post, their founder was an early advisor to Goldfinch, and Stratos is an equity investor in Warbler Labs. We at Warbler considered this valuable because having strong relationships with your borrowers is very helpful in credit.

Since then, the Stratos loan has not performed as expected. Specifically, there are performance issues in two positions, REZI and POKT. Stratos first shared issues about POKT with Backers roughly one year ago, and REZI recently. (See more details about these loans below.) This is disappointing and unexpected to say the least, but the most important thing now is how we work to recover as much of the principal as possible, to protect the Goldfinch community, and to demonstrate Warbler’s continued commitment to integrity and transparency.

This will require a recovery process. At Warbler Labs, we pride ourselves in acting with the utmost integrity and putting investor needs above all else. We want to be clear that Warbler’s pre-existing relationship does not in any way affect our pursuit of maximum recovery from Stratos. To remove any doubt, Warbler Labs will take on the full risk and responsibility of recovery, and we have decided to backstop losses related to REZI and POKT, excluding Warbler’s and Stratos’ positions.

Details on the loan

Stratos has used the $20M on 3 positions: $13M to Threecolts, $5M to REZI, and $2M to POKT. We believe Threecolts is performing strongly, but that the REZI and POKT positions will be written down to $0.

REZI: REZI is a real-estate tech company, focusing on apartment rentals in major U.S. cities. It appears that REZI has stopped making interest payments and we believe the full position will likely be written down to $0. We have asked Stratos to share an update on this situation with the community.

POKT: This position was not shared in the original proposed use of proceeds, but was shared by Stratos with Backers about a year ago. Warbler Labs was not aware of Stratos’ plans to make this investment. While “digital asset investments” were approved collateral in the loan document, this was only intended to allow for stablecoin positions (we have since updated the loan templates we use with borrowers to be more explicit about this in future deals). Since then, the position was sold at a near full loss, and Stratos added new collateral to cover the loss.

Next Steps

  • To repeat from above, Warbler will backstop all losses due to REZI and POKT for the Senior Pool and Backers (excluding Warbler and Stratos). We will share more detail on how the backstop will work in the coming weeks.
  • Separately, Warbler Labs will work with Stratos management to pursue all potential recovery options.
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Thank you for this update Mike.

This is the second occurrence of a lack of transparency from a borrower or a lack of auditing capability from Goldfinch. We can all appreciate that Warbler Labs will backstop the loss, but it is increasingly worrying to discover a complete lack of control from the loan underwriter, especially in the context of Stratos being an equity investor in Goldfinch.

When can Warbler Labs conduct an extensive audit of the current borrowers’ financial stability and identification of potential breaches of their loan agreements? It would be reassuring to have a comprehensive overview of the loan book, rather than discovering every 2 months that a borrower experienced another default.

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Yes @Wiz I absolutely agree. We have been doing ongoing monitoring on a regular basis, and plan to share our most recent extensive review, in addition to taking other steps we will share soon. For confidentiality reasons there will be some limits to how much detail we can include but we’ll be publishing it soon — the TL;DR is that after our most recent review of the entire loan book we believe the rest of the loans and borrowers are in good standing and performing. We will also be conducting & sharing a review of all loans and borrowers on a quarterly basis going forward.

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Agree with @Wiz. There is a case of reputational risk. Thanks @mikesall for addressing. Waiting for the extensive review.

RWA narrative has just started to ride and we cannot let ourself down after building so much.

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Also agree with @Wiz and @mans9841 . Fully support the idea to review the entire loan book and inform the community re the results of this review. Otherwise the community, including backers and LPs, may lose the trust into the Protocol in case such a situation repeats in the future.

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Thank you Mike, I look forward to reading this extensive review. When will Warber Labs be ready to share the next quarterly review?

I hope the backstop strategy will include the release of liquidity to senior pool backers for the amount corresponding to the losses in Stratos loan. Stratos loan is the latest to mature, and the losses represent ~10% of the senior pool.

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Thanks for the update, Mike.

Can you provide more information about Rezi’s collateral? The loan was advertised as “senior secured”, so while Rezi’s company level cashflows may be challenged, it seems unusual that there would be no (or little) recovery from the underlying assets. What were the assets collateralizing this loan and what happened to them?

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@Wiz We’re aiming to share it this week.

@everec We asked Stratos to share an update because we need to be careful about the confidentiality in what can be shared publicly.

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Can you provide revised timing expectations for: (1) the quarterly review and (2) anything that can be shared from Stratos’ Update?

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Hey @NateHoward @Wiz @mans9841 apologies for the delay here, took a little longer than expected to put together the full risk review, but you can see it here: Warbler’s First Community Risk Review

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As another update here, the backstop for Backers is now live on https://app.goldfinch.finance/. Just visit the Stratos pool, and if you are a Backer, you will be able to withdraw your full principal.