Credix V2 — flexibility to handle complexity

Debt capital markets are complex, and so are the financial products driving them. At Credix, we mix proven TradFi- and DeFi concepts to build the future of global credit markets. Today, we’re proud to announce the V2 of the Credix platform, featuring tranching, and arbitrary repayment schedules to allow for more complex deals.

Back in January, we launched the V1. Its main functionalities could be summarized as follows:

• Investors investing in the liquidity pool of a market
• Investors getting LP tokens as a proof of their investment in the pool
• Deals (bullet loans) are being created for borrowers, tapping into the liquidity pool
• Deal repayments lead to an increase in LP token price and thus a positive yield for the investors

This version, accompanied by our aggressive go-to-market strategy and thorough credit underwriting processes, paved the way to where we stand today: 17.5M USDC in live deals and 0% defaults

In order to support bigger credit facilities, and cater to different investors’ needs; we’ve worked hard on implementing arbitrary repayment schedules and deal tranching in a generalistic fashion. Generalistic? We didn’t limit ourselves to known deal structures while designing and developing; we can easily support the most exotic schedule/tranche structures. Welcome to Credix V2!

Arbitrary repayment schedules

Until now, we only supported bullet repayments. Meaning that the borrower would repay interest-only over xx periods of time and repay the principal in full at the end of maturity.

In reality, there is a wide range of repayment schedules possible: bullet with the principal at the end of maturity, bullet with the principal and all interest at the end of maturity, balloon, French amortization, German amortization, amortization with a grace period, …

The type of schedule is often matched to the cash-generating profile of the underlying assets. A bullet loan might be a good choice for a farmer financing crop seeds; as the farmer can repay its principal when harvesting its crops. Amortization is a good choice for mortgages as interest and principal are repaid along the deal’s lifetime at a fixed sum per month.

When creating a deal on Credix, you can now select the repayment schedule of your choice. Next to the pre-configured two most popular ones (bullet, and amortization) the new version allows for arbitrary repayment schedules. You can thus generate the schedule (expected principal and interest per repayment period) in e.g. Excel and send it to our smart contract through the app.

Arbitrary tranches and waterfalls

Investors come in different shapes and sizes. Some are willing to take more risks than others if they are rewarded with higher returns. The concept of tranching was born to cater to those different risk-reward profiles. Tranching allows splitting up a deal into different parts. If we split the deal into 3 such parts, we call them the senior tranche, the mezzanine tranche, and the junior tranche.

Let’s look at an example of a bullet loan of 1M with an annualized interest rate of 15% and a performance fee (= the fee taken on interest repayments) of 10%:

• The senior tranche is often the largest and is funded by the liquidity pool. Let’s say this tranche makes up 80% of the deal. The expected APY for this tranche is 10.13%. The invested capital is protected by the mezzanine and junior tranches’ principal, and yield, meaning that they lose capital first when defaults of the repayments happen. The senior tranche is thus the tranche with the lowest risk.
• The mezzanine tranche is funded by the underwriters after they’ve done the due diligence on the deal. Let’s say this tranche makes up 15% of the deal. The expected APY for this tranche is 22.5%. The mezzanine tranche is still protected by the junior tranche’s principal and yield.
• The borrower itself funds the junior tranche to stimulate good repayment behavior. Let’s say this tranche makes up 5% of the deal. It can expect all proceeds after the senior- and mezzanine tranches reach their expected returns. In this example, the junior tranche could expect an APY of 40.5%

(Quick sanity check: (0.1013*0.8+0.225*0.15+0.405*0.05) = 0.135 which is indeed the interest after the performance fee (0.15*0.9) )

Depending on the structure and profile of the deal, we can change the sizes and expected returns of the tranches. Furthermore, we can create single-tranche deals (senior only), or go up to 10 tranches.

Another challenge we’ve seen in the market is lockups of investments in more junior tranches. To circumvent this, we have built an advanced feature that allows underwriters to withdraw (part of) their initial investment and/or yield along the deal’s lifecycle if the underlying collateral is behaving well.

Bringing it all together

With the launch of the V2, Credix brings proven TradFi concepts on-chain to handle more diverse and complex credit deals. Investors are able to pick investments according to their risk appetite, and trust the smart contract to handle the repayment flows and tranche waterfalls in an automated and efficient way.

Interested in learning more about Credix? Check our documentation
Interested in joining as an investor or borrower? Start your journey

Over the coming weeks we’ll share more details on the first deals going live on our V2. Special thanks for all the input to our underwriters, LPs and fintechs!