Credix and Transfero Prime teamed up to allow existing and new Prime clients (consisting of accredited investors and family offices) to passively invest in debt financing of credit fintechs in Latin America, today yielding a stable 12% APY.
To understand the new product, you need to comprehend how the Credix platform works. The fast-growing company has created a way for investment funds to invest in debt obligations of fintechs which are tokenized and distributed to investors, including Transfero Group. Going forward, Transfero Prime is proud to be the first asset providing its clients access to the Credix liquidity pool.
This market has been growing exponentially in recent years. According to research by the Brazilian Digital Credit Association (ABCD) and PwC Brazil, the volume of credit Brazilian fintechs originated was R$12.8 billion last year, double that of 2020 and almost five times the volume of 2019.
Chaim Finizola
This impressive growth requires not only investment from existing banks and funds but also from high net worth individuals and international investors, who today have difficulty to access these credit opportunities, says Chaim Finizola, co-founder of Credix.
Liquidity pool for credit
Most often a regular debt capital market structure is used, similar to how FIDCs are structured. This includes senior, mezzanine and junior tranches. In this setup, the senior tranche has the lowest risk, with the lowest return because it is protected by more junior tranches in case of defaults.
A capital cushion is built into the securitization company holding the loans and is depleted first if a default happens. In the event the cushion does not cover the defaults, the junior tranche of the FinTech is affected. If additional defaults occur, the mezzanine credit funds are impacted before senior investors would feel any losses. However, to protect against any defaults, protective covenants are defined that cut off any additional capital supply to FinTech if loan losses reach a certain threshold. To-date, there has been no breach of covenants so far.
Unlike deal-by-deal structures, Credix allows liquidity providers in its liquidity pool (LP) to diversify over all senior tranches on the platform. Thus combining the lowest risk tranches in one on-chain tokenized fund, reducing the risk and exposure to one asset even more.
To invest in the liquidity pool, the investor today must deposit USDC — the most regulated stablecoin in the market — in the Credix liquidity pool, receiving back a liquidity pool token, representing its participation in the pool. This way liquidity pool investors contribute to the financing of the fintechs that receive the USDC, convert it in BRL and originate loans to their customers. The interest repayments of these loans by the fintech is what generates the yield for the liquidity providers and the junior investors.
Transfero will invest in the liquidity pool and, in return, will receive the “Liquidity Pool Token”. At some point, says Chaim, the token can be exchanged on the secondary market. But at the moment the LP Token only shows the investor’s participation in the pool.
According to Finizola, the financial return today is around 12% per year on USDC, which can slightly vary depending on the composition of the fintechs deals on the platform, although 12% is their current target yield.
The structure is similar to regular credit facilities, but it has the flexibility of smart contracts and tokens for both sides. This means that those who choose to buy the liquidity pool token get a transparent view of what happens in all parts of the deal and how their money can be invested. Facilities on the Credix platform are called ‘deals.
Before the senior tranche of a deal appears in the liquidity pool, Credix does an in depth due diligence of the fintech and its loan portfolio and will structure the deal in three tranches, being the first loss for the fintech. The next buffer is taken up by specialized credit funds that are actively investing, perform extensive analysis on the loan quality and the deal structure and invest in the mezzanine tranche, yielding higher than the senior tranche but also slightly riskier.
“This way, liquidity pool investors can invest in a passive way, diversifying over different senior tranches, with the assurance that every deal has gone through a thorough due diligence process performed by the credit funds on the asset and loan quality and the deal structure. Additionally, by having the first loss taken up by the fintech, also their incentives are aligned.’’ says Chaim.
Connecting DeFi to real assets
The Credix LP Token provides participation in a tokenized credit fintech bond. These bonds are backed by an overcollateralized loan book, pledged to Credix’ local securitization company. Thus, the generated returns for the investors come from real world assets, in this case auto loans, student loans, SME loans and many others. This is very different from many DeFi applications that have surged over the last couple of years, where it hasn’t always been clear where high yields were coming from.
The executive points out that with the growth of DeFi, there has been the popularization of crypto assets that are used to provide unsustainable returns.”The remuneration is done by issuance of new tokens, throughairdrops That wasn’t sustainable; the value had to come from somewhere”, Chaim said.
Speed is a blessing for fast-growing fintechs
For investors, the tokens offer efficiency and new investment opportunities, for the fintechs it offers new ways of raising debt in a more agile and flexible way. In competitive markets for emerging market fintechs, financing has become a real challenge. In that sense, Credix comes at the right time to support further growth of the ecosystem.
“There are more than 500 credit fintechs in Brazil, and all of them are looking for funding”, says the executive. He recalls that there is still a big barrier for Brazilian fintechs to access international capital and that tokens are an innovative and efficient solution.
“Financing through Credix is quite straightforward. Once the fintech goes through the onboarding and is considered eligible, it structures a facility with the local Credix team. This deal then appears on the platform for the credit funds to analyze at the same time. As soon as a credit fund is willing to take the mezzanine tranche of the deal, the senior tranche is opened up and automatically added into the liquidity pool. This has proven to be a much faster and easier way for fintechs to raise debt capital.”, says Chaim.
“Besides the access to capital for the fintechs, there is also an important socioeconomic impact, as tokens can bring capital to fintechs trying to help businesses, students, and people that can’t always access commercial banks”, Finizola comments. It’s the next wave of crypto and DeFi innovation, and it’s here to stay.
