Tugende, a venture backed company lender based in Uganda, and Warbler Labs, the company building Goldfinch, a decentralized lending protocol, have agreed on a loan restructuring plan that could lead to the recovery of the $5 million loan that the East African motorcycle taxi financing company spent months previously defaulted.
Warbler Labs reached an “agreement in principle” for restructuring (an arrangement that lays the groundwork for a contract) with Tugende and its backers, including a strategic investor, according to an investor update.
The terms of the agreement have not been made public. Tugende co-founder and CEO Michael Wilkerson declined to provide details on the restructuring plan, promising more information in the coming weeks. “There is a larger transaction and a strategic investor coming together,” he said.
The planned restructuring comes after Tugende defaulted on the $5 million it withdrew from the Goldfinch Protocol in October 2021 for its operations in Kenya. Tugende was aware of the monthly interest of $53,400 until May this year, five months before the principal became due. As of June, it went bankrupt, causing panic in the goldfinch community.
Goldfinch is an a16z-backed decentralized lending protocol that allows entities in emerging markets to access crypto lending without having any crypto ownership at all. This is unlike most DeFi platforms that require borrowers to stake crypto assets that exceed the value of the desired loan. Goldfinch’s protocol plan is intended to make it easier for non-US entities such as Tugende to access off-chain collateralized funds. For example, Tugende pledged all assets, including bank accounts, as collateral.
The Bay Area startup has built pools of capital, including “senior” investing in a diversified portfolio, allowing companies like Tugende to get funding from investors under the protocol.
But lending to companies, especially those that normal financial institutions are not so keen on, comes with risks, even if Tugende’s bankruptcy is Putter’s first major setback since its launch.
Attempts to recover the loan
Meanwhile, there is hope after investors learned that the parties involved have reached an agreement on a restructuring plan.
“Warbler Labs has signed a term sheet with Tugende agreeing in principle to a comprehensive restructuring plan that could result in a material recovery for the Goldfinch Senior Pool,” the latest investor update said, in a change of tone from the previous message when it indicated that a restructuring could lead to ‘losses possibly amounting to the entire amount of the loan’.
“If the restructuring is successfully completed on the stated terms, the potential net write-down of the NAV of the senior pool will occur [net asset value] as a result of Tugende’s bankruptcy, could be reduced from approximately 3.95% to less than 0.79%,” said Warbler Labs. In its July update, the company said the net asset value of its seniors pool was likely to be depreciated by 3.95% in the four months through October.
Warbler Labs expects the restructuring and first payment to occur before the end of the year, but was quick to add that it “will be based on current facts and circumstances, including legal work and any necessary regulatory approvals… However, it may be postponed due to unforeseen issues that may arise.”
“This is the first loan restructuring of this kind on the Goldfinch platform. Warbler Labs and Goldfinch will keep the community and investors informed of the recovery efforts and remain committed to transparency and accountability,” Warbler Labs told TechCrunch.
The problems for Tugende started late last year, when Warbler discovered that the financier had breached the loan-to-value covenant, which means that “the outstanding loan must not exceed 80% of the value of the collateral for the loans.’ It also violated the ‘tangible net worth to total assets’ agreement which required Tugende to ‘maintain a tangible net worth amounting to at least 20% of their total assets’ to avoid over-lending.
It was during Tugende’s quarterly reporting in December when Goldfinch also discovered that the lender had diverted $1.9 million of the loan meant solely for the Kenyan entity to support its “struggling operations” in Uganda. This was contrary to the established agreements and happened without the permission of the Goldfinch community. Warbler notified investors of this breach in February.
Warbler then spent the next six months supporting Tugende’s fundraising efforts to resolve the covenant breach. It then became clear that “the situation in Tugende Uganda (i.e. the affiliated company) is much worse than we initially led to believe… In large part due to macroeconomic factors (particularly inflation and rising energy costs) and certain management errors. (mainly an aggressive headcount increase in 2022), Tugende Uganda has performed poorly over the past twelve months and its balance sheet has deteriorated,” Warbler Labs said in their July update to investors.
Tugende launched its motorcycle taxi financing business in Uganda in 2012 and expanded to Kenya in 2019. It used the loan to “grow its loan portfolio and create the profits necessary to repay the loan,” a plan that Warbler Labs said did not materialize. . The loan is part of the $17 million debt it raised in 2021.
The company raised undisclosed pre-Series B funding last year, backed by a number of new and existing investors including Toyota Tsusho venture arm Mobility 54, Partech Africa, Enza Capital, Global Partnerships and Women’s World Banking Capital Partners II. It has raised $61.8 million in grants, debt and equity financing to date, according to Crunchbase.