Since the launch of Envestio crowdinvesting platform we have been constantly receiving questions about how safe the investments are, and what is the legal protection of investors in case of borrower’s default. Although, some information is available in different sections of Envestio website, we feel that there is a need to summarize it in a more concentrated format using this article.
In addition, the article provides a detailed description of how exactly investment repurchase (or buyback) guarantee works in an improbable case of borrower’s default.
Let us start with some terminology. Currently, at Envestio there are two types of projects available to invest in – secured loans and subordinated loans:
“Secured debt” status means that besides providing full information about the business venture and concluding necessary agreements, the investment project owner has provided Envestio with an additional legal insurance, i.e. mortgage, mixed collateral, personal guarantee.
“Subordinated debt” status means that all financial and legal information about the project has been submitted to Envestio and the essential agreements concluded, but no additional guarantee is legally arranged.
Then, many questions are being asked about Envestio buyback or repurchase guarantee. Here is what Envestio FAQ section says:
What if I change my mind? How does the buyback guarantee work?
Envestio buyback (or repurchase) guarantee means that any Envestio participant at any moment can sell an investment from his or her investment portfolio back to Envestio and instantly receive invested money back to his or her investment account. Since the funds, gathered via Envestio portal, constitute a certain share of total financing that is attracted to specific project, besides traditional funding from banks, Envestio is sufficiently capitalized to execute any buyback immediately.
Cost of performing buyback is calculated and shown to Envestio participant in Envestio personal area.
Please note that in some cases cost of buyback can account to substantial percentage of invested amount.
How does it work in reality, and how secured debt differs from subordinated debt? Here is an example:
- Envestio participant invests EUR 1000 in a project that closes on November 30, 2018. Project assumes monthly interest payments.
- At any moment before 31/11/2018 it is possible to sell back the investment share to Envestio with 5% fee charge, i.e. for EUR 950. All interest payments, which are already received, remain in investor’s possession. This condition is the same for both secured and subordinated loans.
- In case the borrower does not repay the principal after 31/11/2018 the event of technical default takes place. After that the borrower still has 5 working days to settle the debt without legal proceedings. If this is not done, then the delay turns into standard default and Envestio, with a support of a leading Estonian debt collector agency, starts a legal process against the borrower, including execution of all guarantees that were provided.
- Investor, who invested EUR 1000 in a secured debt project, gets back 80% of the investment principal, which is EUR 800, on the next working day after the event of standard default has taken place. For the remaining 20% there is a choice: instantly get back half of this amount or wait until the debt is recovered from the borrower. As a result – at least 90% of the investment is fully secured.
- Investor, who invested EUR 1000 in a subordinated debt project is supposed to wait until the debt is recovered from the defaulted borrower using available legal instruments.
In order to provide more comfortable investing experience for our participants Envestio is conducting negotiations with all owners of “subordinated-type” investment projects aimed at converting those into “secured-type” loans.
At the same time, we would like to emphasize that irrespectively from the current type of the active projects (secured or subordinated debt), the investment project owners have passed a detailed check and the event of their default is highly unlikely. Using the internationally accepted credit rating scale (https://en.wikipedia.org/wiki/Credit_rating) Envestio would characterise these borrowers having a rating somewhere between BB and BBB.