Insolvency, bankruptcy or other similar adverse events may significantly influence or even dismiss the ability of the lending company to service issued loans and to execute the undertaken buyback obligation and repurchase with respect to the assigned loan receivables. This means that if the lending company experiences significant problems, the lending company may not be able to transfer the underlying loan repayments from the borrower or make payments of buyback price or repurchase price, which would mean that investors might not be able to receive payments.
On Mintos, there are two types of investments: investments by way of concluding assignment agreements and investments made by investors purchasing Notes – financial instruments which are asset-backed securities backed by loan receivables of the lending companies.
With respect to both types of investments, there can be two types of investment structures – direct and indirect. You can select which structure you would like to invest in by using the Investment structure filter on the Primary and Secondary Market. You can also find which investment structure a lending company uses on Mintos on the Lending Companies page.
If a lending company goes out of business, what happens next can vary depending on the investment type (assignments or Notes) and the investment structure (direct or indirect).
Investments in loans by means of assignment agreements
Direct structure
When you invest in a loan, you are buying claim rights against the borrower based on an assignment agreement. Borrowers make payments on their loans to the respective lending company, and in turn, the lending company and Mintos distribute payments to investors.
In the event that a lending company fails or becomes insolvent, assignment agreements would remain in place and be unaffected. Mintos as a representative of the investor would take over the management of the claim from the lending company, or implement another strategy which would be to the best benefit of the investor.
Indirect structure
Under the indirect structure, the claim assigned to the investor is against the lending company and not the borrower. The loans issued to the borrowers are pledged to the respective Mintos company to secure the obligations of the lending company under the loans that are assigned to the investors. If the lending company becomes bankrupt, the Mintos company which provided the loan to the lending company in the indirect structure takes action as the creditor of the lending company to achieve recovery of the debt for the benefit of the investors.
Investments in Notes, financial instruments backed by loans
Direct structure
In case of a direct structure for Notes the lending company issues loans to borrowers, and then sells the loan receivables to the issuer to form pools of loan receivables that will back the Set of Notes of the issuer. The investors purchase Notes backed by loan receivables, but the issuer purchases the loan receivables from the borrowers, the lending company continues to provide loan servicing of the issued loans. Each time a borrower makes repayments to the lending company, the lending company transfers the funds to the issuer, which in turn makes repayments under the relevant Set of Notes to the relevant investor through Mintos.
Insolvency or bankruptcy might significantly influence or even dismiss the ability of the lending company to service issued loans and to execute the undertaken buyback obligation and repurchase towards the Issuer. This means that if the lending company experiences significant problems, the lending company may not be able to transfer the underlying loan repayments from the borrower or make payments of buyback price or repurchase price to the issuer which would mean that the issuer would not be able to make payments to the investors. The issuer has the right to appoint a backup servicer, who would take over the servicing of the loan receivables. Additionally, certain loan receivables owned by the lending company are pledged in favor of the issuer providing additional security in case of insolvency of the lending company. The issuer however has the risk of having to prove to the administrator, receiver and/or other parties that the loan receivables and the borrower payments towards them are not to be included in the assets of the lending company that are available for the general pool of creditors.
The full description of the Notes setup and possible risks is described in each respective Notes programme base prospectus.
Indirect structure
The lending company issues loans to borrowers, then requests issuance of a loan from a Mintos group entity which is a special purpose entity, which in turn sells the relevant loan receivables to the issuer to form pools of loan receivables that will back the Sets of Notes of the issuer. The issuer issues a Set of Notes corresponding to these loan receivables to investors on Mintos.
Insolvency or bankruptcy might significantly influence or even dismiss the ability of the lending company to repay the loans issued by the special purpose entity, and among other things to execute the undertaken buyback obligation and repurchase obligations. This means that if the lending company experiences significant problems, the lending company may not be able to make payments, which would result in the issuer not being able to make payments to the investors. The special purpose entity has the right to appoint a backup servicer, who would take over the servicing of the loans issued to the lending company. Additionally, the special purpose entity takes collateral/security over loan receivables and/or other assets of the lending company
In case of insolvency of the lending company, there is a risk that there are no sufficient funds to receive full recovery from the lending company, as well as there is a risk that the administrator of the lending company takes action to claw back from the special purpose entity the amounts paid if by law the administrator is entitled to challenge any payments. The issuer, the special purpose entity, and/or Mintos would then have to take legal actions to protect their interests in the payments received that are clawed back and argue against the position of the administrator in judicial proceedings, which could be long and costly, and no assurance could be made of its successful outcome.
The special purpose entity is established for the sole purpose of issuing loans to the lending company as well as other lending companies that Mintos cooperates with and selling those loans to the issuers for issuance of financial instruments as well as directly to the investors on Mintos when the investors make investments by way of assignments.
The full description of the Notes setup and possible risks is described in each respective Notes program base prospectus.
You can find more information about our approach to dealing with lending company issues on our blog.
We encourage investors to read the Disclosure of risks before making any investments.