Earlier this year, after sharing an update on the upcoming introduction of Notes, we received a lot of interest and questions on how Notes will work. Now that Mintos has become a regulated marketplace, we have updated the answers below with more precise and clear information.
Table of contents (shortened questions):
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- How would the buyback mechanism work?
- What will happen to the existing loans on Mintos?
- What Note principal amount will be paid in the end?
- Will loan extension exist?
- How many loans will be grouped into Notes?
- What if the repayment of the underlying loan is delayed?
- How will grace periods and pending payments work?
- What information will be in the prospectuses?
- Will there be a lot of documentation because of ISIN?
- Are the ISIN only internal or will they be registered?
- When will Mintos start the transition to Notes?
- What happens with extensions and late payments in crisis?
- Will there be the same payback standard as for bonds?
- Do you think it’s enough to update the prospectuses once a year?
- How can investors have the time to read all prospectuses?
- How will the accrued interest be handled?
- Can Mintos tell more about the changes in the ownership?
- Will my money be protected from any government authority?
- Do Notes come with the same protection as bonds?
- Will legal entities need LEI code to invest in Notes on Mintos?
1. “How does the buyback mechanism work? Do Notes have some kind of buyback obligation?”
All Notes are backed by loans with a buyback obligation. The buyback mechanism for each lending company is described in detail in the base prospectuses.
2. “What will happen to the old structure of loans that are still serviced? Let’s say someone brought a 4 year loan. Under which guidelines will this loan be dealt with? How will the interests be paid?”
Notes will be gradually introduced on a lending company basis. Mintos will cease selling assignments for each lending company and start selling Notes. From this moment, the existing loans will gradually amortize – principal and interest will be repaid in accordance with the existing contractual terms. All existing assignment agreements will stay in force. For example, if an investor has invested in a loan a month before we introduce Notes, the investor will be able to keep the respective loan in their portfolio until it is fully amortized.
3. “What Note principal amount will be paid in the end?”
The payments for the Note will be contingent on the payments from the underlying loans and will be reflected on the Note schedule, which is a summed schedule of the all underlying loans’ repayment schedules.
4. ”Will loan extensions still exist? In a bond market the Note holders have to agree to an extension.”
Extensions will exist in a similar way as now. The terms and conditions of Notes enclosed in the prospectuses will include the right for the lending company to extend the loan, and relevant extension limits. Relevant provisions will be described in the prospectuses.
5. “How many loans will be grouped into Notes?”
To create a Set of Notes, 6-20 loans with similar properties are pooled together. The experience investors currently have on the marketplace will not change.
6. “If one/several underlying loans delay payments, what happens? Partial payments? Loan extensions?”
Investors earn returns from the cash flows of the loans underlying the Notes. If an underlying loan is late, Note payments related to this specific underlying loan will also be delayed. If there is a buyback obligation, the lending company is obliged to buy back loans that are more than 60 days late, together with any interest. Notes will fully reflect the payments and credit risk of the underlying loans.
7. “How are delays (either from borrowers or from the Notes’ originator) going to work: please explain how grace periods and pending payments work?”
Not much will change from the current setup and current credit risk exposure as the payments for Notes are contingent on payments from the underlying loans. Grace period and pending payments will work the same as before.
8. “It would be nice to have a simplified outline with the most relevant information from prospectuses. If FCMC does not impose/suggest a model to be followed, you could draft one and ask for inputs from customers.”
The content of prospectuses is defined by EU regulations. They include significant parts like descriptions of risks, transactional overview, descriptions of the major parties participating in the issue, overview of transaction documents, and terms and conditions of the Notes. In addition to the prospectuses published and available to investors, investors will also have the current marketplace dashboard interface, containing all major business terms of the instrument.
9. “If each Note has its own ISIN, that would create a lot of tracking numbers and documentation. How do you see investors keep up with that?”
Each prospectus will cover a specific lending company’s loans in a specific country. For example, Mogo Moldova will have one prospectus, Mogo Latvia will have a different prospectus. There won’t be major changes to the investor experience when it comes to the amount of documentation. Currently, each loan on the Mintos marketplace has its own Loan ID. For Notes, there will be an ISIN code instead. Similar to now, investors will be able to generate account statements, portfolio summary and other post trading documents within their profile. We will add some fields to fill in information required by the regulatory framework, yet these additions will not make investing more complex.
10. ”Are the ISIN only internal or will they be registered?”
Each individual international securities identification number (ISIN) will be provided by an external securities depositary and created in accordance with industry and ISO standards.
11. ”When will you start with this transition? Before the Investment Firm license is granted like competitors are doing?”
Along with Mintos becoming regulated, the transition to Notes has already started. To ensure this transition is as smooth as possible for investors, we will be gradually replacing the current system of investments in claim rights. We will do this by decreasing the number of claims and increasing the number of Notes available for investment. The first offering of Notes is expected to launch in the coming weeks.
We anticipate this transition period to be no longer than 6 months and we’re eager to finalize the transition even sooner. So by the end of January 2022 at the latest, we expect to offer investments in loans in the form of Notes only. Any loan investments that have been made as claims will be held in investors’ portfolios until they amortize.
12. ”Can you outline the details of extension and late payments in case of crisis and lending company defaults? The interest would accumulate, but wouldn’t represent the expected amount of returns. How do you see the process here?”
Extensions and late payments will work in a similar manner as they do now – they will be an embedded feature in Notes and described in the Prospectuses.
13. ”You compare Notes to how bonds are paid back. Most bonds you get the principal back in the end. Will this be the standard here too?”
There are different ways how bonds can be amortized. In the case of Notes, it depends on the underlying loan amortization type. As Notes will reflect the cash flow of the underlying loans, the payments for Notes will be contingent on the payments from the underlying loans and will depend on their schedule.
14. ”Do you think Note security is covered by checking and updating the prospectus on a yearly basis?”
Each prospectus will be updated once a year, according to the requirements of the EU and Prospectus Regulation. However, if there are substantial changes, a supplement for the prospectus will be created and made available to investors.
15. “How can an investor get the time to read all the prospectus for each loan if they invest in an automated form?”
There won’t be a prospectus for each loan or for each Set of Notes. One prospectus will cover Notes for a specific lending company in a specific country and will be valid for one year. For example, Mogo Moldova will have one prospectus, Mogo Latvia will have a different prospectus. There will be a specific document for each Set of Notes, which is called Final terms. The Final terms will cover only specific information about each Set of Notes that is not known at the moment of the creation of the prospectus (e.g. the interest rate and term of the Set of Notes). We urge investors to learn more about the lending companies that are included in their strategies. Today, investors should review the relevant assignment agreements before activating a strategy. In the future, they should review the relevant prospectuses instead. So while the format may be different once we become licensed, the recommended steps for investors are not changing.
16. “For me the biggest question is: how is the interest handled in case of the Secondary Market transactions, especially say when the loan is more than 30 days late:
– The seller gets accrued interest from the buyer?
– The seller only gets the Note value, and not the accrued interest?”
The experience for investors will not change. The seller is selling the Note principal and future payments, but will keep already accrued interest.
17. “At the moment, lending companies are just servicing the loans on behalf of Mintos investors. Lending companies don’t own the loans. With the new system, investors lend money to lending companies with terrible balance sheets. But maybe Mintos can tell us more?”
Before Notes are issued and sold to investors, the lending company sells loan receivables, minus the skin in the game, of the loan to the issuer, which is a Mintos group special purpose company. This leaves the lending company with only the skin in the game as part of the loan principal value. As of the moment the loan receivables are sold, the lending company continues just to service the loan on behalf of the issuer. If the lending company experiences problems, including bankruptcy, Mintos on behalf of the issuer would be entitled to enforce its rights. These rights include engaging a backup servicer to take over the loans outstanding and backing the issued Notes. The prospectus will describe the transactional setup for the Notes to be issued under the respective prospectus and the risks associated with them.
18. “The time Mintos will be regulated, Notes will replace the current agreement if I understand well. Will Notes be like bonds in the stock market? If a company that has issued a Note goes bankrupt, will my money be protected from any government authority? Will Mintos work like a stock exchange for these notes?”
Mintos will be acting as an investment firm managing the trading platform (marketplace), where trades, operations, and the holding of Notes will take place (more or less the same role Mintos had before). If the Notes issuer, a Mintos group company, becomes insolvent, this means the event of default of Notes under its terms. The appointed receiver will manage assets and debts of the issuer within the insolvency procedure, so the receiver will continue to collect due sums from the lending companies (loan issuers) under the acquired claims (loan receivables) and pay them to the Noteholders on a limited recourse basis. Notes will constitute general, direct, and unsecured obligations of the private issuer, which means no third party, including any governmental authority, has guaranteed their performance.
19. “If the issuer of a Note defaults, for example here in Greece if a bond defaults you will be protected by the government for 30 000 per person at each Investment Firm. That means that if a bond here in Greece defaults and costs 30 000 you will take all your sum back. Is that the same with these Notes?”
The national investor compensation scheme established according to the requirements of EU Directive 97/9/EC applies to the investment firm, not to the performance of an investment. If Mintos fails to provide investment services, retail investors are entitled to a compensation of 90% of the irrevocable loss, up to a limit of €20 000.
The investor compensation scheme does not compensate investors for losses resulting from:
- Changes in the price of an investment
- The default of a borrower, lending company, or issuer
- The lack of a market for the purchase or sale of an investment
The investor compensation scheme does not apply to investments in loans that are made by way of assignments. It only applies to investments in Notes.
20. ”Do these changes mean that investors who invest through a company will need a LEI code?”
For investors who operate on Mintos via legal entities, a LEI code will not be required to buy or sell Notes. If Mintos decides to offer other investment opportunities, such as ETFs, legal entities will need a LEI code to invest. For more information on LEI codes, please see ESMA information.
Investors should remember that underlying risks of investing in Notes will still remain the same, as always.
