Handling Losses

Losses and defaults are key risks associated with any type of lending. To account for this reality, Kasu has a structured approach to handling such situations. Understanding this process helps Lenders better understand the potential risks and protections in place in the event of losses and default.

An Unrealised Loss event occurs when an End Borrower fails to meet its contractual repayment obligation and is therefore deemed to be in 'default.' When an Unrealised Loss event occurs, it is first reported to the Kasu system. After reporting occurs, losses are applied in a specific order:

1. First Loss Capital (if applicable)

2. Junior Tranche

3. Mezzanine Tranche

4. Senior Tranche

Unrealised Losses therefore reflect a situation where the Delegate has deemed there to be an expected loss which has not yet materialised.

All Lenders who are impacted by the Unrealised Loss event receive non-transferable ERC-1155 Unrealised Loss tokens. These tokens represent the Lender's share of the Unrealised Loss and their potential claim on any recovered funds.

Naturally, an Unrealised Loss lowers the affected parties' lending balance. This adjustment is reflected in the number of Unrealised Loss tokens issued.

The Delegate then initiates recovery actions on non-performing loans, and if any funds are recovered, they are distributed proportionately to Unrealised Loss token holders. After recovery efforts are exhausted, any outstanding unrecovered amount becomes a Realised Loss.

It's important to note that Unrealised Losses don't necessarily mean permanent losses. They represent a temporary impairment that may potentially be partially or fully recovered through the Delegate’s off-chain recovery efforts. This includes exercising a Delegate’s security position over End Borrower’s and formal legal proceedings (if applicable).

For Lenders, this system offers several advantages:

• Transparent process for handling potential and actual losses

• Fair distribution of any recovered funds

• Potential for partial or full recovery of losses

While Kasu's structure and processes, along with Delegates' credit risk structuring aim to mitigate these risks where possible, it's crucial to understand that lending always carries risk.

Understanding how Kasu and Delegates handle losses can help you make more informed decisions about your approach to lending and potential returns relative to your personal risk tolerance and other personal circumstances. Please refer to the 'Risk Disclosure: Senior, Mezzanine and Junior Tranches' in the Important Information Section, along with the Risk Warnings Section, for detailed risk explanations.