Initial Defi Offering: Chateau Alternative Debt (CHAD.D)

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Chateau capital is excited to announce the first IDO (Initial DeFi Offering) on the platform:

Chateau Alternative Debt, ticker $CHAD.D‍

This article lays out the investment case for $CHAD.D as well as the key details of the offering. There is also a link to the full investment prospectus at the end of this article.

Offering Overview

• Issuer: Chateau Capital Corp
• Preferred Return: 15% APY
• Token Standard: ERC-20
• Offering Size: $10 Million available for Tranche I (New Tranche every month)
• Initial Blockchain: Arbitrum One
• Regulatory Framework: Reg S offering for non-US Investors
• Price: Continuously marked up tracking $1 Invested since Inception
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$CHAD.D offers exposure to Covenant VC's offshore Credit Income Opportunities strategy through Chateau Capital Corp.'s investment in Covenant International Fund SPC, Ltd. 

This strategy provides tax-efficient access for international investors to the U.S. small and medium business lending market.

Covenant's syndicate focuses on businesses with solid cash flow ($500K-$20M revenue, $100K EBITDA) that face difficulties securing traditional loans due to lack of three-year trailing EBITDA growth, despite these loans showing lower default rates than those of larger companies.

$CHAD.D allows investors to use $USDT to invest in a high Sharpe debt asset on-chain and utilize their $CHADD.D tokens within the DeFi ecosystem.

The Case for On-Chain Private Credit

The U.S. private credit market is massive, standing at $1.4 trillion in value and is projected to grow to $2.3 trillion by 2027. Today these markets are only accessible to select investors. Currently, over ⅔ of U.S. private credit is composed of pension funds, foundations/endowments, and wealthy families.

On-chain private credit, removes barriers to entry and allows any international investor to gain access to these otherwise closed off markets.
This demand is evident considering that the total active loans on-chain has increased from $36M to over $607M in just 3 years.

The Investment Case for U.S. SME Credit

It’s important to note that not all private credit is the same. Counterparty risk is the main risk factor when evaluating credit or debt products.

DeFi investors learned this lesson the hard way over the past several years. Several high profile crypto companies imploded following Terra Luna's UST collapse. Alameda Research had over 300M outstanding in on-chain credit which was marked down to 0. More recently a $5M loan on Goldfinch went into in default.

In GoldFinch's case, the counterparty was a motorcycle taxi startup in Uganda, which is an emerging market that lacks sufficient legal safeguards for investor protection. The lesson here is that it is extremely important for investors to consider who their counterparty is before becoming a lender in on chain credit or debt products.

For Chateau Alternative Debt, our counterparty is Covenant International SPC with a solid track record dating back to 2011. All loans are made to healthy small and medium sized businesses in the U.S. These are not speculative startup companies; but rather, cash-flowing U.S. companies with $500K - $20M of revenue.

There are also further safeguards in place to hedge against downside risk:

• Max exposure of 3x EBIDTA for each loan
• No loan comprises more than 1% of the fund to manage concentration risk
• 80% of loans are backed by personal guarantees from the business owner
• U.S. laws safeguarding investor rights in the event of default

Lastly, it is worth noting that these are not highly leveraged companies. As you can see from the diagram above, leverage is a much stronger signal for default rate than loan size. In fact, larger loans are 3x more likely to default than smaller loans. The fact that Covenant BVI engages in a strategy that is focused on small loans to non highly-leveraged companies, leads to a much higher Sharpe ratio than traditional business credit.

The Investment Case for $CHAD.D

The Covenant team consists of Wall Street veterans that have managed a $500M loan syndicate since 2011. This syndicate has yielded 18-21% per year since inception, less than a 1.6% principal loss rate, and consists of 80% institutional capital.

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Now all DeFi investors have the opportunity to access the U.S. Alternative Debt market through this vehicle.
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Summary

$CHAD.D is a rare opportunity to get exposure to a relatively risk-off asset, while also yielding a preferred return that is 3x higher than other comparative on-chain offerings.

Invest in $CHAD.D Today

The Chateau App is now live on Arbitrum One. Arbitrum powers an extremely robust DeFi ecosystem that has amassed over $3.4 billion in TVL.

Non-U.S. investors can enter the app here and connect their wallet to pass KYC via our onboarding partner Quadrata.

For those interested in seeing the full investment prospectus deck, you can access it here: Docsend link.

If you are interested in our future debt and credit offerings, please sign up for our newsletter here.