Losses and recovery
A loss reaching the tranche accounts reduces Junior first. Senior absorbs the part that exceeds Junior's remaining value. Recovery adds restrictions while an incident is handled. It does not reverse the loss or promise repayment.
The loss waterfall
For a recognised loss L reaching the tranches and Junior value J:
Junior loss = min(L, J)
Senior loss = L − Junior lossRemaining locked profit can absorb a NAV decline before it reaches the tranche accounts. See profit smoothing.
Illustrative starting values: 80,000 USDC Senior and 20,000 Junior. Each row is an independent scenario, with no locked profit remaining.
| Recognised loss (USDC) | Senior remaining (USDC) | Junior remaining (USDC) |
|---|---|---|
| 5,000 | 80,000 | 15,000 |
| 20,000 | 80,000 | 0 |
| 25,000 | 75,000 | 0 |
Ordinary loss and incident
A small loss can be an ordinary negative period. A loss exceeding the configured incident threshold, a loss reaching Senior or an impaired position can put the vault into Recovery.
An impairment mark reduces the value recognised for a troubled position. For example, a position previously valued at 10,000 USDC might be marked at 4,000 while the recoverable amount is investigated. That records reduced value. It does not mean the vault has received 4,000 in cash.
Restrictions in Recovery
Recovery stops deposits and new allocations. Some exits can proceed if their funding conditions hold. Junior still needs enough coverage. A frozen condition stops new funding when Senior is impaired or conservative withdrawal valuation would put Senior at risk.
USDC already funded is different from an unfunded request. Read the request's state rather than assuming every withdrawal action is either available or blocked together.
How returned value is allocated
Positive results first restore outstanding Senior impairment. After that, qualifying principal recovered from impaired positions can restore Junior's tracked incident losses. Remaining gain follows the ordinary premium split.
Illustrative starting point: Senior has 5,000 USDC of recorded impairment and Junior has 20,000 of tracked incident losses. Compare two independent cases. Ignore profit-unlock timing and rounding:
| Value recognised | First 5,000 USDC | Remaining 3,000 USDC |
|---|---|---|
| 8,000 of ordinary income from healthy positions | Restores Senior impairment | Follows the ordinary gain split. It does not first repay all Junior incident losses |
| 8,000 of qualifying recovered principal | Restores Senior impairment | Restores 3,000 of tracked Junior incident losses |
A higher accounting mark and actual cash received are different events. The implemented recovery classification determines which restoration rule applies.
Returning to Active
The admin can resume the vault after every impaired leg has been retired and Senior impairment is zero. Retiring a leg requires it to be empty and have no pending external action. Retirement can follow recovery or a write-off.
Any Junior incident loss still unrecovered when the vault resumes remains realised. Resuming Active does not promise that Junior has been made whole.
Settlement
The admin can put an Active or Recovery vault into Settlement to wind it down. Ordinary deposits, new withdrawal requests and normal withdrawal funding stop. The program fixes tranche entitlements and share supplies for settlement, then distributes recovered cash Senior first, up to its entitlement, before Junior.
An entitlement is the amount the settlement accounting aims to pay. Available cash can be insufficient. For example, with entitlements of 80,000 Senior and 20,000 Junior, distributing 50,000 pays Senior 50,000 and Junior zero. A later 40,000 distribution adds 30,000 to Senior and 10,000 to Junior.
In the app, Collect converts your share tokens into a settlement claim and pays the amount currently allocated to it. The claim remains after that payment, so you can collect again following later distributions. Share tokens remain transferable until converted into a claim.
For an existing withdrawal request, cancel its unfunded portion to recover the shares for settlement. An already funded USDC amount remains a separate claim. Settlement is a different process from repeatedly pressing Complete on an ordinary request.
Review liquidity and permissions alongside these rules.