 "Edtech giant Byju's 'skips' interest payment on $1.2-billion loan")
Byju’s has filed a suit against US-based investment management firm Redwood, challenging the acceleration of a $1.2-billion term loan B (TLB) facility and to disqualify the lender for its “predatory tactics”, the edtech major said on Tuesday. Byju’s also skipped an interest payment of about $40 million on the loan, thus becoming the only Indian start-up to have defaulted on a US-dollar loan.
Byju’s, which filed the suit in the New York Supreme Court, said that contrary to the conditions of the loan facility, Redwood purchased a significant portion of the loan while primarily trading in distressed debt.
Given that legal proceedings are now on in both Delaware and New York, the entire TLB is disputed, the company said in a statement. “As such, Byju’s cannot be expected to and has elected not to make any further payment to the TLB lenders, including any interest, until the dispute is decided by the court,” it said.
TLB is a term loan by institutional investors with the prime goal of maximising their long-term returns. In TLB, borrowers are not required to pay the principal upfront; they can pay a large amount at the end of the loan period.
Byju’s is not the only Indian start-up that has used the TLB route to raise funds. OYO received $600 million in TLB funding in 2021. But, unlike Byju’s, they were rated by Moody’s and Fitch. In case of Byju’s, the loan is a whopping $1.2 billion and it’s unrated.
Additionally, once a company raises a loan, it needs to rate the bonds within nine months. But Byju’s couldn’t do this as its financial results were delayed, according to sources, who also said this prompted the creditors to either seek full or partial repayment of the loan.
“A crisis of confidence, as well as macro stress, may have prompted investors to sell to third parties. The first issue could be the allegation that $500 million was moved by Byju’s out of its US subsidiary. The second may arise from loan covenants, with speculation abound, from filings to financing. We would need to wait for the courts to decide on the matter,” said Siddarth Pai, founding partner, CFO & ESG officer, 3One4 Capital.
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Byju’s in its filing also mentioned that on March 3, 2023, lenders unlawfully accelerated the TLB on account of certain “non-monetary” and “technical defaults”.
“The lenders need to send the interest invoice but it has not come to the company,” said a person familiar with the matter. “Also, the company has told the lenders that the latest payment would be made, and the firm has substantial cash reserves. The company has written to the lenders that it can pay the interest at any time, but they first need to remove the acceleration of the $1.2-billion TLB as well as the litigation in Delaware court.”
According to the Bloomberg data, Byju’s loan was trading at a discount of 35 per cent on the dollar on Tuesday.
“BYJU'S had so far demonstrated remarkable restraint by refraining from utilising the disqualification clause,” said the company in its statement. “In the wake of all these actions, BYJU’S was left with no option but to commence proceedings in New York – the contractually agreed forum – challenging the acceleration. Along with this, BYJU’S has also issued a notice to the Redwood entities disqualifying them.”
Sources in the know were not too surprised by what the TLB lenders have done. “It is a well-known fact that TLBs come with strict riders and governance issues are very stringently looked at. Also these loan terms are highly negotiated and any terms violated or not followed means going against the contract, and they will then look to recoup their investment,” an investment banking source said.
Byju’s is yet to file its 2021-22 (FY22) results with the Ministry of Corporate Affairs (MCA). Other edtech unicorns such as Unacademy, upGrad, Vedantu, PhysicsWallah, and Eruditus have already filed their FY22 results. The company should have filed its annual results with the MCA by September last year.
Byju’s filed its 2020-21 results in September 2022, after a nearly 18-month delay. According to sources, the company would come out with the latest financials soon. They said this is due to multiple acquisitions by Byju's during the financial year and it took time to do consolidation across various geographies. “It is a little cumbersome, but the firm is working hard to finish it soon and doesn’t want to delay it further.”
Byju’s tussle with its investors has lessons for the Indian start-up industry, which had to put sudden brakes on its fast growth due to funding woes. Many like Byju’s aggressively acquired and raised funds via debt route. “Debt investors act very differently from equity investors, especially syndicated debt. Any kind of stress situation in an investee company will see a variety of players converging for their own interests, which may be at odds with management,” said Pai.
Byju's woes are certainly impacting the edtech industry. Ronnie Screwvala, founder, Upgrad, said in a tweet: “Drama with zero content...not even Netflix or HBO will buy it. While sullying India’s name as a great investment destination! Wonder what its erstwhile Board thinks of its fiduciary duties - just asking.”
VC players were also of the view that though the case is now in court, this may impact Byju’s fundraising efforts because a chunk of this will also be used for paying the legal fees.
The firm recently raised Rs 2,000 crore ($250 million) from Davidson Kempner Capital Management, a US-based investment firm, in a structured instruments deal, according to people familiar with the matter. The funds have been raised against convertible notes issued by the company’s tutoring subsidiary, Aakash. Davidson Kempner Capital Management will get a stake in the upcoming market debut of Aakash. This is part of an ongoing $1-billion funding round the firm is raising in a mix of equity and structured instruments at a valuation of $22 billion.