Mint explainer: What’s Byju’s beef with its lenders?

Byju’s in its plea has classified its TLB lenders led by Redwood Capital Management as ‘predators’ and has moved to disqualify Redwood as a lender.

The latest development comes after Byju’s filed a lawsuit in Delaware on May 8 and asked the court to take control of its US unit, Byju’s Alpha. The edtech firm is now battling its US lenders on two fronts.

How did this happened?

Byju’s has raised $1.2 billion in debt through Byju’s Alpha in November 2021 for its international expansion, which includes acquisitions. However, the company’s relations with its creditors soon began to sour.

Like any loan agreement, the agreement between Byju’s and its lenders contained several conditions. One of these was that Byju’s would have to file its audited financial statements on time. However, the company filed its FY21 statements in September 2022 after a delay of 18 months. It is yet to file its audited financial statement for FY22, which was also due in September 2022.

This put Byju’s in breach of the terms of the loan, but the company said it was only a “technical default” and that it was making regular interest payments.

This changed on June 5, when it did not make a $40 million interest payment to lenders from Byju’s Alpha, thus defaulting on a $1.2 billion loan.

Why now?

On June 6, Byju’s said it had received a notice from lenders to repay the loan in full. “They (lenders) issued a notice demanding immediate payment of the entire amount under TLB, noting that this alleged expediency was under challenge before the court,” the company said.

Initially, both the lenders and the company negotiated various commercial terms. TLB was raised when global interest rates were low. Since then, several central banks have raised rates. Byju’s was offering higher interest rates and partial repayment on its TLBs to pacify lenders following its “technical breach”. Case against Byju in May.

What did the creditors allege in the court?

US media reported that lenders Byju’s sued in Delaware And asked the court to control Byju’s Alpha.

“The lenders have claimed that because of a default earlier this year, they have the authority to put their representative, Timothy R. Pohl, in charge,” Bloomberg cited sources as saying.

The creditors also alleged in the court that Byju’s took $500 million from its US branch. Byju’s defense was that “the transfers were fully in compliance with and did not violate any of the terms of the credit agreement and rights and responsibilities agreed upon by the parties.” This, it said, was because it had raised $1.2 billion for specific purposes. And was using the money for these purposes.

However, it appears that the lenders have been motivated to “accelerate repayment” of the entire loan. Byju’s challenges this “acceleration”.

What is Byju’s defence?

The company has not commented on whether it believes it has defaulted on the loan. A Byju’s spokesperson simply said that the company is “constrained in releasing the payment due to the reasons set out in the press release”.

These reasons include “illegal acceleration of loans on the basis of alleged technical defaults, failure on the part of the loan agent to provide interest invoices and calculations, and refusal to provide list of lenders and their holdings to perform KYC”. Applicable Law Byju said. It added that it has written to lenders that “interest will be paid provided the acceleration and Delaware litigation is withdrawn”.

Byju’s in its defense also suggested that the lenders were in breach of the loan agreement as they failed to identify themselves for KYC purposes. This may be significant in the context of the company’s allegations against Redwood.

What is the company alleging?

Byju’s said Redwood Capital Management and other lenders are engaged in ‘predatory tactics’. It said it “moved to disqualify Redwood, which, contrary to the terms of the TLB, purchased a significant portion of the loans while trading primarily in distressed debt.” , like its competitors.

However, it has said that Redwood “continually increased its exposure by acquiring a substantial stake in TLB with the intention of making windfall profits” while also participating in a smear campaign against Byju’s. It said on one hand the loan agent refused to provide identification. of TLB lenders to Byju’s.

“The agent of the TLB lenders has also refused to provide the identity of the TLB lenders to Byju’s – something Byju has a right under TLB. In addition, the TLB lenders have repeatedly taken measures to tarnish the reputation of Byju’s. At the same time, Redwood – a lender known to primarily trade in distressed loans – steadily increased its exposure by acquiring a sizeable stake in TLB with the intention of reaping windfall gains,” said a Byju’s spokesperson.

Redwood Capital Management officials were not immediately available for comment Tuesday afternoon.

What is the likely outcome of all this?

Byju’s decision to intensify its fight with lenders comes amid talks of a possible $700 million equity fundraising by the company. It also took out a structured loan of about $250 million from Davidson Kempner in May, agreeing to repay the money with the proceeds of an initial public offering by its subsidiary Aakash Educational Services.

Byju’s said it looked forward to resolving the issue quickly and “this disagreement with the lenders does not have any significant impact on its operations”.

However, the public spat has created panic in India’s startup ecosystem. Responding to Byju’s default on social media, Ronnie Screwvala, founder of higher education platform Upgrade, said the episode was “maligning India’s name as a great investment destination”. He said, “I wonder whether [Byju’s] The preceding board takes care of their fiduciary duties.”

Updated: June 06, 2023, 06:21 PM IST