Byju’s  default could spark lender action

In a statement on Tuesday, the country’s most-valued startup said it would not pay any further interest on the Term Loan B (TLB) until a US court decided on its petition against some of its lenders, including Redwood Capital Management Llc.

Byju’s said its agreement with lenders allows it to disqualify distressed debt investors such as Redwood and also disqualify competitors from buying up the TLB debt.

“Byju’s has taken the decisive action to file a complaint in the New York Supreme Court to challenge acceleration of the $1.2 billion TLB and to disqualify Redwood Capital Management, who, contrary to the terms of TLB, purchased a significant portion of the loan while primarily trading in distressed debt," the statement said.

TLBs are senior secured debt with higher interest rates. They are typically used by companies to fund acquisitions and are often structured with covenants and terms based on the borrower’s creditworthiness.

The company attributed its action to a series of “predatory tactics" by lenders led by Redwood. Byju’s said these included threatening to seize the management of its US unit Byju’s Alpha Inc. and demanding it make early repayments.

“Given that legal proceedings are now on foot in both Delaware and New York, it is clear that the entire TLB is disputed. 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," the company said.

Byju’s will remain open to discussions with lenders and “is ready, willing, and able to continue making payments under the TLB if the lenders withdraw their ill-conceived actions and honour the terms of the agreement", the company said.

Following the default, the TLB crashed from 79 cents to a dollar to 65.5 cents, according to Bloomberg data.

The development is likely to have wider implications on Byju’s and could trigger action against some group entities as well, lawyers said.

“Typically, a US TLB default would result in lenders accelerating the loans and taking enforcement action," said Joseph Jimmy, partner, law firm Trilegal. Under loan agreements, lenders can accelerate loans—or demand that the borrower pay up the entire sum immediately—under certain conditions.

In Byju’s case, lenders accelerated the $1.2 billion loan on 3 March after the company failed to file its FY22 statements due in September, a breach of a loan covenant. The company also failed to get its loans rated, causing another breach.

Lenders sued Byju’s in Delaware on 8 May and asked the court for permission to take control of Byju’s Alpha, alleging a sum of $500 million was missing from the company.

“It (the default) could also risk jeopardizing the cash flows due to the borrower. Such default would often result in cross-default across other loans of the borrower, and it is likely for other lenders and bondholders of the borrower to call an event of default. This could also have an impact on loans taken by group companies and holding companies of the borrower, as typically, a cross-default event would cover borrowing by such entities," Jimmy said.

Byju’s has named several entities, including its US game-based learning platform Osmo (Tangible Play Inc.), its Singapore holding entity Byju Pte Ltd and its higher education subsidiary Great Learning Pvt. Ltd as initial guarantors in its loan agreement. In India, WhiteHat Jr. (WhiteHat Education Technology Pvt. Ltd) and Think & Learn Pvt. Ltd are guarantors.

Lender action may begin with a notice to the parent and the loan guarantors to repay within a certain stipulated period before action is initiated against the entities, lawyers said.

“Guarantees can be invoked, failing which the borrower and guarantors could be subject to insolvency action. If guarantees are defaulted, the lenders could also file an insolvency application against the parent in India," Jimmy said.

Byju’s declined to comment on the guarantors. A person aware of the matter said the lenders are yet to issue an invoice for the interest payment.

Earlier, on whether the company considers this as a default, a Byju’s spokesperson said it is constrained from making any payments because of “the unlawful acceleration of the loan on the basis of alleged technical default, failure on the part of the loan agent to provide the interest invoice and calculation and refusal to provide a list of lenders and their holdings to undertake KYC as per applicable law."

A partner at BTB Legal, Xerxes Antia, said the location of the assets, as well as the seniority of debt, would be critical.

“While overseas lenders may have several options in case of a default—both contractual and those available to lenders under Indian law—exercise of these options will necessarily have to take into account several factors, including the nature of security available to such lenders, the priority of their loan and limitations under Indian laws on restructuring/rescheduling overseas borrowings," said Antia," a partner at BTB Legal.

Antia said the US lenders may choose to proceed against the US guarantors.

“Any enforcement action would, of course, depend on the location of the assets (in case of secured lending), as well as the seniority of the debt. Additionally, while overseas lenders may not be able to access all remedies/fora in India, they could approach the National Company Law Tribunal under the Insolvency and Bankruptcy Code. However, overseas lenders will need to weigh such actions against the priority and rights of the other lenders and creditors," Antia said.