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

In its petition Byju’s categorised its TLB lenders, led by Redwood Capital Management, as ‘predatory’ and moved to disqualify Redwood as a lender.

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

How did this come to pass?

Byju’s raised a $1.2 billion loan in November 2021 through Byju’s Alpha for its international expansion, including acquisitions. However, the company’s relationship with its lenders soon began to sour.

Like any loan agreement, the contract between Byju’s and its lenders had 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 an 18-month delay. 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 loan’s terms, but the company maintained that it was only a “technical default" and that it had been making interest payments regularly.

That changed on June 5, when it didn’t make a $40-million interest payment to the lenders from Byju’s Alpha, thus defaulting on the $1.2 billion loan.

Why now?

On June 6 Byju's said it had received a notice from its lenders to repay the loan in full. "They (lenders) issued a notice demanding immediate payment of the entire amount under the TLB, despite knowing that this purported acceleration was under challenge before the court," the company said.

Initially, both the lenders and the company negotiated for different commercial terms. The TLB was raised when global interest rates were low. Since then, several central banks have hiked rates. Byju's was offering to pay a higher interest rate on its TLB and a partial repayment to pacify the lenders after its “technical breach". A Bloomberg report last week said that lenders had stopped negotiating with the firm over the repayment terms weeks after they filed a suit against Byju's in May.

What did the lenders allege in court?

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

“Lenders have claimed that because of a default earlier this year, they have the right to put their representative Timothy R. Pohl in charge," Bloomberg reported, citing sources.

The lenders also alleged in court that Byju’s took $500 million out of its US arm. Byju’s defense was that “the transfers were in full compliance of and did not contravene any terms of the parties’ credit agreement and the agreed-upon rights and responsibilities". This, it said, was because it had raised the $1.2 billion for specific purposes and was using the money for those very purposes.

However, that’s what appears to have prompted the lenders to “accelerate the repayment" of the entire loan. Byju’s has challenged this “acceleration".

What's Byju's defence?

The company has not commented on whether it thinks it has defaulted on the loan. A Byju’s spokesperson simply said the company has been "constrained from releasing payment for reasons set out in the press release".

These reasons include “the unlawful acceleration of the loan on the basis of alleged technical defaults, 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," Byju's said. It added that it has told the lenders in writing "that interest payment would be made provided that the acceleration and Delaware litigation are withdrawn".

Byju’s also appeared to suggest in its defence that the lenders were in breach of the loan agreement because they failed to identify themselves for the purposes of KYC. This could be critical in the context of the company’s allegations against Redwood.

What has the company alleged? 

Byju’s said that Redwood Capital Management and other lenders engaged in ‘predatory tactics’. It said it moved to “disqualify Redwood, who contrary to the terms of TLB, purchased a significant portion of the loan while primarily trading in distressed debt". The loan agreement signed in November 2021 allows Byju’s to opt out of taking money from specific lenders, such as its competitors.

However, it has said Redwood “consistently increased its exposure by acquiring a sizeable stake in the TLB with the intent of making windfall gains" while also participating in a smear campaign against Byju’s. It said on one hand the loan agent refused to provide the identities of the TLB lenders to Byju’s.

“The TLB lenders’ agent has even refused to provide identities of the TLB lenders to Byju’s – something Byju’s is entitled to under the TLB. Additionally, the TLB lenders have consistently taken measures to smear Byju’s reputation. At the same time, Redwood – a lender known to primarily trade in distressed debt – consistently increased its exposure by acquiring a sizeable stake in the TLB with the intent of making windfall gains," a Byju’s spokesperson said.

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

What’s the potential fallout from all this?

Byju’s decision to escalate its fight with the lenders comes amid talks of a potential $700 million equity fundraise by the company. It also raised a structured loan of around $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 looks forward to resolving the issue quickly and "that this disagreement with the lenders does not pose any significant impact on its operations".

The public spat, however, has caused jitters in India’s startup ecosystem. Reacting to Byju’s default on social media, Ronnie Screwvala, founder of higher-education platform Upgrad, said the episode was “sullying India’s name as a great investment destination". He added, “Wonder what [Byju’s] erstwhile board thinks of their fiduciary duties."