By R Chandra Mouli
Will Rogers, the American social commentator, once said, “All I know is just what I read in the papers, and that’s an excuse for my ignorance.”
In the second week of September, the business press in India was agog with news reports of Byju’s defaulting on a loan of USD 1.2 billion. Because the edtech major has been associated with alleged non-payments and challenges with auditors and creditors, no one doubted what they had read in black and white. News reports carried a definitive statement by the US lenders that Byju’s is obligated to pay the loan with interest.
Here’s the question no one asked: Why did Byju Raveendran, the founder, refute their claim?
Because lenders are right and wrong. Like a financial statement that can mislead by what it conceals rather than what it reveals, the lenders’ announcement could have been fraught with concealment. A major omission in news reports is the payment date. What’s not widely known is that Byju’s subsidiary, Alpha Inc., availed of the loan in November 2021 for a five-year period ending in December 2026. Referred to as ‘Term Loan B’ (TLB), it was meant to help Byju’s expand in North America, with a caveat that the loan couldn’t be used for operations in India.
For the uninitiated, TLB is a unique loan agreement with flexible repayment terms under which majority of the principal is repaid at maturity. This allows the borrower to primarily focus on investing in business growth. Some of India’s other booming startups – one in ride-hailing and the other in hospitality – have also availed TLBs.
Also read: Solving the Byju’s question: Is there sunrise after sunset
A notable characteristic of the instrument is that upon drawdown by the borrower, the original lender can sell the debt, in whole or part, in the secondary market. As a result, the lender makeup can undergo drastic transformations, such that the original lender may completely assign its interest in the loan onward to other parties.
The problem starts when the loan is assigned to traders who deal in distressed debt. Such parties, labelled as predators, have no interest in maintaining a long-term position and may want to make short-term gains by selling their positions or extracting an early pre-payment from the borrower, a step that is inconsistent with the purpose of TLB – designed to have funds available for the long term.
Wary of such a development, Byju’s had incorporated in the loan agreement various safeguards. These include:
- Right to request a list of the identity of lenders and their interest in the TLB;
- Right to provide a list of entities prohibited from becoming lenders;
- Right to disqualify those lenders whom the borrower never intended to be lenders in the first place, including those lenders “whose primary activity is the trading or acquisition of distressed debt.”
The last safeguard is known as a ‘disqualification’ right, and it exists because a borrower cannot exhaustively list out in advance every possible entity prohibited from becoming a lender. Accordingly, disqualification depends on the nature of the lender’s business activity, not the duration or the date on which the lender acquired the loan.
Disqualification rights are common in such loan agreements and have been enforced by US courts in the past. The Loan Syndications and Trading Association – the leading platform in the US syndicated lending market – expressly recognizes disqualification rights as a way for borrowers to avoid their debt being held by persons with whom borrowers’ interests do not align.
Between November 2021 and May 2023, Byju’s complied with the Credit and Guarantee Agreement and did not commit any default. It made all payments required under the TLB, totaling approx USD 140 million. While bank interest rates increased during this period because of inflation in leading economies and external factors such as the Ukraine conflict, Byju’s made payments in their entirety.
In the meantime, the loan was trading at stable rates with almost no volatility. Noting the loan was steadfast, a secondary market lender acquired around 3% interest in the TLB and later raised to 20% of the total debt. Spurred by the 20% holder, whose participation was not with the consent of Byju’s, whose presence was against contractual obligations, and whose business practice is acknowledged as the takeover of distressed debt in their company website, the consortium of lenders began insisting on the following:
a. Full repayment of the loan within a year, even though the lenders already had more than sufficient guarantees;
b. An extra 2% interest over and above the agreed rate, plus additional fees;
c. Immediate repayment in March 2023 – about 3.5 years early – claiming Byju’s had defaulted, and proceeding with legal action in the US.
However, a Delaware court rejected the lenders’ claims and confirmed Byju’s right to disqualify lenders.
As a result, on June 5, 2023, Byju’s officially disqualified some of the distressed debt holders. Further, Byju’s has filed a complaint in New York, challenging the authority of the administrative entity managing the loan for the US lenders.
Byju’s argued that speeding up the loan repayment and taking legal action were invalid because it hadn’t defaulted on the loan.
Despite receiving the disqualification notice – and despite the Delaware court’s order refusing to interfere with Byju’s’ disqualification rights – the 20% entities continued with their attempts in the debt collective. Meanwhile, other distressed asset lenders increased their loan exposure in the TLB.
Byju’s countered through a second disqualification notice on 25 January 2024, against seven lenders who primarily deal in distressed debt.
At present, and according to information provided by Byju’s, over 61% of these lenders are disqualified and therefore, have no authority to vote or provide instructions to the debt administrator. No lender has challenged this second disqualification in court.
In summary, Byju’s must overcome three challenges, perceived and real, in the USA: an attempt to pre-close a long-term loan; unsubstantiated claims that the company has defaulted on repayment of USD 1.2 Billion; and the notion that an Event of Default empowers US lenders to take action against the company.
As a business leader who wrote the book on crisis management, what does the future hold for Byju Raveendran? The entrepreneur in him is used to facing and transforming a fait accompli – an impression already formed. Quite likely he will work towards a turnaround, present the facts in every forum, and win the billion-dollar battle – even if the odds are one in a million.
(The author, R. Chandra Mouli, is a communications consultant and former journalist. Views expressed are his own and not necessarily those of financialexpress.com)