Edtech giant Byju’s just defaulted on a $1.2 billion loan. And it's not because it doesn’t have money (Or at least that’s what it says). Rather, it pins the blame on the lenders who’re allegedly harassing the company.

So in today’s Finshots, we dive into what on earth is happening at Byju’s.

The Story

A couple of years ago, nothing could stop the Byju’s edtech juggernaut.

It hired great educators and teachers. It built a bunch of solid content for school students. It packed them together into tablets. And hired sales and marketing folks to convince parents to ‘invest in their children’s future’.

Then came the pandemic and it supercharged growth even more. All education went online. And investors were willing to bet everything they had on Byju’s. They said the company was worth $22 billion. And Byju’s capitalized on the money flowing into its coffers. It used the roughly $6 billion it had raised to get even bigger. It acquired other edtechs and rivals.

But such stratospheric growth is addictive. And Byju’s didn’t just stop at raising equity. It decided to go the debt route too. And in November 2021, it took out a loan. It thought, “Hey, these central banks are keeping interest rates so low. Let’s just capitalize on this and borrow money at dirt cheap rates now.”

It went to some lenders and asked for a $1.2 billion term loan or what’s called a Term Loan B (TLB). And Byju’s just had to pay a paltry interest of 5.5% plus LIBOR. LIBOR’s nothing but a benchmark interest rate that’s used to price loans. And back then, LIBOR was just 0.20%.

So yeah, a dirt cheap loan.

And the plan was simple — gobble up even more companies with this money. Especially in the US.

But barely two years later, this loan has turned out to be an albatross around Byju’s’ neck.

What do we mean by that?

Well, here’s what you should know about these TLBs. Let’s say you borrow money via the TLB route. You don’t need to worry about repaying the principal and interest every month. The lenders will let you take your time. They’ll typically give you 5–6 years to repay the entire thing. And ask for just tiny bits of the loan to be paid every few months.

But this kind of loan structure carries a fair bit of risk. A lot can happen in those 5 years. The borrower can run into financial troubles. They can go bust. And the lenders will have lost everything.

So the lenders attach quite a few terms and conditions to the loan.

For instance, in Byju’s case, they demanded some of Byju’s’ subsidiary companies as collateral. And they also attached a few riders to the loan.

  1. Byju’s had to get this loan rated within 9 months by a rating agency like Moody’s or S&P. These folks would pore through financial statements and make projections on the likelihood of default.
  2. An auditor had to sign off on Byju’s’ financial statements for FY22. So someone like Deloitte would have to scrutinize the statements and certify that Byju’s wasn’t resorting to any accounting jugglery.

Now the thing is, Byju’s apparently didn’t fulfil either of these conditions. They conveniently ignored it and went about their business. Needless to say, the lenders started getting jittery.

Oh, and there’s something else you must know about the TLBs.

TLBs can be traded in the open market like stocks. The original lender can simply package the loan and sell it to anyone else who wants to buy it.

But if people believe that something is going wrong at the company in question, the price of the loan can drop precipitously. And you can guess what happened to the loan when Byju’s failed to fulfil its promises, right?

People wanted to get the loan off of their hands. And by September 2022, the loan was trading at a 30% discount in the market.

Now for some investors, this was an opportunity to lap up something cheaply. Maybe they felt that Byju’s wouldn’t go bust. So they took the plunge and bought the loan.

But they couldn’t just sit around and wait for Byju’s to come good on its promises, right? They needed to recoup their money too.

So they took the fight to Byju’s. They said that the edtech giant flouted the riders. They asked for a prepayment of the loan. And then, they said that $500 million of the loan given to Byju’s was missing! They didn’t know what Byju’s had done with the money. So they did what they could — they tried to take over Byju’s-owned US subsidiaries.

And even took Byju’s to court for good measure.

Also, in the midst of all this, Byju’s’ grand plan of borrowing cheap money was failing. The ultra-low interest rate regime turned upside down as central banks tightened the screws. LIBOR soared to a whopping 5%. And that meant the interest rate at which Byju’s had to pay back the loan had probably doubled to 10.5%. Ouch.

Anyway, Byju’s wasn’t pleased with what had transpired. It felt it was being bullied.

So, Byju’s went on the offensive this week.

It turned the tables and took the lenders to court too. It called them predatory. Especially a firm called Redwood which had bought the loan in the secondary market. Byju’s’ claim is that Redwood made an unlawful attempt to seize control of Byju’s Alpha, a subsidiary in the US.

So, Byju’s simply decided that it wouldn’t pay a dime of what it owed. It disqualified the lenders until the matter was settled. Or in other words, it sort of had defaulted on a $40 million payment that was due.

And that’s where things stand. In court.

But, there’s one more thing we want to highlight here. Now most reports say that Byju’s did this because it just didn’t want to play by the rules of the lenders. That it wasn’t facing a cash crunch.

But is that really true?

Because here’s the thing, The Morning Context has been chronicling Byju’s’ money troubles for quite some time now. And let us lay out some of it for you.

Apparently, a few months ago, both Google and Facebook suspended Byju’s’ accounts because the company ran ads and didn’t settle its dues after. Then there were the rumours that the edtech firm deducted taxes from its employees (TDS) but didn’t deposit it with the government. That they’d used the money to meet other obligations instead. And the most egregious one — when customers who bought courses on loan asked for a cancellation and refund, Byju’s didn’t follow protocol. It didn’t close the loan immediately. Instead, it resorted to paying EMIs on the loans.

If all this doesn’t reek of money problems, we don’t know what does!

So yeah, that’s the gist of things as they stand. And at the moment, Byju’s looks like a Jenga tower. On the face of it, it has been carefully built block by block. But everyone knows that it just takes one wrong move to topple the entire thing.

Was the $1.2 billion loan the wrong move for Byju’s? Time will tell.

Until then…

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