Byju's Default
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Last week, Byju’s repudiated the interest on its foreign currency loan due to the presence of distressed asset funds as the owners of the loan. As per Byju’s, this was against covenants of the loan.
Financial situation at Byju’s
In last few months, Byju’s has seen its financial situation deteriorate steadily. The costs have been mounting and the revenues have failed to keep pace. To add to their problems, their valuations have been consistently downgraded by most of their investors and that made fresh fund raising very difficult. In the midst of this financial melee, interest on the loan came as an added burden. The edtech company tried its best to rehash the terms of the loan, but it failed.
No restructuring of the loan
Even as the lenders were playing hard on restructuring, Byju’s had raised some equity from global funds. The lenders were open to restructuring the loan but wanted Byju’s to have more skin in the game. They wanted Byju’s to use the equity funds raised to repay half their foreign loans and then restructure the other half. The lenders even accused Byju’s of hiding the equity infusion into the company. Byju’s was open to rehash the loan conditions and even willing to pay a much higher coupon rate on the restructured loan. Since both sides could not agree on a common ground, lenders decided to call off the loan restructuring.
Enter Redwood Capital
It is here that a distressed assets fund, Redwood Capital started to pressure the edtech group to pay up. Redwood had picked up the loan bonds in the market at a discount. At the time of the loan talks being called off, the Byju’s loan was already trading at 70% discount to its original price. Byju’s contention is that distressed funds like Redwood had bought their paper in the market by first beating down the bonds and then they were using strong arm tactics to get the full money back. According to Byju’s, the bond covenants clearly bar any sale of their bonds to distressed funds. That is the reason, Byju’s refused to pay the interest tranche till Redwood was out.
A default is a default anyways
Currently, the case is in the US courts so it is technically sub-judice. We must wait for the final legal decision. Whatever be the outcome of the court order, it would be treated as default anyways. That will not only impact the Byju’s bond paper further, but also make fund raising for the edtech company tougher. How the company will manage its cash flows in the coming months remains to be seen. But the real issue could be larger. It is a big question over fund raising for the digital players in general and edtech players in particular. Also, it does raise questions over Indian companies hiding behind the veil of legal ambiguity. This could have far-reaching implications.