Byju's definitely defaulted on its loan
Or how not to hide money from your lenders
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Typically there are a few ways for you to borrow money if you’re a company. You could get a loan from a bank. Or you could go to the market and issue some bonds and sell them to investors. Or you could get a loan from a bunch of institutional investors whose business it is to make loans to companies.
Each of these choices has its own pros and cons. A bank would probably charge the least interest but won’t lend to you if it feels the risk is on the higher side. Bonds, on the other hand, take time. You’d have to register with the regulator, draft long documents about how you intend to use money and hope that the bond market is doing okay.
A loan from institutional investors though—that’s convenient! Unlike banks, these guys are okay with risk. You also don’t need to get involved with regulators. As long as you can convince some institutional investors to lend to you, you can take that money and do whatever you want with it.
Okay, not whatever! What you can do with the money depends on the contract you have with your lenders. If the contract says “do whatever you like with the money,” then sure you can do whatever. If the contract says “do whatever you like with the money but only if you somersault twice first,” then you better make sure you do those somersaults before you do whatever you want with the money. My point is that while this loan is convenient, the contract that it comes with can have conditions which might not always make the strictest sense. But that doesn’t matter! If you borrow from institutional investors and have a certain contract with them, you have to stick to exactly what’s in the contract.
Anyway earlier this month the Delaware Court of Chancery in the US decided that Byju’s defaulted on its loan because it couldn’t stick to its contract. From Bloomberg:
A syndicate of 37 lenders provided loan commitments totaling $1.2 billion, Zurn said in her Nov. 2 ruling. The loan terms allowed lenders to take control of pledged Byju’s Alpha shares if a default triggered that right, the judge said.
When a company unit failed to get the Indian government’s backing as a loan guarantor, the lenders filed a notice of default in March, according to a transcript of the judge’s announcement of her decision.
Usually when someone defaults on their loan, the understanding is that they failed to make their repayments on time. But that’s not the case for Byju’s. The repayments were fine! The problem was that Byju’s had defaulted because the loan agreement had some conditions which Byju’s had not been able to meet.
I wrote about these conditions back in June but here’s a quick gist. The agreement that Byju’s had with lenders said that Whitehat Junior—a subsidiary of Byju’s—had to guarantee the loan. Which meant that if Byju’s in the US couldn’t repay its loan, Whitehat would have to. But Whitehat couldn’t guarantee this loan because some government regulations didn’t allow it.
But Byju’s India—which owned both Byju’s US and Whitehat—already guaranteed this loan. Usually, the purpose of a guarantee is to help get some money back if things go bad, and the lenders had all the guarantees that they needed. But whatever, they wanted Whitehat to guarantee the loan as well and it couldn’t. So, theoretically, Byju’s couldn’t stick to its loan agreement and that was enough for the lenders to claim a default. And now the Court agrees.
Get the $$$ back
Normally if you’re a company that defaults on its loan, that’s really just the start of things. You’ll be pulled into insolvency court, there’s a court-monitored recovery process, your assets and liabilities are stripped apart, it’s an unpleasant process for everyone.
When Byju’s defaulted on its $1.2 billion loan, its lenders got control of its US entity right away. Because, well, that’s what the agreement said. But it’s not as bad as it sounds. The US entity, called Byju’s Alpha, was a special company formed only to borrow the $1.2 billion. It had no employees or business of its own. The lenders essentially got hold of a bank account with “Byju’s Alpha” written on top of it.
The problem for the lenders was that Byju’s had taken $500 million out from its Byju’s Alpha bank account right around the time there was a risk of this bank account going into the hands of the lenders. Here’s a fun Bloomberg piece from September which gives us a view into where this $500 million went:
Byju’s last year transferred more than half a billion dollars to Camshaft Capital Fund, the investment firm founded by William C. Morton when he was just 23 years old, some Byju’s lenders claim in a lawsuit. Morton’s fund received the money despite an apparent lack of formal training in investing, according to the lenders.
Also,
Byju’s sent the money to Camshaft even though the hedge fund appears to cater to smaller clients. Camshaft accepts as little as $50,000 — “an extremely low threshold for a hedge fund,” lenders said in their court filing.
Byju’s transferred the $500 million to a hedge fund called Camshaft Capital. Apparently, this is an unknown hedge fund started by a kid. Also interesting is that this hedge fund is usually happy to accept $50,000 cheques but in this case got $500 million. That’s 10,000 times more. Phew.
This isn’t even the most fun part from the Bloomberg story. Here’s more:
In a 2020 Securities and Exchange Commission filing, Camshaft listed its principal business address as 285 NW 42nd Ave. Far from a typical office, that building is currently home to an IHOP.
…
An employee on shift on a slow Tuesday afternoon served two families who sipped juice and munched on burgers while Blake Shelton’s “God’s Country” played in the restaurant. “A hedge fund? No,” the server, Ana, said with wide eyes.
“A hedge fund? No,” the server, Ana, said with wide eyes. So good! This is what finance journalism should look like. Visiting the registered office address of shady looking hedge funds and asking the fast food servers inane questions.1
Normally when you transfer money to a hedge fund the idea is that you get some shares or fund units in return. You might not always be able to redeem those shares for money right away but you do have shares worth the same amount which you can redeem for cash sooner or later.
But there’s nothing normal about Byju’s Alpha and Camshaft Capital! Here’s what the lenders say in their court filing: “How Borrower came to learn of Camshaft and what Borrower received in exchange for the $533 million (if anything) remain unknown.”
If I transfer more than $500 million to a hedge fund I better be receiving some shares! Right away! Apparently Byju’s Alpha has been fine all this time with nothing.
Okay see, this is why the lenders have a second lawsuit going, this one against Camshaft Capital. Had Byju’s “transferred” its money to a legitimate hedge fund, the lenders would still be annoyed but probably okay with it?2 But Byju’s gave the money to a nondescript hedge fund registered at a fast food restaurant which looks like a front for stashing away money.
Byju’s Alpha gave its money to Camshaft Capital and now the lenders control Byju’s Alpha. Camshaft doesn’t look like it can hold out for much longer.
What would the Bloomberg journalist have asked the IHOP server to get the response she did? Do you serve food but also do some financial analysis at a hedge fund on the side?
Not really! Some hedge funds have really long term capital commitments. I can’t imagine the lenders being okay with waiting 5+ years to see their money again. Another problem would also be that the lenders may not have been able to sue a legitimate hedge fund. Their entire case in this lawsuit stands on Byju’s transferring money to a shady hedge fund only to hide the money from lenders.