Daybreak - Byju’s $1.2 billion bad loan just cost it a unit in the U.S.

Episode Date: November 12, 2023

Since last year, the edtech giant is facing the wrath of a group of creditors who had given it a $1.2 billion loan. They wanted it to immediately repay part of the loan.On Friday, a Delaware judge in the US concluded that the lenders had properly cited the default on loan when taking over control of a unit of Byju’s. Basically Byju’s lost the case. What could’ve triggered this lack of confidence amongst the creditors of the Edtech giant?FREE READJob hunt was once a skill test. Now, it’s a patience test tooTune in.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Ever since we started Daybreak, one of the most talked about companies on our podcast has been by juice.

Whether it was the botched of financials, Deloids, Adverse Audit Report, the Enforcement Directorate, Raids in India, you name it. We've spoken about all of it. On Friday, the air tech giant was in the news again. So since last year, Bayju's has been facing the wrath of a group of creditors who had given it a $1.2 billion loan. They wanted it to immediately repay a part of that loan. And what happened was that the clutch of the lenders who controlled a part of that $1.2 billion loan, which includes Redwood Investments LLC and Silver Point Capital LP, lawyered up and had been pushing Bayju's to liquidate its assets in the US worth $500 to $800 to $800 million or pay up from its cash reserves.

Bayju's, of course, had been fighting back. But on Friday, a Delaware judge in the US concluded that the lenders had properly cited the default on the loan when taking control of a unit of Bayju's. Basically, Bayju's lost the case. According to Bloomberg, the Delaware judge ruled that the lenders were within their contractual rights to replace a relative of the company's founder, Baidu Ravindran, on the board of Baidu's Alpha with their nominee. Alpha is a special purpose company formed for financing purposes. So what could have triggered this lack of confidence amongst the creditors of the ATTEC giant?

A huge part of it was Bayju's consecutive and delayed and messed up financials. So today, I thought I'd take you back to the very first episode that I had done on Bayju's to give you a clearer sense of how things got to this point. Welcome to Daybreak, a business podcast from the Ken. I'm a host Nick Da Sharma and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story. that is worth understanding and worth your time.

Today is Monday, the 13th of November. 2021 should have ideally been a great year for Bayju's. It was the year when the pandemic had brought about a newfound appreciation for online learning. Bayju's raised $2.5 billion since the beginning of the pandemic. Its valuation rose from $8 billion to $22 billion. In the short period between 2020 and 2021, Bayju's users almost doubled from 64 million to 110 million. 2021 was a year when Bayju's made a dizzy number of acquisitions and garnered mind-boggling valuations. So when its auditor, Deloitte, took months to give Bayju's an approval for its financial year 2021 filings,

many thought it could be because of a lack of audit bandwidth. After all, the company had seen a five-time scale in size. And that is exactly what a company spokesperson also told the ken when in June we asked them about the delay in the filing. Unfortunately for Bayju's, that five-time scale in size also indicated the size of its losses. It was 15 times. Turns out, the Deloitte auditors were not satisfied with what Bayju's was presenting to them as a fair picture of their accounts.

The auditors gave in a diverse opinion on Bayju's financial statements for the financial year 2021. This basically meant that Deloitte had sufficient evidence to conclude that Bayju's financial statements contained material misstatements and did not represent its financial. position fairly. But before I get to the details of what Deloitte was talking about, my colleague Dijksha has a message for you. Not two weeks, not even one month. It took more than two months for a senior business analyst to land a job at a Bangalore-based consulting firm this year.

That is double the amount of time it took to get a job in 2022 and three more times than 2017. Gone are the insane hiring boom days of four. 2021. In 2023, there are way more candidates than jobs. And it's an employer's market all the way. Basically, job seekers are being put through the grinder. From the usual two or three rounds of interviews, it's now gone up to as many as five grueling rounds. Companies are now having special assessments to check the candidates' culture fit. And even though some have it worse than the others, no sector or draw profile has been spared.

But you might be thinking, boom and bus cycles in hiring are nothing new. Downturns always follow market frenzies, almost like night follows day. But this time around, things are not quite the same. Even though the long and tedious hiring cycles are costing companies a lot of money, they're using this year to correct the hiring mistakes that they made in the past. A complete redesign of the hiring process is in the works. If you're curious to know more, there's no better way than reading the Ken reporter Alifia story on the current churn in the hiring market. And guess what? We've made this story available for free for exactly 24 hours.

Just for today, the 13th of November. And we've put the link in the show notes of this episode. So go ahead, give it a read, share away with your friends before the counter runs out. I'm Dixie from the Ken's audio team. Thank you for listening to it. us. If you like what we do, please rate and review us wherever you get your podcasts. And now back to your host, Snigda. The same month in June, the Ken was the first to report that Deloitte had held off from

approving Bayju's financial statements over its revenue recognition practices. Now, one of the most notable changes in Bayju's financials for the year that ended in March 2021 is to do with how it books its revenue. EduTech products, mainly tablets and memory cards, accounted for more than 80% of Biju's revenue in this period. And as in the previous year, it recorded the entire sale value of these products when the customer bought them. But it took a different approach for the revenue that it got from the streaming of educational

content. Whatever a learner was charged for the content, it would now be booked. through the period that they availed of it. For example, if the learner paid, say, 10,000 rupees for Bayju's content over two years, it would be divided equally between the two years instead of being captured entirely in the first year's financials. Apart from that, in its report,

Deloitte also pointed out problems related to determination of financial guarantees given on behalf of customers. Also, it noted, proper estimation of sales returns and expected credit loss, and also the absence of an accounting manual. Plus, there was White Hat Jr., the 4-year-old coding for kids startup that Bayju's had acquired in 2020 for $300 million. The acquisition is gradually turning out to be quite a burden for Bayju's. From the time it was acquired, White Hat Jr. pulled in 327 crore rupees in revenue. But its losses were five times that amount. It contributed to around

one third of Baidu's consolidated losses in the year that ended in March 2021. One likely reason is its high customer acquisition costs. The Ken had earlier reported that White Hat Jr. was spending as much as $2,000 to acquire a customer in the U.S., which is Baidu's second largest market. market. The auditors also highlighted that the company had a lack of personnel with adequate experience and required competence in financial reporting and internal control. So no thanks to these auditing changes, the $22 billion ed tech company saw its revenue grow only by 4%. Apart from the standard audit fee, Bayju's also had to pay $3.5 crore rupees to Deloitte. This was an account of the additional effort incurred in the audit consequent to material weaknesses observed in internal controls.

So now you're getting a sense of why Bayju's lenders saw their confidence in the company dropped to a new low. Clearly, they were not happy with Bayju's audit report. The report showed them how Bayju's overestimated its revenue, how the company had weak internal financial control, and how they had not hired the right people to handle their accounts. While the exact details are not disclosed to the public, it was reported that the company failed to file its annual statements for the financial year 2022 and couldn't get credit ratings for the $1.2 billion loan within the duration of nine months. It all started in November 2021 when the company was looking to raise $500 million

via an institutional term loan. But it ended up raising $1.2 billion, which was touted as one of the largest unrated term loans by a startup ever. Now, one detail that we need to understand about such loans is that they can be traded, which means lending can actually be saved. securitized. The lender can turn the loan that it's given into an asset for itself. For example, if you lend me 100 rupees, I am an asset worth 100 rupees to you. You can trade this loan with someone. You can go to someone and say, give me 80 rupees now and you can take back 100 rupees from Snigda.

And this is exactly what Bayju's original lenders did. They passed on the loan to a third party. Now this third party is the one who is negotiating the terms of the loan with Bayju's and is holding Bayju's accountable for breaching the terms of the loan. Bayju's in turn is asking for renegotiating the terms of the loan because interest rates have gone up significantly. But lenders are pointing towards Bayju's failure to keep up with the original terms of the loan in the first place. Now the new lenders want Bayju's to pay a part.

part of the loan in order for them to renegotiate the terms to suit Bayju's. To sum it all up, Bayju's has made multiple stakeholders very unhappy, from its customers and auditors to its lenders. No matter how successful a business becomes, it does need to be mindful of the value that it is creating for all its stakeholders. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. It is t-he-he-k-en.com. I am Snigda Sharma, your host, and today's episode was edited by my colleague. Rajiv Sien.