The Downfall of India’s Hot Startup Is Wiping Out US Debtholders
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The Downfall of India’s Hot Startup Is Wiping Out US Debtholders
Reshmi Basu, Steven Church and Anto Antony
7 min read
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On Wall Street, it was an easy sell: The most valuable startup in India’s history, a tech company with Silicon Valley cachet, a charismatic founder and visions of dominating the online-education business that seemed sure to be one of the post-pandemic’s next big things.
More importantly, Think & Learn Pvt — more widely known as Byju’s — was willing to pay handsomely to borrow hundreds of millions of dollars in the US just as the world’s central banks were holding interest rates at next to nothing.
So when JPMorgan Chase & Co. and Morgan Stanley went to line up buyers for Byju’s debt in late 2021, orders poured in. There was so much interest, in fact, that the size of the deal was more than doubled to $1.2 billion, giving Byju’s a pile of cash to plow into a global expansion and put it on the road to becoming India’s next hot stock.
What followed instead was a corporate collapse, setting off an unusual court clash that’s slowly working toward its end — and may leave investors recouping only a small fraction of what they’re owed.
When debt holders tried to recover over half a billion dollars from Byju’s US accounts, they came up empty after it was whisked out of their reach through a Miami hedge fund, records show. In late November, the US judge overseeing the case said he was going to take the unusual step of alerting criminal authorities after a Nebraska businessman said the Byju’s founder tried to keep him from testifying about the founder’s business tactics with the offer of a $500,000-salary job in Dubai.
The case is shaping up as a lesson about the perils of lending at a time when money can rapidly disappear across borders. It’s also casting a shadow over the start-up boom in India, whose fast-growing economy and has drawn investors from around the globe.
“Byju’s exploded onto the scene as an upstart with major upside potential,” said Michael Kugelman, director at the South Asia Institute of the Wilson Center. “The company’s rapid descent is stunning and sobering.”
Byju’s and its namesake founder, Byju Raveendran, didn’t respond to requests for comment on the company and the allegations raised by creditors. In court papers and testimony, Raveendran and his associates have denied wrongdoing.
Raveendran became a public face of India’s ambitions to become a tech powerhouse as his businesses won the backing from global investors like Sequoia Capital and Mark Zuckerberg’s Chan Zuckerberg Initiative.
A former teacher and engineer who grew up in the southern state of Kerala, he started a business tutoring students in Bengaluru in 2005. Within a few years, it grew so quickly that he started holding classes in stadiums to accommodate thousands of attendees.
After digitizing his business by launching a self-learning app focused largely on math, science and English, Byju’s went on an acquisition spree after the pandemic — seizing on the excitement for startups and the shift toward online education. It snapped up rivals like Great Learning Pvt. Ltd., Epic!, and Aakash Educational Services in 2021, creating a company that was valued around $22 billion by early 2022.
But the problems piled up quickly. When the US Federal Reserve started pushing up interest rates, the company’s financing costs rose and banks that had been extending loans to Byju’s customers pulled back, cutting off a source of revenue, since the customers used it to pay for long-term contracts, according to people familiar with the matter. By late 2022, the company started negotiating with anxious lenders after the delayed release of its audited financial statements threatened to trigger a default on the US debt it sold just the previous year.
The matter landed in Delaware state court in mid-2023 when the agent for debt holders sued Byju’s Alpha to secure control of the unit, which lenders thought held loan proceeds that it hadn’t spent. Byju’s quit making interest payments and responded by accusing creditors, including Redwood Capital Management, of trying to manufacture a crisis.
That lawsuit — and two US bankruptcy cases that followed — handed victories to creditors and raised questions about Raveendran’s handling of the company.
The Missing Money
After the lenders’ representative, Timothy Pohl, put Byju’s Alpha into bankruptcy, he discovered that $533 million of the remaining loan proceeds had been transferred to a small Miami hedge fund that had the same business address as a local IHOP. At least part of that money appeared to have been moved after Pohl had taken over, according to records disclosed in court, an action that US Bankruptcy Judge John Dorsey called “straight up fraud.”
After the court issued an arrest warrant for the hedge-fund manager, William Morton, he testified that the money was moved to a logistics and supply-chain company in London. Raveendran has denied any wrongdoing and said it was used to reimburse that company for purchases made on Byju’s behalf.
Fresh allegations were raised against Raveendran in court in November. William Hailer, a Nebraska businessman, said the Byju’s founder recruited him for a plan to secretly buy back the US debt from creditors in a bid to regain control of Epic!, an education-software firm, that’s being overseen by a trustee acting on behalf of creditors. In a declaration to the court, he said he believed Raveendran was trying to use unspent loan proceeds to buy the debt at pennies on the dollar.
Hailer testified that Raveendran — who is now based in Dubai — tried to convince him to leave the US to avoid testifying in the case by sending him a $10,700 plane ticket and offering him a high-paying job there. Judge Dorsey said he would send a formal referral to federal prosecutors to investigate potential witness tampering.
A lawyer for one of Byju’s allies tried to cast doubt on Hailer’s testimony, pointing out that the small-business owner had once been sued by an investor who made fraud allegations. The suit was dismissed by a judge, Hailer said during his November court appearance.
The saga has riled creditors, whose ranks include HG Vora Capital Management, HPS Investment Partners and Silver Point Capital. Representatives for a group of creditors said in a statement that Raveendran has “obfuscated and even lied about the whereabouts of the term loan” in a bid to “siphon off value that is rightfully owed to the lenders.” The group said they “remain confident they will recover what is theirs.”
The focus has since shifted to Epic! and two other US software and web-platform units that Byju’s bought for about $820 million.
Bankers at Moelis & Co. have been hired to sell Epic!. Neuron Fuel Inc. is also up for sale, while digital learning app Tangible Play Inc. may be shut down, according to people familiar with the matter. Neuron, which does business as Tynker, is a coding tutorial platform, while Epic is a kids’ digital reading platform.
‘Long Haul’ Ahead
The sales, if successful, will only recover a fraction of what its current creditors are owed since the three units could raise around $150 million to $200 million, the people said.
Further recoveries will need to come from how Indian courts rule on the company’s broader insolvency plan and how it aims to repay creditors; it’s unclear how much — if any of that — may be available to those in the US.
As a result, brokers are quoting a market price on the loan maturing in 2026 at around 13 cents on the dollar, according to a person familiar with the matter.
“It will likely be very time consuming, costly and arduous for the appointed trustee to recover significant value for creditors as to U.S. assets, let alone foreign assets,” said Paul Silverstein of law firm Hunton Andrews Kurth, who isn’t involved in the case.
“Realizing significant recoveries both in the U.S. and India is possible — but it will be a very long haul,” said Silverstein.
