Facebook Inc plans to increase its $2.5 billion credit line to help cover a major tax hit when employee stock awards vest shortly after it goes public, according to two sources familiar with the company's plans.
The world's largest social media network, which boosted its borrowing capacity by two-thirds just six months ago, is taking advantage of its strong position to get more financing for its phenomenal growth, the sources said.
The sources spoke on condition of anonymity because they are not authorized to speak publicly about such plans.
A spokesman for Facebook declined to comment.
"All these tax obligations are being created and you need cash to take care of it. You see this all the time but in this case it will be substantial," said Michael Moe of GSV Capital, which owns Facebook shares. "Having the cash to be able to take care of that makes a lot of sense. That would be the motivator of a larger credit facility."
Facebook has said it plans to pay taxes on its employees' restricted stock units, or RSUs, when they vest six months after the company's initial public offering. The exact amount is likely to total billions of dollars, based on Facebook's stock price at the time.
Helping employees cover tax on RSUs is relatively unusual and leaves the employer with a "very expensive obligation" that could increase if Facebook shares climb, said Bart Greenberg, a partner at law firm Haynes and Boone LLP who advises start-up tech companies.
"It could create such a large cash obligation that it eats up most of the credit facility," Greenberg added. "That facility may have been originally set aside for acquisition opportunities or working capital."
Facebook said it may sell equity securities, tap its credit facility, use cash or a combination of these options to meet its tax obligation, according to its IPO filing.
In February 2011, Facebook set up a $1.5 billion credit agreement with affiliates of Morgan Stanley, J.P. Morgan, Goldman Sachs, Bank of America's Merrill Lynch and Barclays Capital, the leading underwriters of the company's IPO. In September 2011, the borrowing capacity was increased $2.5 billion.
"The golden rule of finance is that you get the money when you can, not when you need it," said Moe, who co-founded investment bank ThinkEquity. "Creating maximum flexibility will allow you to be efficient with your use of capital but also opportunistic when appropriate."
Some other tech companies that recently went public have also arranged similar credit facilities. Zynga, the social games giant, set up a $1 billion facility with some underwriters of its IPO, which happened late last year.
Facebook and Zynga generate substantial profits, but the companies have big credit facilities because it is good corporate finance strategy to line up back-up cash from a position of strength, Moe and others said.
The months leading up to an IPO are a good time for companies to arrange credit facilities because they have the most negotiating power with banks vying for lucrative roles in equity offerings, according to the chief financial officer of a large private tech company who asked not to be identified.
Copyright Thomson Reuters 2012