Why Doesn't Facebook Hit The Corporate Bond Market?

Facebook might have lower its financing costs, retain full control of the company, face less regulatory scrutiny and be able to remain private without controversy by issuing corporate bonds instead of selling stock.

The controversy is reaching a crescendo over Facebook’s effort to remain privately held while $1.5 billion or more of the company’s stock changes hands. Yet all the brouhaha could be avoided if the social network tapped the corporate bond market.

It’s so much cheaper for issuers to sell debt than stock right now. Interest rates remain near record lows and even the higher yield that corporate bonds have to offer still would still add up to smaller fees going to the bankers.

The Goldman Sachs stock sale charges four percent up front plus another five percent of capital gains, the latter presumably due whenever the client sells. Now compare that to the corporate debt market, where nine percent well exceeds even the most speculative junk bonds.

With a debt sale, the issuer doesn’t give up ownership of parts of the company (unless there’s a filing for bankruptcy, in which case bondholders get first dibs on assets in court, but that seems extremely unlikely compared to Facebook’s current finances). Shares by definition give the purchasers more influence over what a corporation does, regardless of whether those stocks have public or private status.

As long as Goldman Sachs is the shareholder of record, it has influence over Facebook’s decisions. That amount of control by an outside entity defies the argument against having an initial public offering: outside shareholders do put a lot of pressure on a company, including the ability to demand the ousting of a Chief Executive Officer in the even that the stock underperforms.

The only difference between an IPO and having Goldman as the shareholder of record on behalf of $1.5 billion or more in shares is that the outside influence is concentrated at the bank, rather than spread out among a bunch of stockholders.

Bondholders, by contrast bonds, are lenders, not owners. Furthermore, private bond sales don’t require disclosures to the public, even if the number of bondholders grows large. With stocks, once ownership reaches 500 shareholders or more, the Securities and Exchanges Commission asks for information.

Obviously Goldman Sachs has the wherewithal to do a private bond sale for Facebook if both parties wanted that. Perhaps the SEC may pressure the transaction to take a form that differs from the $1.5 billion “special purpose vehicle.”

Do you think Facebook should issue debt instead of trying to transfer privately-held stock through a “special purpose vehicle?”