Zynga Downsizing Includes Its Credit Facility

 

As Zynga downsizes its workforce and operations, it also downsizes its credit facility with Morgan Stanley, Goldman Sachs and JPMorgan.

As Zynga has faced some problems in its business, it had to make some changes, including “substantial cost reductions, including a workforce reduction and closure of various office locations.”

Another significant change is the amendment to their credit agreement.  The amendment significantly decreased the amount of funds available to Zynga from the banks, which included Morgan Stanley, Goldman Sachs and JPMorgan.  The amounts available decreased from $1 billion to $200 million, with the potential for increase to $300 million.

Although Zynga did not appear to use the credit facility, this signals that:

  • Zynga itself does not anticipate the type of growth that could need debt financing;
  • the banks were not comfortable with Zynga’s financial position;
  • Zynga wanted to reduce the $0.6 million per quarter commitment fees it was paying to not use the credit facility; or
  • some combination of the above.

The banks did impose tighter restrictions with leverage ratios by adding an additional Consolidated Leverage Ratio (“CLR”).  Previously, if the CLR was at least 2.5:1.0, the top commitment fee and interest rates were:

Commitment Fee:
0.350%
Applicable Rate for   Eurodollar Loans (based on adjusted LIBOR):
2.000%
Applicable Rate for ABP Loans   (based on prime, fed funds or adjusted LIBOR):
1.000%

The new agreement added a new top fee and rate schedule if the CLR is at least 3.0:1.00:

Commitment Fee:
0.400%
Applicable Rate for   Eurodollar Loans:
2.250%
Applicable Rate for ABP Loans:
1.250%

In addition, the banks required a separate covenant stating that Zynga may not have a ratio of Consolidated Total Debt to Consolidated Capitalization in excess of 30%.

While this is not exactly John Mellencamp’s evil banker scenario, the banks were not blind to Zynga’s troubles and growth prospects and imposed additional constraints on Zynga’s financial position.

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