Strain on WeWork intensifies as CEOs race to secure new financial backstop
The financial strain on WeWork has only become more apparent in the days since the lossmaking group pulled its initial public offering, jettisoned co-founder Adam Neumann from the chief executive role and failed to secure a $6bn loan from Wall Street.
The latest sign of trouble this week came from the rating agency Fitch, which projected the company’s cash pile had fallen to $1.5bn at the end of September from $2.5bn a quarter earlier. Fitch swiftly slashed WeWork’s debt rating deeper into junk territory and warned of “material” cash charges as the company readies for sweeping cuts to its 12,500-plus workforce.
The company’s debt has been in a near freefall since the IPO collapsed, and was trading hands at less than 85 cents on the dollar this week. That pushed the spread on the bonds above 1,000 basis points over comparably maturing US Treasuries. It is a metric worth noting; investors in the $9.5tn US corporate bond market now judge WeWork to be in distress.
Short sellers have piled in, and the debt has become among the most expensive corporate bonds to short, according to IHS Markit. More than 10 per cent of WeWork’s debt was now on loan, a proxy for how intense short interest in the company’s debt is, DD’s Eric Platt and the FT’s Joe Rennison were first to report. That was a record level.
The pressure is now on for new WeWork CEOs Artie Minson and Sebastian Gunningham to find a financial lifeline. The company is in talks with JPMorgan Chase and Goldman Sachs, as well as several other banks, for some lending package. Expect it to be far, far smaller than the $6bn financing it had earlier agreed, sources tell DD.
DD has already told you that SoftBank considered pumping extra money into WeWork, given it has billions of dollars riding on the property group’s success. The company is also in talks to sell off a handful of companies that it has recently acquired, including Managed by Q, Meetup, Conductor, SpaceIQ and Teem, as well as its stake in The Wing.
Even then, the heat on Minson and Gunningham will not abate (and we’re not talking about from the thousands of WeWork employees who saw their stock options plunge in value). Rival IWG is looking to double its growth rate and ramp up its expansion as WeWork struggles. IWG, it’s worth mentioning, is profitable.
IWG boss Mark Dixon (pictured below) sat down with the FT and laid out one of the key problems with WeWork’s business model, which includes free beer and kombucha on tap.
“Essentially, the space is a break-even business and the profit comes from the services,” he said. “It’s like running a hotel and giving away the room service and having a free bar. You will have a very popular hotel but you won’t make any money.”