What would a WeWork bankruptcy look like?
Several scenarios could play out for co-working company that recently had close to $50B in lease obligations
In April, a Manhattan landlord who leases a large space to WeWork received an email from a broker who was working on behalf of the struggling co-working company to renegotiate its office leases.
“I told him politely it’s not happening, so don’t waste your time,” the landlord said, noting that because his lease with WeWork is below market-rent, he’s comfortable taking the space back. “I’m going to play hardball.”
Brokers at Newmark Knight Frank and JLL have spent the last several weeks reaching out to WeWork’s landlords — trying to negotiate concessions on billions of dollars of leases that threaten the company’s cash flows.
WeWork had $47.2 billion worth of
lease obligations on its books as of late last year, and is reportedly looking to reduce those rent liabilities by 30 percent.
Now as Covid-19 puts further pressure on the co-working company’s bottom line, critics are raising questions about whether its business model of packing a rotating cast of strangers into tight spaces can survive in a world of social distancing and contact tracing.
That raises the stakes for WeWork’s lease negotiations, according to those who believe this could be a make-or-break scenario for the Softbank-backed company once valued at as much as $47 billion before its failed IPO last year. WeWork was recently valued at just
under $3 billion, Bloomberg reported in May.
WeWork’s critics have long speculated that the company could be forced to file for bankruptcy in a downturn. If that happened, WeWork would have several scenarios laid out in front of it, experts told
The Real Deal.
“Landlords aren’t always willing to make concessions outside of bankruptcy,” said Timothy Duggan, an attorney at the Stark & Stark in New Jersey who represented office equipment provider Transamerica as a creditor when Regus — another large flex-office company — filed for bankruptcy in 2003.
But that dynamic often changes once under Chapter 11.
“If I’m a landlord and I know a bunch of other landlords are making concessions and I have a shot of coming out of bankruptcy, I might be more willing to make a deal,” Duggan noted.
Still, under the protection of bankruptcy the company’s core challenge would be the same: It still has to convince its creditors that it has a viable plan to turn things around.
“Even in bankruptcy, they still have to get people to believe they can come out of this,” Duggan added. “It’s all still one big negotiation.”
ReWork
WeWork had $1.3 billion of long-term debt when it issued its prospectus last year, including credit agreements with JPMorgan and $669 million in corporate bonds. Those bonds were trading for as low as 28 cents on the dollar in May.
The task of convincing creditors that the company can turn itself around would fall largely on the management team headed by Sandeep Mathrani — the veteran retail executive who led mall landlord General Growth Properties through bankruptcy in 2010.
Mathrani joined WeWork earlier this year to help
right the ship after its co-founder Adam Neumann was ousted following the IPO debacle.
“He is a proven leader with turnaround expertise in the real estate industry,” SoftBank’s Raul Marcelo Claure, the former interim chairman of WeWork, said about Mathrani in a February statement.
To be clear, WeWork has made no public plans to file for bankruptcy, and that option is by no means an inevitability.
A spokesperson for the company told
TRD that WeWork has a strong financial position with $3.9 billion in cash and commitments that “provides us the liquidity to weather this current climate while also executing on our five-year plan and investing in our future.”
“We continue to rightsize our portfolio by exiting locations that are unprofitable, growing in markets where we see enterprise demand,” the spokesperson added, noting WeWork is planning to open more than 60 new locations through early 2021 and is investing $100 million in WeWork India.
But the company’s critics have long speculated that WeWork could end up in bankruptcy, particularly during an economic downturn.
The company has laid off
thousands of employees since November. Softbank backed out of a financial bailout and IBM is reportedly ready to walk from its WeWork space at
88 University Place — one of the first locations in the co-working company’s pivot to an enterprise model.
Softbank last month took another writedown on its WeWork investment, saying it expects to take a
$6.6 billion loss for the year on the portion of the firm’s stake held outside of its $100 billion Vision Fund.
“Every writedown takes Wework’s carrying value closer to reality,” Redex Holdings analyst Kirk Boodry opined in Reuters. “Clearly the value is zero.”
Softbank CEO Masayoshi Son said in April that he expects a significant portion of the 88 companies backed by more than $80 billion in venture capital from the first Vision Fund to end up in bankruptcy.
“I would say 15 of them will go bankrupt,”
Son predicted, adding that he expects another 15 of the fund’s bets to prosper.