It’s been a long time coming, but it feels fitting that one of the ultimate expression of the era of low rates and venture capital spray-and-prays is now finally undergoing a debt restructuring.
This just hit BusinessWire:
WeWork Inc. (NYSE: WE) (“WeWork”), the leading global flexible space provider, today announced that it has entered into a series of agreements with an ad hoc group representing over 60% of the company’s public bonds, a third-party investor, and SoftBank’s Vision Fund II (“SoftBank”) which will provide the company with an improved and sustainable balance sheet. The ad hoc group includes funds and accounts managed by King Street Capital Management, L.P., funds and accounts managed by BlackRock, funds and accounts managed by Brigade Capital Management, and other leading financial institutions.
This is hardly unexpected. Adam Neumann’s pot-stoked, SoftBank-funded fever dream has been stumbling towards a debt workout for a while.
In its fourth-quarter quarter results, WeWork bragged about finally turning a profit in December (real adjusted ebitda, not community-adjusted), which is an elaborate way of saying they lost almost $2.3bn in 2022. By the end of the year, its cash balance had withered from $924mn to $287mn.
The main details of today’s deal is that creditors (primarily SoftBank) will wipe out about $1.5bn worth of debt for equity, and there’s another $1bn of funding coming in as the company tries to, well, actually make money. WeWork today said it thinks it will manage to do so for the 2023 fiscal year. Huzzah! Here’s the company’s full presentation if you are so inclined.
However, it’s hard to shake off the feeling that commercial real estate more broadly is facing a tough time, which will make a durable WeWork turnround very difficult.
The Covid-19 hangover is still there, more people are working from home, while interest rates have gone up dramatically and are likely to stay high as long as inflation refuses to come down. Now we even have a little US banking crisis that will inevitably lead to tighter credit conditions.
As Oxford Economics puts it (with our emphasis below):
— The failure of Silicon Valley Bank and other stresses in the global banking system have triggered a sharp repricing in financial markets, with stocks and bond yields sliding. Our baseline assumes a banking crisis will be averted. But some shift in market pricing is not surprising considering that a banking crisis — even if a tail risk — would have very serious consequences for growth.
— Historically, banking crises tend to hit output hard. Up-front effects can be substantial and lasting damage is also possible — some estimates of the cut to long-term GDP are in the range 5%-10%. Even crises focused on smaller banks can have a substantial negative impact.
— The channels through which banking crises affect economies include: disruption to payments, negative wealth effects, damage to output in the financial sector, and sharply tighter credit conditions for the broader economy — bank share prices are a leading indicator of bank credit standards. Fiscal clean-up costs can also add to the burden via higher long-term interest rates. Our recent modelling captures these kinds of impacts.
A notable risk area is the effect on lending to commercial property. This can be an important channel even when a banking crisis is focused on smaller banks, such as in the US savings and loans crisis and the UK’s secondary banking crisis. CRE lending could be a problem area today, too, given the already-weak trends in the sector and its concentration in smaller US banks.