WeWork’s hedge fund takes over debt

Robby Simmons, a finance worker, recently explored the WeWork building in London’s Canary Wharf to break up the monotony of his workday. Simmons, 32, climbed the elevator between the ten floors and looked through the glass to see if there were any empty spaces.

WeWork needs to fill empty seats, even though remote working is very popular in Britain.

The firm continues to make losses and hemorhage cash thirteen years after Adam Neumann, its messianic founder, opened WeWork’s first coworking space in Manhattan. Chief executive Sandeep Mathrani, who has $2.87 billion (PS2.38 trillion) of debt due by 2025, is racing to convince backers it can succeed.

The company’s unsecured bonds trade at 47 cents per dollar. This suggests that investors have serious concerns about the company’s ability to refinance its debt. Most of the company is owned by SoftBank, a Japanese investment giant. At a time when borrowing costs are rising rapidly, this raises questions. King Street, a US hedge fund, has taken WeWork’s debt and made it the second-largest holder. This sets the stage for a dispute over the future of the co-working company.

WeWork is London’s largest commercial tenant. This has significant implications for London’s office market. With the rise of interest rates and concerns that the majority of Britain’s workforce won’t return to working five days per week, valuations for all buildings are plummeting at alarming speeds.

WeWork was founded in 2009 to provide hot-desking space to start-ups. It has led a shift toward flexible office space that can be leased on short-term leases to companies like Amazon and KPMG.

In 2016, Neumann took just 12 minutes to present a pitch that convinced Masayoshi Son, SoftBank boss, to invest more than $4B in WeWork’s venture capital fund. SoftBank’s first investment was made in Son’s car. It brought together two ambitious people with incredible consequences. WeWork built 100 new buildings in the next year. The company doubled its size and lost almost $1 billion.

Howard Schultz, former chief executive of Starbucks, advised Neumann in early 2018 to slow down and address issues that could otherwise plague WeWork over the years. Neumann ignored this advice and within months, he was lobbying Elon Musk for permission to build a WeWork community in Mars after SpaceX founder Scott Kelly had made a breakthrough.

Even though his company was suffering huge losses, Neumann continued to work with WeGrow, an Manhattan school that teaches Hebrew and robotics to children.

WeWork also relaxed its due diligence regarding new locations and routinely overpaid for them. WeWork also offered brokers a 100 percent commission on the first year of rent from tenants. WeWork offered a year rent-free in many cases. It also paid no income to the landlord for two years. It suffered another $2 billion in losses as young tech workers indulged in free beer and WeWork employees enjoyed wild, company-sponsored music festivals. Patrick Nelson, WeWork’s international head for real estate, was recently fired. He is a survivor from the Neumann era.

Neumann was a pot-smoking, idealist, who was raised on a kibbutz. He praised his special relationship to Son and compared WeWork’s founder with Jack Ma, China’s answer for Amazon. The WeWork losses rose and the criticism mounted about Son’s kindness towards Neumann. However, the Japanese billionaire said that feeling is more important than looking at numbers.

These numbers look terrible now. SoftBank had already funded Neumann’s vision with $16.9 million in equity and debt financing by the time WeWork was floated in New York in 2021 via a special purpose acquisition company (Spac). SoftBank’s latest writedown was last week when it took a PS1.58billion charge for expected losses. The Japanese giant is the owner of $1.65 billion of WeWork’s $2.87 trillion unsecured debt.

WeWork could face more problems due to the influx of tech workers, who account for 30% of its tenants. Its precarious situation is already starting to show its ugly side in the UK where it owns 61 buildings. Tesco Pension Fund, which is the owner of Dalton Place in Manchester, a block of office space leased to WeWork, placed the property on the marketplace in September. However, concerns about WeWork’s health partially explain why the owner has reduced the asking price by more that PS44 million.

The bids for an office block located in the shadows of St Paul’s Cathedral that WeWork has signed a lease for have been around the PS50million mark, well below the asking price of PS68 million. Sam Resouly, a property investor Trinova, stated that the WeWork covenant was not worth anything at this time.

Flexible office providers suffered from a severe pandemic that saw a lot of tenant cancellations and renegotiations. Mathrani is a US property veteran who assumed the helm after Neumann’s resignation in 2019. He has cut costs by approximately $4 billion over the last three years.

WeWork’s co-working spaces and offices, despite concerns about its financial viability are still highly sought after, The firm reported to investors that it had increased sales by 24% to $817 million in its third quarter. This raised the possibility of the company making an underlying profit for December, which would mark the first profitable month in WeWork’s turbulent history.

WeWork has more demand for their top sites than they have available. They are receiving rents at an astronomical premium to what the landlord is paying,” stated Mike Hussey chief executive of Almacantar, which has WeWork in London’s Southbank Place.

Large companies have sought shorter and more flexible leases because of uncertainty about future office requirements and economic conditions. Workthere, an estate agency Savills’ flexible-office broker, reported that the UK average cost for a desk was PS549 per month in 2013, up 4% from pre-pandemic levels.

WeWork’s offices have a high occupancy rate of 79%, which is a popular choice with workers. Raunak Jha (a software developer at fintech Mmob) said there is no free pool table or football table during lunch. He is a tenant at WeWork’s Canary Wharf location. You can always have a relaxing time between work. It’s quite chilled.”

Mathrani will also present his plans to avoid a painful restructuring, along with WeWork’s latest results. Fitch analyst Kent Reynolds said that the company had enough liquidity to last at most 12 months, but a restructuring was inevitable.

WeWork’s small assets make it unlikely that lenders would push it into bankruptcy. This makes restructuring of debt more likely. It may be difficult to align the interests of SoftBank (a shareholder that is looking for ways to reduce its losses at WeWork) and King Street (an opportunistic investor who arrived much later).

James Williams, a partner at JMW Solicitors’ restructuring practice, stated, “If $2.9 billion of debt is due and you aren’t making any profit, then how can you repay it?” All stakeholders must buy into WeWork’s future to negotiate a refinance.

Maybe some of Neumann’s unwavering optimism is still needed.

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