WeWork bonds fall on SoftBank’s roughly $10 billion rescue package

WeWork bonds fall on SoftBank’s roughly $10 billion rescue package

October 24, 2019

Investors in WeWork’s existing bonds aren’t thrilled about the office-sharing venture’s roughly $10 billion rescue package from SoftBank Group Corp.

WeWork’s nearly $670 million of outstanding junk-yield bonds fell to an average of 83.60 cents on the dollar in trade Wednesday, down from a recent high of 91 cents on the dollar on Oct. 14, according to bond trading platform MarketAxess.

The leg lower in trading comes as investors digest details of SoftBank’s 9984, -1.48%  11th-hour takeover of the embattled real estate platform, which otherwise could have run out of money by the end of next week, according to a CNBC report.

SoftBank’s fresh debt and equity package will give the Japanese conglomerate an 80% stake in WeWork and the company another shot at finding a path to profitability under fresh management.

As part of the plan, controversial co-founder Adam Neuman could land a nearly $1.7 billion windfall to cut most of his ties to the company, while the Financial Times has reported that WeWork expects to slash about 30% of its staff globally.

SoftBank’s rescue package includes an up-to-$3 billion tender offer for WeWork shares, a fast-tracking of its planned $1.5 billion investment in the venture and another $5 billion of debt financing, which could cause the company’s existing junk bonds to be worth less should the turnaround effort fall short.

“You’re putting a significant amount of debt on that’s senior to the existing bonds,” said John McClain, a portfolio manager at Diamond Hill Capital Management, of the planned financing package. “It’s a positive in terms of extending the company’s lifeline, but negative in terms of creditors being lower in a priority claim.”

WeWork declined to comment for this article. SoftBank did not immediately respond.

But if WeWork were to eventually look to restructure its debts, existing junk-bond holders could end up waiting behind newer creditors for any potential payout.

And as investors mulled the debt package, yields on WeWork’s junk bonds jumped to about 12% Wednesday from a low of 9% on Tuesday, and an initial yield of 7.8% some 18 months ago at issuance when the company still was considered a rising star. Bond yields move in the opposite direction of prices.

To be sure, WeWork’s bond yields have been elevated since the company’s plans for its highly-anticipated initial public offering were thwarted last month, amid rising criticism from potential investors about the company’s significant cash burn, hefty $47 billion pile of long-term leases and lofty $47 billion private valuation, which this week was slashed to about $8 billion.

Check out: Here’s what savvy bond investors are saying about the failed WeWork IPO

But more broadly, debt investors have shown no lack of appetite when it comes to financing other unicorns that remain unprofitable, which was underscored this week when Netflix NFLX, +1.72% , another cash-burning company, was able to raise another $2.2 billion in the junk-bond market at yields well below 5%.

Check out: Netflix sells $2.2 billion of junk bonds as it braces for onslaught of competition

Ride-hailing service Uber Technologies UBER, +1.60% also raised $1.2 billion in the junk-bond market last month, more than its initial $750 million target, while paying investors yields of 7.5%.

And while the debt markets may be open, SoftBank will need to show investors rattled by WeWork’s swift reversal of fortune that it can cut costs and eventually turn a profit, said Loren Trimble, chief executive officer of AArete, a global consulting firm.

“One thing they have to do is get more revenue out of its footprint,” said Trimble, who estimates that WeWork could blow through its new financing package in about 10 months without implementing significant costs savings.

In that vein, Trimble suggested that WeWork immediately increase the amount of rent its charges users of its office-share spaces.

“They also have to go down their list of $47 billion of lease commitments, and one-by-one renegotiation contracts and come up with better pricing,” he said.

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