WeWork’s bankers are pitching investors on what would be one of the riskiest junk-debt offerings in recent years — potentially giving the venture’s top private shareholders a final chance to avoid having their stakes severely diluted.
A roughly $5 billion financing package led by JPMorgan Chase & Co. Is the company’s preferred option, rather than selling a controlling stake in itself to SoftBank Group Corp., according to people with knowledge of the matter. The structure and terms under discussion may change depending on investor appetite. Notably, the financing may include at least $2 billion of unsecured payment-in-kind notes with an unusually hefty 15% coupon, one person said.
That proposed yield — nearly double what WeWork paid on its debut bond offering last year — underscores skepticism among debt investors that the company will be able to stem its cash bleed and become profitable anytime soon. It’s a costly option that may however reward investors handsomely in the event of an actual turnaround.
WeWork’s leaders hope to turn around the office-sharing venture with emergency borrowing, even if it’s expensive, rather than watching early backers’ equity and influence diminished in a rescue by SoftBank. Top stakeholders include controversial WeWork co-founder Adam Neumann, as well as venture capital giant Benchmark Capital. Their holdings soared in value and then cratered as investors spurned an attempted initial public offering, which was halted last month.
“There may be little appetite for a cash-burning business facing other headwinds, even with a bond yield over 10%,” Bloomberg Intelligence analyst Arnold Kakuda said in a report last week.
JPMorgan’s bankers are discreetly sounding out investors and floating potential terms for the package of debt, which could help the unprofitable startup avoid running out of money as soon as next month. The financing relies on WeWork’s largest shareholder, SoftBank, following through with a plan outlined in a regulatory filing to contribute at least $1.5 billion in funding next year, according to one of the people, who asked not to be named discussing confidential talks.
Representatives for WeWork and JPMorgan declined to comment.
As recently as September, WeWork parent We Co. Appeared to be headed toward a rich valuation in its public debut before investors balked over concerns about the venture’s governance and mounting losses. The company ended up ousting Neumann as chief executive officer and postponing the offering. The delay leaves WeWork without a crucial source of funding: a $6 billion loan contingent on a successful IPO.
The financing plan JPMorgan is developing could give the company some breathing room.
The $2 billion of proposed unsecured debt may carry an additional sweetener for investors: equity warrants designed so that investors could boost their return to around 30% if the company gets to a $20 billion valuation, according to the person who described the structure. WeWork would pay only a third of the coupon in cash, while the rest of the interest would accumulate and become due at maturity, the person said.
The financing package may also include around $1 billion of secured debt that would be sold to investors, as well as about $1.7 billion in letters of credit that would be split among participating banks, according to the people.
JPMorgan’s assistance reflects the combination of financial and reputational interests as well as CEO Jamie Dimon’s mantra that the bank “be there in good times and bad” for its clients. The bank already is the lead lender on WeWork’s $650 million revolver loan and a major lender to Neumann. Its funds are among WeWork’s largest shareholders.
There’s no guarantee the financing package will be completed, as it’s unclear if there’s sufficient demand from banks and debt investors. WeWork has said about 60 financing sources have signed confidentiality agreements as part of the process, indicating JPMorgan and the company are casting a wider net than is typical for such a deal, according to people familiar with the process.
But as talks continue, people inside WeWork view a potential sale of a controlling stake to SoftBank as a backup plan, less desirable to employees whose holdings would shrink in such a deal, according to people with knowledge of their thinking. WeWork is expected to make a decision as soon as this week about which option it will proceed with.
Since pulling its IPO, the startup’s new leaders have promised to rein in its once lavish spending. The venture has said it’s looking to offload several of the companies it recently acquired, plans to shutter an elementary school located in its corporate headquarters in New York and even put its $60 million corporate jet up for sale.
Masayoshi Son, the head of SoftBank, last month tasked Chief Operating Officer Marcelo Claure, a former CEO of Sprint Corp. With cleaning up WeWork, people familiar with the matter said. Claure’s role has not yet been defined, but the people said he would be looking for ways to cut costs and boost revenue.
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