Fitch downgrades WeWork after aborted IPO leaves financing hole

Joshua Franklin, Reuters

Posted at Oct 02 2019 01:45 PM

A WeWork logo is seen outside its offices in San Francisco, California, US September 30, 2019. Kate Munsch, Reuters

NEW YORK, United States - Global credit rating agency Fitch Ratings on Tuesday downgraded WeWork's credit rating by two notches to "CCC+," putting the Softbank-backed office-sharing firm deep into junk territory a day after it abandoned an initial public offering.

WeWork, whose parent We Company lost $1.9 billion in 2018, had hoped to raise at least $3 billion in the abandoned IPO and borrow a further $6 billion in a loan from banks that was contingent on the listing.

"In the absence of an IPO and associated senior secured debt raise, WeWork does not have sufficient funding to meet its growth plan," Fitch wrote in a note.

Additionally, Fitch warned that there is a potential for WeWork's customers, particularly big companies, to "hesitate to sign membership agreements" given the current flux. It said there was no evidence of this yet.

WeWork's rating outlook is also negative, Fitch added.

WeWork declined to comment.

Monday's decision to scrap the IPO marked the conclusion of a tumultuous few weeks for WeWork, which failed to excite investors who raised concerns about its ballooning losses and a business model that involves taking long-term leases and renting out spaces for a short term.

Fellow ratings agency Standard & Poor's last week downgraded WeWork to "B-" from "B".

Both "CCC+" and "B-" are junk bond ratings reserved for corporate borrowers judged to be higher risk to lenders.

WeWork is in discussions with banks as well as its largest investor SoftBank Corp about potential alternative funding, two sources familiar with the matter told Reuters on Monday.

Fitch said it could revisit the rating if WeWork was "able to negotiate a firmly committed financing plan and demonstrate successful implementation of any turnaround plan."

WeWork's 7.875 percent junk bond was last trading at about 84 cents on the dollar, according to MarketAxess, a significant discount to face value, which indicated investor concerns about repayment or doubts about the company securing alternative financing.

WeWork's new co-CEOs Artie Minson and Sebastian Gunningham, who replaced ousted founder and chief executive Adam Neumann last week, have talked about the need to return to WeWork's core business of renting out trendy office space to freelancers and enterprises. That would pull the company back from the fringe activities Neumann had forayed into, such as education.

Given that, Fitch expects WeWork "will face material restructuring cash charges as it reduces its workforce, which had reached over 12,500 in the second quarter."

WeWork had under $2.5 billion in unrestricted cash at the end of June and is due to receive $1.7 billion from SoftBank in 2020, according to Fitch, which estimated that would provide for four-to-eight quarters of funding, without taking into account any potential restructuring costs.