WeWork has elected to not pay due interest on five notes. This comprises $37.3m in cash and $57.9m in PIK notes.
The notes on which interest has not been paid are:
- 15.000% First Lien Senior Secured PIK Notes due 2027;
- 11.000% Second Lien Senior Secured PIK Notes due 2027;
- 11.000% Second Lien Exchangeable Senior Secured PIK Notes due 2027;
- 12.000% Third Lien Senior Secured PIK Notes due 2027; and
- 12.000% Third Lien Exchangeable Senior Secured PIK Notes due 2027.
WeWork has a 30 day grace period under the indentures for each security – until each non-payment becomes an event of default.
WeWork says that it has the liquidity to make the interest payments and may chose to do so at a later date.
The company stated: “Entering the grace period is intended to allow discussions with certain stakeholders in the Company’s capital structure to commence, while also enhancing liquidity as the Company continues to take action to implement its strategic plan. As part of this strategic plan, the Company is focused on rationalizing its real estate footprint and improving its capital structure.”
Debt Restructuring or Chapter 11
This may mean that WeWork bondholders can expect negotiations that could, among other things, aim to reduce the quantum of their due amounts, reduce the interest rate on their debt and/or extend the tenor of their debt .
This may be the best action possible by interim CEO David Tolley given the situation he has inherited to try and achieve the best outcome for the company’s stakeholders. Cash balances are low relative to expenses and cashflows used in operating activities per WeWork’s Q2 accounts.
A debt restructuring might make sense for all parties including bondholders – with it appearing clear that company will not be able to repay its outstanding debt.
As an indication WeWork’s $702m 7.875% May 2025 bonds are quoted at around 7 cents.
A debt restructuring might prove complex with the number and formats of obligations WeWork has outstanding and the total number of lenders across all those obligations. In addition to this, WeWork’s lease obligations might create additional legal complexity. A 30-day clock before an event of default might also be tight.
WeWork may enter a Chapter 11 process if a capital structure restructuring cannot be achieved through direct negotiation.
Broader Implications Beyond WeWork
WeWork has company specifics that have resulted in this situation. WeWork has some characteristics of a real estate company: most notably that its main input is office building space. But the company is relatively asset light (leasing its offices from landlords) – potentially making recovery post default values on debt very low relative to companies that own their own real estate.
That said, the company’s current situation is also in part due to a very bullish lending environment over the last few years – that has now turned. This has contributed to WeWork not being able to raise additional new funding – as debt or equity. At its peak, WeWork’s valuation was $47bn. It’s market capitalization is now around $150m.
In this context, we might reasonably expect a greater number of companies with large amounts of debt outstanding that have found themselves facing a radically different environment and set of options now relative to recent years , to begin to restructure and/or default.
