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Is the WeWork IPO Dead? Junk Investors Start to Think So

The company’s debt is trading at a record-low price and yielding close to 12%.

Is the WeWork IPO Dead? Junk Investors Start to Think So
Pedestrians pass in front of a WeWork Cos Inc. location and Away luggage store in the Seaport neighborhood of Boston. (Photographer: Adam Glamzman/Bloomberg)

(Bloomberg Opinion) -- WeWork says it’s on an “official pause” from becoming a public company. Its bondholders might be thinking it’s something more permanent.

The company’s $669 million of junk-rated debt traded at an all-time low of 84.5 cents on the dollar on Monday after it announced it was formally withdrawing the prospectus for its initial public offering. It’s the seventh consecutive day that the price of WeWork’s bonds has declined, the longest losing streak in more than a year. The yield is close to 12%, more than double the average rate in the Bloomberg Barclays U.S. Corporate High Yield Index.

Is the WeWork IPO Dead? Junk Investors Start to Think So

Of course, WeWork is no average company. Its debt has always been rated junk, but S&P Global Ratings downgraded it one level on Sept. 26 and warned it could do so again in six to 12 months “if the company struggles to secure additional financing to support its operating and growth needs.” As it stands, the bonds are veering toward triple-C — a category that signifies “in the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

At this point in the WeWork saga, it’s starting to feel as if there’s little escape from adverse conditions. Concerns about corporate governance led co-founder Adam Neumann to step down as chief executive officer last week. That obviously didn’t save the IPO, which the company had previously committed to completing this year. It lost $900 million in the first half of this year and is trying to remedy that by selling a few businesses and a $60 million Gulfstream jet as well as potentially laying off thousands of employees. It’s reportedly in talks to get a new $3 billion loan, but that’s contingent on raising new equity. That, in turn, would probably have to come from SoftBank Group Corp., which reportedly urged WeWork to postpone its IPO.

Given all of that, it seems that WeWork pulling its IPO wasn’t so much a shock for some bond investors as it was simply the final straw. Prices fell, to be sure, but hardly to the extent that they would have if creditors were caught unaware. Rather, what the chart of WeWork’s junk bonds shows is a steady exodus as investors grow increasingly doubtful that WeWork will be able to bounce back from the onslaught of market skepticism. It’s just been a matter of how much bad news is too much.

To be clear, WeWork has given no indication it’s throwing in the towel. “This puts an official pause on our process of becoming a public company,” Artie Minson and Sebastian Gunningham, the interim co-CEOs of WeWork parent We Co., said in a note to staff members. “Rest assured, WeWork will become a public company, but we can only IPO once and we want to do it right.”

It’s true that a company can only IPO once. The alternative, of course, is that a company doesn’t IPO. 

WeWork’s bondholders were most likely counting on the company’s IPO because it would put public equity investors beneath them in the capital structure. The debt rallied after the company announced in late April that it had filed paperwork confidentially with the Securities and Exchange Commission to hold an IPO. It popped again after WeWork filed its S-1 prospectus in August.

With WeWork’s IPO officially shelved for now, bondholders are as alone as they’ve been in some time. For those still holding on, one key reason has to be SoftBank’s huge stake in WeWork’s success. The Japanese conglomerate has invested nearly $11 billion since the start of 2017 and controls two board seats. It seems in too deep to give up now.

Bondholders — most of whom are unknown — can cut their ties more easily. High-yield investors are used to dealing with dicey companies and sticking it out through thick and thin. It says something about WeWork’s future that they’re beginning to lose their nerve.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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