WeWork Boosts Junk-Bond Deal to $702 Million in Debut Sale

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(Bloomberg) -- WeWork Cos. sold $702 million of bonds in its first-ever offering, increasing the size of the deal by 40 percent after finding plenty of investors willing to fund the cash-burning company that subleases office space.

The startup backed by SoftBank Group Corp. priced the seven-year unsecured bonds to yield 7.875 percent, according to a person with knowledge of the matter. The company had initially planned to sell $500 million, and then received orders of about five times that amount, the person said, asking not to be named because the deal is private.

WeWork also moved up the pricing by a day, likely another sign of strong investor demand, CreditSights said in a report Wednesday. The office space company had initially dangled yields of 7.75 percent to 8 percent, the person said.

The company is the latest high-flying upstart with big ambitions and negative cash flow to tap into debt investors’ desperation for yield. Uber Technologies Inc. in March and Netflix Inc. earlier this week also boosted the size of their debt offerings.

A representative for New York based WeWork was not immediately available for comment.

WeWork is in the midst of a global expansion supported by a $4.4 billion investment from SoftBank. Just this month, the company bought a Chinese startup and an office complex in London. It also plans to open several new offices throughout Japan this year.

WeWork began business in 2010 by leasing office space and renting desks to New York’s creative set, touting unusual perks like microbrews on tap and allowing workers to bring pets to the office. It now has 234 locations locations across 22 countries, company documents show, with a portfolio of short-term co-working spaces, mainly leased from landlords on long-term rental agreements.

Those leases add up to an $18 billion rent bill due through 2023 and beyond, according to bond documents seen by Bloomberg. That figure, as well as a heavily engineered earnings measure it calls “community adjusted" earnings before interest, taxes, depreciation and amortization, have drawn heavy scrutiny -- summed as “sketchy financials with no public history” by CreditSights analyst Jesse Rosenthal.

‘Recipe for Disaster’

“We cannot get comfortable with the company’s financial and operating position, which includes a massive asset/liability mismatch that is usually a recipe for disaster, significant cash burn, cyclically untested real estate business model, and uncertain path to profitability,” Rosenthal said in a report Wednesday entitled “WePass.”

By some creative metrics, WeWork is profitable. Debt investors typically look at Ebitda as a measure of how much money is available to pay interest. WeWork’s “community adjusted Ebitda” ignores basic expenses like general and administrative, marketing and development costs, which are usually considered critical for daily operations. That measure of earnings, for the year ended Dec. 31, was $233.1 million.

WeWork is also using a different adjusted earnings figure in some of its lender agreements that give investors fewer protections, Covenant Review analyst Anthony Canale said in a report Wednesday. The firm called the adjustments “aggressive.”

Not Profitable

Moody’s Investors Service rated the notes Caa1, seven steps into junk. S&P Global Ratings rated them three steps higher than Moody’s at B+, while Fitch gave them a rating of BB-, four steps higher than Moody’s.

“WeWork has billions in cash and deep-pocketed private equity backing, but spending on its ambitious global growth plans mean it will likely be years before there are consolidated profits or free cash flow,” Moody’s analyst Edmond DeForest said in the report.

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, Morgan Stanley, UBS Group AG and Wells Fargo & Co. managed the sale, the person said.

©2018 Bloomberg L.P.

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