Only JPMorgan Can Fill WeWork's $47 Billion Hole
(Bloomberg Opinion) -- When JPMorgan Chase & Co. reports its earnings Tuesday, one question investors will want answered is what the bank is doing with WeWork. The disgraced unicorn, whose valuation went from $47 billion to less than $15 billion in a matter of weeks, could run out of money as soon as next month.
Just like the rest of the junk-rated corporate world, WeWork is looking to dig out of its cash-flow woes with more credit. The company is currently weighing two options: a roughly $5 billion financing package led by JPMorgan, and selling a controlling stake to SoftBank Group Corp. WeWork prefers the bank rescue, Bloomberg News reported.
Part of the deal may include at least $2 billion in financing with an exorbitant 15% coupon, a person familiar with the matter said. That’s double what WeWork paid for a $702 million bond in April 2018, and compares with a range of 2.5% to 6.2% for its bank loans, according to the company’s prospectus. To top it off, the $2 billion chunk is structured as payment-in-kind notes, which allows the company to pay interest via the issuance of additional bonds. This structure essentially allows WeWork to squirm out of cash outlays and kick the repayment can down the road.
JPMorgan CEO Jamie Dimon could well say that WeWork’s rescue package proves the full-service bank will “be there in good times and bad” for its clients. The reality is, the lender can’t wriggle out of WeWork as easily as your traditional investment bank, whose responsibilities end when an IPO is pulled. JPMorgan has been at WeWork’s side the entire time, grooming the company to become the $47 billion bubble that it was.
In recent years, Dimon has made a considerable effort to win big IPO deals by pitching the bank as a soup-to-nuts operation. With WeWork, JPMorgan did just that. The bank participated in a funding round that valued the company at $5 billion in 2014, and followed up with a $650 million credit line in 2015 and an additional $500 million two years later. JPMorgan’s role was so prominent that WeWork listed the bank, along with founder Adam Neumann, SoftBank and Benchmark Capital, among its “investors” in the 2018 bond-offering memorandum.
It’s therefore not unreasonable to suspect that JPMorgan is trying to avoid potential impairments by rescuing the startup from the brink of collapse. Jefferies Financial Group Inc., for instance, already wrote down the value of its WeWork investment by $146 million. Potential losses related to WeWork have also prompted analysts to cut earnings estimates for Goldman Sachs Group Inc., which also reports Tuesday — a revision amounting to a 25% fall in profit from a year earlier.
Some of this could hit JPMorgan indirectly, too. Any pullback in the operations of WeWork, a major lessee of commercial real estate, could swipe at the entire sector, which counts JPMorgan as its third-biggest lender in the U.S.
But most likely, the WeWork hiccup won't leave a dent in the business of megabanks like JPMorgan, which spans commercial to investment banking. Rather, this $5 billion rescue may reflect Dimon’s faith that throwing capital at a business concept with no profitability in the foreseeable future is still an effective strategy in the fantastical world of unicorns.
Just look at how the financing is being restructured: The $2 billion of debt may carry an equity warrant so that investors can boost their return to around 30% if the company achieves a $20 billion valuation, Bloomberg News reported. In other words, as long as credit investors keep the liquidity taps open, WeWork’s business model could still scale up quickly. Once it’s too big to fail, wouldn’t stock investors want exposure, too?
And who else on the Street can provide better financing than JPMorgan? As I’ve written, the lender has emerged as a big winner from the collapse of Lehman Brothers Holdings Inc. Thanks to fast retail growth, it has more money to lend. And well-loved by shareholders, JPMorgan can afford to take some risks, such as branching into lending to non-conventional corporates (like WeWork).
No doubt, WeWork is a cash vampire. But who can feed one better than a bank? So move over, SoftBank. When it comes to incubating startups, your $100 billion Vision Fund has nothing on the most prominent commercial lender in the U.S.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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