WeWork Files for Bankruptcy Amid Continued Losses

WeWork has filed for bankruptcy ending the last few days of speculation about its future. The company was perennially loss-making and had a bloated debt pile.

In its release, WeWork said that it “has commenced a comprehensive reorganization to strengthen its capital structure and financial performance and best position the Company for future success.”

It has entered into a Restructuring Support Agreement (RSA) with the majority of its secured creditors to “drastically reduce the Company’s existing funded debt and expedite the restructuring process.” It added, “During this period, WeWork will further rationalize its commercial office lease portfolio while focusing on business continuity and delivering best-in-class services to its members, as global operations are expected to continue as usual.”

WeWork filed for bankruptcy

WeWork has filed for a Chapter 11 bankruptcy which is related to its locations in the U.S. and Canada and the company reported liabilities between $10 billion to $50 billion in its filings.

The company has been struggling with perennial losses and reported a net loss of $397 million in Q2 2023 which took its first-half net loss to $696 million while the losses narrowed from $1.14 billion in the first half of 2022, they are still quite sizeable. At the end of June, it had a cash balance of a mere $205 million.

During the earnings release, it warned “as a result of the Company’s losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the Company’s ability to continue as a going concern.”

Back then it said that among others its ability to continue as a going concern is contingent upon the following

• Reducing rent and tenancy costs through restructuring actions and negotiation of
• favorable lease terms.
• An Increase in revenue by lowering member churn and making new sales
• Cutting expenses and capital expenditures
• Raising additional capital through either issuance of debt or equity securities or sales of assets

Meanwhile, the macro environment has only worsened amid the ongoing Israel-Hamas war and several companies have said that they have seen some slowdown since the war began.

Macro conditions have worsened

David Tolley who took over as the position of WeWork’s CEO last month only said “Now is the time for us to pull the future forward by aggressively addressing our legacy leases and dramatically improving our balance sheet.”

He added, “We defined a new category of working, and these steps will enable us to remain the global leader in flexible work. I am deeply grateful for the support of our financial stakeholders as we work together to strengthen our capital structure and expedite this process through the Restructuring Support Agreement.”

WeWork has a troubled past

WeWork which is backed by Japanese venture capital giant SoftBank has a troubled past. It was targeting a valuation as high as $47 billion in the 2019 IPO which was stalled, among others for corporate governance issues. SoftBank subsequently valued the co-working space company at around $8 billion in a bailout.

It eventually went public towards the end of 2021 in a special purpose acquisition company (SPAC) transaction that valued the company at $9 billion. However, as has been the case with most de-SPACs, WeWork shares also plummeted after the listing and the company recently had to do a reverse stock split to meet the minimum exchange listing conditions.

SPACs became very popular in 2020 and 2021 and enabled several loss-making companies like WeWork to go public easily by avoiding the hassles and higher regulations associated with the traditional IPO route.

SPAC mania has busted

2020 was a record year for SPACs and there were more SPAC IPOs in the year than there were in the previous ten years combined. The total money that SPACs raised in 2020 was almost similar to what traditional IPOs raised. Also, SPAC IPOs hit another record in 2021 amid the continued demand for these blank cheque companies.

However, over the last year, SPACs have been in the news for mostly wrong reasons which include winding up, mass redemptions before the merger, as well as reports of financial irregularities. Also, many former SPACs have done a reverse stock split to meet the listing requirements. Worse, the list of former SPACs filing for bankruptcies is only rising and WeWork is the latest entrant to the expanding list.

One of the loopholes with SPACs which US regulators have since plugged was their ability to forecast future earnings, which in hindsight turned out to be far too rosy for most, if not all SPACs. WeWork for instance forecast total memberships at 1.5 million at the end of 2024, but at the end of Q2 2023, the actual number was just about a third.

Similarly, its occupancy levels of 72% are way below what it projected. Importantly, the company forecast $2 billion of operating cash flows in 2024. It posted negative operating profits in the first half of 2023.

Adam Neumann

Neumann meanwhile said that he was “disappointed” after WeWork’s bankruptcy filing. He said, “It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before. He added, “I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.”

SoftBank

WeWork is among the worst investment for SoftBank and the company has already written off most of the investment. Its Vision Funds posted a record loss of $32 billion in the last fiscal year amid the fall in valuations of startup companies.

Meanwhile, in its filings, WeWork said that it has over 700 locations globally and 40 million square feet available to rent, half of which is in the US and Canada. The company expects the bankruptcy process to last less than seven minutes.