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WeWork’s Cash Clock Is Running Down Quickly

The company’s two newly appointed CEOs need to quickly figure out how to raise enough money by next spring.

(Bloomberg)—WeWork has only enough cash to last to maybe next spring. It’s losing millions of dollars a day. It may be shut out of the public stock and bond markets to raise new money.

That’s the grim situation confronting the office-sharing company days after a corporate upheaval that left its once-glittering plans shattered. Adam Neumann, who founded the company nine years ago with a promise to change the world, was ousted as CEO. WeWork’s initial public offering, intended to raise urgently needed financing, was called off, until at least next year. And that, in turn, unraveled a $6 billion financing package.

So now the two new co-CEOs named to replace Neumann -- Sebastian Gunningham and Artie Minson -- need to quickly figure out a way forward for a company that was once one of the world’s most valuable startups but has never made a penny in profit. That likely means seeking substantial new bank loans and private investments. It also may mean shedding thousands of jobs and tossing out Neumann’s grow-at-all-costs ambitions.

The first task: WeWork is in talks with Goldman Sachs Group Inc. and JPMorgan Chase & Co. about a new $3 billion loan. But there’s a catch: Any such deal would also require the company to raise new equity. That could mean Gunningham and Minson returning hat in hand to its biggest investor -- SoftBank Group Corp., the Japanese company that has already pumped in more than $10 billion.

Getting new financing is critical. The company lost $690 million in the first six months and it burns through cash. Even with $2.5 billion in cash as of June 30, the company could run out of money by mid-2020, analysts have said.

Such numbers could spell the end to Neumann’s profit-less growth ethos. When Fitch Ratings downgraded the company’s debt in August, it said the company had made a choice to prioritize growth over profitability by planning for more than 1.25 million new desks -- more than twice what’s currently available -- and plans to open in 175 new cities globally.

For next year alone WeWork, or We Co. as it was renamed, had planned to add 725,000 new desks at a cost of about $4.5 billion, S&P Global Ratings has estimated.

Business Model

Even WeWork’s basic business model could be at stake. WeWork has raised more than $12 billion to rent office space that it renovates and then leases to companies. But that strategy has left it in a precarious position. It has some $47 billion of future rent payments due. On average it leases its buildings for 15 years. Yet its tenants are committed to paying only $4 billion, and on average have leases for 15 months.

Those long-term leases “may become an albatross in an economic downturn,” Bloomberg Intelligence analyst Jeffrey Langbaum wrote in a report Wednesday, adding that WeWork needs to find a “clear path to profitability.”

A WeWork representative didn’t immediately respond to a request for comment.

One immediate task for the new executives is to reduce costs drastically and slow the cash burn that’s worried investors. They are weighing job cuts that could number in the thousands -- the company currently employs about 12,000 people -- and eliminating or spinning out non-core businesses, such as WeGrow, an experimental New York City private school, a person with knowledge of the matter said earlier.

Deep cuts could free up meaningful resources: the company spent $184 million on payroll last year, and another $23 million in stock compensation.

WeWork has long maintained that it could become a profitable company if it decided to cut its growth ambitions. The new co-CEOs have warned employees in an email that they “anticipate difficult decisions ahead” to protect WeWork’s “long-term interests and health.”

WeWork could try tapping the high-yield bond market again. But credit investors would demand a steep price. WeWork’s existing high-yield bonds yield about 9.8%, far above the average for junk bonds, which sit around 5.7%. On Wednesday, they were trading at the lowest prices since June.

With revenue of more than $3 billion in the first six months of this year, WeWork in theory shouldn’t have difficulty making interest payments on its bonds. That debt isn’t due until 2025, though the company will make more than $52 million in annual payments on the notes.

Even as the new managers seek to clear up the company’s balance sheet to prepare for an IPO at some point, “The market is highly skeptical of this company,” said John McClain, a high-yield bond investor at Diamond Hill Capital Management. “All eyes will be on SoftBank and how WeWork will proceed as they move away from Neumann.”

--With assistance from Sally Bakewell and Ellen Huet.

To contact the reporter on this story: Claire Boston in New York at [email protected].

To contact the editors responsible for this story: Nikolaj Gammeltoft at [email protected]

Larry Reibstein, Michael Hytha

© 2019 Bloomberg L.P.

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