According to a story posted in the Wall Street Journal on August 24, several owners of WeWork’s secured debt totaling $1.2 billion are holding what were called “preliminary talks about the company’s restructuring options and indicated that they would support a plan for WeWork to file for chapter 11 bankruptcy.” However, the creditors who include BlackRock, King Street Capital and Brigade Capital, have not yet provided specific proposals concerning a bankruptcy or debt restructuring to WeWork, as per sources that were not identified.
What does this news mean for WeWork tenants, known as members? It is not a short-term prospect. We are only at the beginning of a long process with many twists. I consulted Eric Haber, general counsel for my firm Wharton Property Advisors who is also a bankruptcy attorney. To do so I consulted Eric Haber, general counsel for my firm Wharton Property Advisors who is also a bankruptcy attorney.
A Potential Bankruptcy Scenario
Under a potential bankruptcy reorganization plan, those senior creditors would swap their debt for equity in a reorganized WeWork and the current shareholders would potentially have their stock wiped out or severely diluted. WeWork would need to be able to renegotiate a sufficient number of above-market leases at more favorable terms, while still remaining a profitable business. WeWork has undergone multiple reorganizations over the past few years, which is equivalent to an out-of-court bankruptcy. So why would a third or fourth time be a success? In the business models of competitors, coworking operators form a partnership with landlords in which they both share the costs and risks involved in leasing out a space to tenants and share in any profits if that space is profitable. That is in contrast to the WeWork format under which WeWork leases space directly from landlords and then operates an independent business.
For the purposes of our example, let’s assume that WeWork does have enough success in bringing its rental costs down one way or another such that the senior creditors would be interested in exchanging their debt for equity under a bankruptcy plan (a very tall order). WeWork will then assume leases it believes are profitable under the new terms. As a result, at the centers that are profitable, there would likely be little change for members.
However, the situation would be different where WeWork determined that it is impossible to make a profit and/or could not successfully renegotiate lease terms with the landlord. WeWork would reject those leases. The situation of tenants at these locations will be much more uncertain. The landlord may try to lease the space out to a larger business and kick the tenants out. The landlord can also allow tenants to stay and run the space themselves (which is difficult), or partner with another coworking organization to help them. I’m not confident that WeWork will be able to pull off a successful restructuring. Office leasing is today a highly risky business. The demand for office space has dropped significantly since the pandemic because of remote work. While that drop in demand does give WeWork some leverage in negotiating with landlords who will have great difficulty replacing WeWork because it is a large tenant, the underlying economics of office leasing are still daunting.
Indeed, WeWork might not even file bankruptcy at all if it is successful negotiating with its landlords outside of court and if it does file bankruptcy, it might not be able to reorganize. The words of late Hollywood screenwriter William Goldman, who said “nobody knew anything” about the success of a film, also apply. The WeWork script is not even complete. The plot is getting thicker fast.