Fitch Ratings has downgraded WeWork Companies, LLC and WeWork Inc.'s (collectively WeWork) Long-Term Issuer Default Rating (IDR) to 'D' from 'RD' following the company's filing for Chapter 11 bankruptcy protection on Nov. 6, 2023.
There was approximately $4.2 billion in total debt (including accrued interest) outstanding as of the petition date. Fitch is also downgrading the first-lien debt to 'C'/'RR4' from 'CC'/'RR3'. Fitch has affirmed the second-lien and unsecured debt at 'C'/'RR6'.
The company filed with a restructuring support agreement in hand in which WeWork and several key constituents, including SoftBank and holders of WeWork's first and second-line notes, agreed to support a restructuring process that will equitize the company's first and second-lien debt and reduce funded debt by approximately $3 billion. Close to $490 million of third-lien and unsecured bond debt are expected to be extinguished.
To address liquidity during the bankruptcy process, the company is arranging a senior secured, debtor-in-possession cash collateralized LOC facility in an aggregate amount not to exceed $750 million. Any amount drawn on the LOC DIP facility in excess of $100 million will be converted to equity. Amounts drawn up to $100 million will be rolled into a new first-lien exit facility upon the company's emergence from bankruptcy. The terms of the DIP facility are subject to judicial approval.
Key Rating Drivers
Lease Negotiations: The company claims in its filing to be in negotiations with more than 400 landlords to reduce its lease obligations. It is also rejecting 69 leases, of which 40 are in New York City, as part of the bankruptcy process. The company views a successful reduction in its lease payments as essential to its ability to exit bankruptcy with a viable business. This process is a continuation of ongoing attempts to reduce its lease liabilities. In its 2022 annual filing, WeWork noted that during the prior three years, the company had successfully exited or reduced the obligations associated with more than 700 leases. Current upheaval in the commercial office space market benefits WeWork in these negotiations, and the bankruptcy filing will add pressure on the landlords.
The mismatch between the long-term nature of the company's leases and the short-term agreements with its customers is a fundamental flaw of the business model. WeWork has a few revenue sharing agreements with landlords that protect it from lower demand for office space. The benefit of this model for WeWork is obvious, but it is not clear whether the company can shift its business model completely.
Post Emergence Prospects: WeWork has a valuable brand, including excellent name recognition. The company's revenue of more than $2.5 billion in 2021 and $3 billion in 2022 demonstrates considerable demand. The customer list is diverse in terms of company sizes and geographic distribution. All of these factors should result in a viable business, but the company has never been profitable. It may need even further reductions in its footprint, and Fitch envisions a materially smaller company emerging from bankruptcy than the rejection of 69 leases would suggest. WeWork has not committed to a specific number of leases that will be rejected, because negotiations with landlords are ongoing. However, in the 8-K filing, specifically Exhibit 99.2, the company assumes that they will exit 163 locations as part of a preliminary business plan.
Derivation Summary
Fitch's downgrade of WeWork to 'D' follows WeWork's Nov. 6, 2023, Chapter 11 bankruptcy filing. The filing follows years of operating losses and cash burn. Given the challenging environment for commercial office space, the company will have significant negotiating leverage with its landlords; however, its co-working peers have also struggled with underperformance.
Key Assumptions
Revenue: Fitch assumes challenging macro conditions will lead to 2023 revenue being flat and growth of only 2% in 2024. An important driver of this will be WeWork's pricing power, which Fitch expects to be an ongoing challenge especially if the broader economy contracts.
EBITDA: With limited growth, Fitch believes WeWork will not be EBITDA positive in the next 12 months to 18 months, although the trend continues to improve, and renegotiation or rejection of leases underlying unprofitable locations will further bolster this improving trend.
Recovery Analysis
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that WeWork would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated;
Fitch has assumed a 10% administrative claim.
Going Concern (GC) Approach
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the valuation of the company;
Fitch estimates WeWork's GC EBITDA by assuming a substantially smaller footprint of continuing operations in line with the assumptions regarding rejected leases. Fitch assumes 60% of current domestic revenue and 40% of non-domestic revenue, resulting in approximately $1.5 billion. Using a normalized 30% location gross margin and an estimate of restructured overhead expense of approximately $200 million results in an EBITDA margin of approximately 16% or $250 million.
Enterprise Value (EV) Multiple Approach
An EV multiple of 5x is used to calculate a post-reorganization valuation. The estimate considered the following factors:
The historical bankruptcy exit multiple for companies WeWork's sector ranged from 4x-7x, with a median reorganization multiple of 6x;
Current EV multiples of public companies in the Business Services sector trade well above the historical reorganization range. The median forward EV multiple for this sector is about 10x. Historical multiples ranged from 6x-12x;
WeWork does have unique characteristics that would allow for a higher multiple given its unique brand and stake in joint ventures;
However, uncertainty surrounding WeWork's business model and the high degree of strategy and execution risk leads Fitch to utilize a recovery multiple that is below the sector median.
RATING SENSITIVITIES
Rating sensitivities are not applicable given the company's Chapter 11 bankruptcy filing.
Liquidity and Debt Structure
To address liquidity during the bankruptcy process, the company arranged for a senior secured, debtor-in-possession (DIP) cash collateralized LOC facility in an aggregate amount not to exceed $750 million. Any amount drawn on the LC DIP facility in excess of $100 million will be converted to equity. Amounts drawn up to $100 million will be rolled into a new first-lien exit facility upon the company's emergence from bankruptcy. The terms of the DIP facility are subject to judicial approval.
Issuer Profile
WeWork provides space and amenities for today's hybrid and flexible workforces. The company also markets technology for managing workspace that can be used by landlords or tenants. WeWork has more than 700 locations in 39 countries, which members access either on an all-access basis or by a physical location.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
WeWork has an ESG Relevance Score of '4' for Management Strategy due to ongoing challenges to implement a strategy to achieve sustainable profitability, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
WeWork has an ESG Relevance Score of '4' for Governance Structure due to SoftBank ownership concentration, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
WeWork has an ESG Relevance Score of '4' for Group Structure due to the complexity of its structure and related-party transactions with SoftBank, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
WEWORK INC. 
