Fitch Ratings has affirmed WeWork Companies LLC and WeWork Inc.'s Long-Term Issuer Default Ratings (LT IDRs) at 'CCC+'.
Fitch has also affirmed WeWork Companies LLC's senior unsecured notes at 'CCC-'/'RR6' and assigned a 'CCC-'/'RR6' rating to WeWork's proposed secondary senior unsecured notes offering.
The affirmation reflects Fitch's mostly unchanged view of the improvement in WeWork's financial position over the past year. The company rationalized its location portfolio with commercial landlords, preserving its reputation and reducing occupancy costs. The demand environment for workspaces also improved as employers returned to work and companies pursue increased flexibility.
WeWork has sufficient liquidity to meet its cash needs under our base case scenario from previously raised equity proceeds. However, a high degree of uncertainty remains surrounding the office market environment, COVID-19, and exogenous shocks including the evolving omicron coronavirus variant. WeWork would require additional liquidity sources if the office market remains depressed for an elongated period.
Key Rating Drivers
Liquidity and Funding Plan: Pro forma to the $333 million in trust proceeds plus the $150 million equity backstop from a wholly-owned subsidiary of Cushman & Wakefield, $800 million in PIPE investment, repayment of $350 million secured CP facility, $98 million in transaction expense and related employee payments as well as Fitch's estimated incremental 2H'21 FCF deficit, WeWork will exit 2021 with approximately $900 million in global cash. With the new $550 million senior secured SoftBank notes (replacing the undrawn $1.1 billion under the senior secured note purchase agreement) and $350 million of secured CP availability, WeWork will have approximately $1.8 billion in cash and secured financing commitments (having fully drawn the $2.2 billionSoftBank senior unsecured notes in 2021.)
Successful Restructuring: While COVID-19 has severely impacted WeWork's business, delaying its attainment of breakeven profitability, the company successfully exited on amicable terms from over 150 full leases and amended 350 leases year to date. This addresses the meaningful portion of desks that were previously to be built out in locales where the company is no longer targeting expansion. Additionally, right-sizing its portfolio has led to a significant decrease in rent and tenancy costs. The company has reduced overhead expenses by $1.1 billion on a run-rate basis. To the extent WeWork's top-line continues to recover, the company will be better positioned to realize operating leverage, leading to attaining breakeven profitability in 2022.
Flexible Workspace Demand Recovery: WeWork's occupancy rate has improved 15 percentage points from its 4Q'20 nadir of 45% (on a pro forma consolidated basis) to 3Q'21. Physical memberships increased 68,000 (physical desks declined 88,000 over the same period, reflecting restructuring). WeWork estimates occupancy was 64% at 3Q'21 when accounting for net desk sales of 30,000, and projects physical occupancy reaching 74% by year-end, which would be just below the 75% attained in 4Q'19. Consolidated monthly revenue has increased each month since April and was the highest level for the year in September. Monthly new desk sales have increased on a double- and triple-digit percentage basis since March 2021.
As companies pursue hybrid workplaces and re-evaluate their office strategies demand for flexible office space may increase to allow for lease-free contraction/expansion. Fitch expects recovered demand to drive WeWork's occupancy levels to the low- to mid-80% range over the next several years, which would be in line with the company's pre-pandemic occupancy levels.
Recovery and Notching: Fitch's recovery analysis assumes that WeWork would be considered a going-concern in bankruptcy and that the company would be reorganized rather than liquidated. Under its recovery scenario, Fitch assumes 40% of domestic leases and 60% of non-domestic leases default together comprising approximately $19 billion of future remaining rental payments due. Guarantor and non-guarantor leases are approximately proportional to their estimated percentage of revenue.
Assumed rejected operating lease claims totaling approximately $1.1 billion less cash security would be pari passu with the senior unsecured notes in addition claims under associated corporate guarantees and surety bonds. Fitch assumes WeWork has fully drawn the availability under its $2.2 billion senior unsecured notes and $550 million senior secured notes. Fitch also assumes $33 million of other loans as of September 30, 2021 are senior secured claims.
Fitch estimates WeWork's going concern EBITDA by assuming the guarantor's 71% portion of an estimated normalized 33% location gross margin on $3 billion of revenue or approximately $750 million, reduced by an estimate of normalized, restructured overhead expense of approximately $200 million, reflecting a substantially smaller footprint of continuing operations. Fitch uses a 5x multiple, at the lower end of the 4x-7x range of emergence multiples observed in past restructurings, in reflection of the potential that WeWork's market position and brand is compromised permanently in distress and that the flexible workspace market experiences sustained structural demand declines due to long-term effects of COVID-19.
Additionally, Fitch assumes a proportion of value after associated claims exists from JV locations approximately equal to $250 million (approximately $70 million GC EBITDA less a proportion of restructured overhead at a 4x multiple, discounted to the 5x applied to WeWork's domestic locations given a less established presence and weaker market position) is available, although reduced to a degree due to uncertainty over the business model. After assumption of a 10% administrative claim, the distribution of value yields a recovery ranked in the 'RR6' category for the rated senior unsecured notes.
Fitch considers factors for highly speculative issuers in a relative fashion. WeWork's business model appears viable exiting the coronavirus pandemic having right sized its footprint and cost structure. FCF has remained consistently negative but has improved over the past year. However, the company's FCF outlook is subject to risks and uncertainties, particularly to the extent office demand is structurally weak over the medium term.
WeWork's financial policy while supportive of providing needed liquidity may not be sufficient in the medium term to protect creditors. Fitch does not expect under its base case that WeWork will need to draw on SoftBank's senior secured facility although its existence along with the funds raised from outside investors supports a meaningful liquidity buffer. However, in a more elongated depressed office demand environment, Fitch does not believe WeWork's available liquidity is sufficient.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Approximately $2.6 billion in revenue in 2021 to reflect combined COVID-19 impact, mid-single digit percentage core leased ARPM decline, 135k decline in workstations, offset by an approximately 30-point increase in occupancy;
Strong double-digit revenue growth in 2022 to reflect build-out of COVID-delayed workstations, and low- to mid-single digit ARPPM and mid-single digit occupancy improvement to reflect modest normalization and return to work; high teens revenue growth thereafter;
Negative location margin in 2021 improving to 2019 levels in 2022 and then normalizing around 30% in 2023 in reflection of occupancy and pricing trends plus exits of underperforming locations
Overhead expense as a percentage of revenue at approximately 30% in 2021 and improving to approximately 25% in 2021 and around 20% thereafter in reflection of run-rate restructuring and operating leverage;
Approximately $200 million in gross capex in 2021 and $250 million to $400 million over 2022-2024 based upon reduced location build out due to successful location exit and continued trends in tenant improvement allowance collections;
No assumed draw of senior secured notes required under base case assumptions.
KEY RECOVERY RATING ASSUMPTIONS
Going Concern Approach
WeWork's GC EBITDA is based on LTM Sept. 30, 2021 operating EBITDA of approximately negative $850 million, representing the 71% share of consolidated operating EBITDA that guarantor subsidiaries represent;
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the valuation of the company;
The GC EBITDA is approximately $250 million, above LTM EBITDA, to reflect the guarantor's 70% portion of an estimated normalized 33% location gross margin on $3 billion of revenue, adjusted for assumed location exits, reduced by an estimate of normalized, restructured overhead expense of approximately $200 million.
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 has unique characteristics that would allow for a higher multiple in its unique brand and stake in JVs;
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.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FCF margin expected to be sustained neutral;
- (CFO-capex)/total debt with equity credit expected to be sustained at or above 1%;
Total debt with equity credit to operating EBITDA expected to be sustained at or below 6.0x;
FFO interest coverage expected to be sustained at or above 2.0x;
Confidence in flexible office demand environment sustainability;
Operational metrics including occupancy, ARPPM and desk adds that show evidence of consistency with Fitch's base case scenario.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Accelerating negative FCF margin;
- (CFO-capex)/total debt with equity credit expected to be sustained negative;
Total debt with equity credit to operating EBITDA expected to be sustained at or above 7.0x;
FFO interest coverage expected to be sustained at or below 1.0x
Worsening of office demand environment, potentially structurally;
Operational metrics including occupancy, ARPPM and desk adds that show evidence of consistency with Fitch's stress case scenario.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Near-Term Liquidity: WeWork had cash and cash equivalents of $477 million at Sept. 30, 2021. $101 million of cash was held by the company's variable interest entities (VIEs). On a pro forma basis to the completed SPAC merger and related transactions, WeWork's available liquidity availability totaled approximately $1.7 billion plus an available $550 million senior secured senior secured note commitment from SoftBank. Additionally, WeWork retains access to its uncommitted million LC-backed commercial paper facility, subject to Board and related approvals.
Refinancing Risk: WeWork had $669 million of principal outstanding on its May 2025 senior notes, limiting its immediate refinancing risk. The $2.2 billion senior unsecured SoftBank notes also mature in 2025. WeWork's access to the $550 million senior secured SoftBank notes expires in 2023 and the company's LC facility matures in 2023, but SoftBank has agreed to extend its guarantee of the facility until 2024. WeWork remains subject to risk that it is unable to access markets to meet liquidity needs to the extent its funding requirements exceed the proposed financing.
WeWork Inc. 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 ratings in conjunction with other factors.
WeWork Inc. 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 ratings in conjunction with other factors.
WeWork Inc. 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 ratings in conjunction with other factors.
WeWork Inc. has an ESG Relevance Score of '4' for Financial Transparency, revised from '3', due to its material weakness in internal control over financial reporting, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entities, either due to their nature or the way in which they are being managed by the entities. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
WeWork provides membership-based access to workspace and amenities. It had 575,000 memberships and 762 locations operating in 150 cities across 38 countries as of Sept. 30, 2021 excluding China, India, and Israel, which were deconsolidated and began operating as franchises.
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.
Entity / Debt
WeWork Companies LLC
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