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WeWork Bond Prices Continue to Fall

With Few Assets and Short History, Investors Seek Higher Returns in Exchange for Risk
May 9, 2018
A week after the initial offering closed, WeWork Cos. high-yield bonds continue to see price declines on the secondary markets.

The popular co-working giant's bonds traded at 93 cents on the dollar on Tuesday. That's a notable decline from the $702 million bonds' face value when the company first marketed them in April.

It pushed the bonds’ return up to 9.26 percent, about a percentage point and a half higher than the annual interest rate, or coupon, initially offered. The increasing yield suggests investors are looking for higher reward to take on a bond some might consider risky from a company with very few assets and a short history.

Credit rating companies were conflicted about the bonds with Moody’s rating it "very high credit risk" at Caa1 and Fitch giving it a higher rating at BB-, but still considered "speculative" grade.

As WeWork has grown larger, it’s been posting bigger losses. Many investors and others are seeking a better sense of when the company's pursuit of growth might turn a profit – especially in anticipation of any attempt to go public.

Robert Calhoun, regional economist in New York at CoStar Group Inc., which publishes CoStar News, said the bond market doesn’t do a lot of trading on faith – and that makes this debt a more difficult sell.

"For you to own a WeWork bond, you have to believe the WeWork story, and that’s equity-like," he said. "But you don’t have equity. It’s a senior unsecured bond... You have to put quite a bit of faith that by the time this matures in 2025 that the company will have grown to a point you will be paid back."

Indeed, WeWork has very few assets available to recover even a portion of the debt if the company couldn’t pay them back at maturity. It owns the Lord and Taylor building on Fifth Avenue in New York (pictured, above) and Devonshire Square in London. For the most part, it leases direct office space from landlords than subleases it to individuals and companies in a co-working community.

While a number of companies have tapped the bond market to raise funds through debt lately, those firms, such as Netflix, haven’t seen the same sell-off and sharp rise in yield, said a person at a commercial real estate firm in Los Angeles who tracks WeWork but was not authorized to speak.

"A lot has to do with the fact that investors feel the business models of Netflix and those companies might be able to survive a downturn or something bad happening," he said. "At the end of the day, a Netflix can sell itself. What’s WeWork’s exit play if things really hit the fan?"

Netflix’s bond prices have generally risen while its yield has fallen. Tesla’s bonds, which have fallen recently, traded at a higher rate, around 97 cents on the dollar, for months after its initial offering in August.

WeWork received a $4.4 billion investment from SoftBank last year that valued the company at around $20 billion. But it’s been burning through cash as it continues to double in size, now to nearly 11 million square feet worldwide.

Last year, it was nearing a limit on its consolidated leverage ratio requirement to borrow against its senior credit facility, according to its bond offering memo. The funds raised through bonds will allow the company to continue to grow and finance its operations.



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Jacquelyn Ryan, Los Angeles Market Reporter  CoStar Group   
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