WeWork Inc. is expected to file for bankruptcy as soon as next week, a move that could allow the embattled office-space provider to cherry-pick leases it wants to keep or reject, according to four restructuring experts.<\/p>\n
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The company has been under fire since before the pandemic hit, which caused demand for office space to further freeze up. It lost an estimated $15 billion since the end of 2017, according to a New York Times tally as of September. A month earlier, WeWork reported having substantial doubt about its ability to stay in business. <\/p>\n
In a bid to salvage a business it came to dominate, the cash-burning company began slashing its leasing obligations after its botched initial public offering in 2019, with negotiations with landlords eventually saving the company $12.7 billion on lease expenses. <\/p>\n
Now, a bankruptcy filing could force the hand of holdout landlords that it owes $25 billion in outstanding leases, according to Evan DuFaux, a special situations analyst at CreditSights, who earlier this year warned that a balance-sheet recapitalization would buy WeWork only so much time.<\/p>\n
\u201cThe recapitalization this spring provided the company\u00a0an additional two quarters of liquidity, but it didn\u2019t\u00a0solve the fundamental problems underlying its operations,\u201d\u00a0DuFaux\u00a0told MarketWatch.<\/p>\n
WeWork\u2019s main problem has been that it rents out desk space short-term, but has long-term leases at top market rates that average 15 years, with landlords spread across hundreds of locations in the U.S. and abroad. It has yet to become a consistently profitable business. <\/p>\n
The company reported about $680 million of liquidity as of late June. Then in October, it withheld interest payments on some bonds with coupons of 11% to 15%. By Tuesday, it said it had reached a seven-day forbearance agreement with bondholders.<\/p>\n
\u201cIn a bankruptcy, I\u2019d expect the company to reject many of its leases, but to keep enough leases in profitable locations to continue to operate, hopefully as a profitable company, after a reorganization,\u201d DuFaux said.<\/p>\n
Another possibility is that a liquidation could wipe out a historic volume of office leases in one fell swoop, further pressuring an already distressed U.S. office market. Retailer Bed Bath & Beyond\u2019s bankruptcy earlier this year ended in a wind-down and liquidation. <\/p>\n
WeWork also could be sold, but finding a buyer could be tough, as its office-share rivals Regus and Knotel have already gone bankrupt.<\/p>\n
A spokeswomen said WeWork doesn\u2019t \u201ccomment on speculation\u201d when asked a potential bankruptcy filing. She did say the forbearance agreement provides time for it to continue \u201cpositive conversations\u201d with key financial stakeholders.<\/p>\n
\u201cI don\u2019t see a way this works out for WeWork or the landlords,\u201d said Shlomo Chopp, a commercial real-estate restructuring expert and bond buyer at Terra Strategies, about any WeWork bankruptcy.<\/p>\n
\u201cSometimes landlords aren\u2019t even in control of a property anymore and lenders are in place,\u201d Chopp said. \u201cI don\u2019t see anything good coming out of it.\u201d\u00a0<\/p>\n
WeWork\u2019s new chief executive, David Tolley, said in September the company would be looking to renegotiate nearly all of its leases, a process that can take longer than in a bankruptcy situation. Tolly is widely viewed as a corporate restructuring specialist, previously overseeing the overhaul of Intelsat S.A. as it emerged from bankruptcy with less than half its original debt , after his prior stint in private equity.<\/p>\n
\u201cThe cool thing about leases is that you can do some funky stuff as a debtor in a bankruptcy,\u201d said Isaac Marcushamer, partner and co-founder of DGIM Law, which specializes in restructurings. \u201cYou can say, \u2018Hey, I don\u2019t want to have this lease anymore,\u2019 walk away and the landlord can have it back.\u201d<\/p>\n
For long-term leases, that can mean a landlord might only hope to recoup a fraction of the total lease amount owed. \u201cThat\u2019s the kind of power that exists,\u201d Marcushamer said.<\/p>\n
In the past, if a lease was rejected in a bankruptcy case, it might open a pathway for a landlord to collect more rent from a new tenant. But leasing activity in many cities has remained sluggish in the wake of the COVID crisis, given the resilience of flexible work, the Federal Reserve\u2019s interest-rate hikes and an avalanche of debt coming due.<\/p>\n
Related<\/strong>: Dirt cheap: Distressed office buildings likely to fetch only cost of land, Barclays says <\/p>\nRocco Cavaliere, vice chair of bankruptcy and corporate restructurings at law firm Tarter Krinsky & Drogin, said a debtor only needs to show it is exercising businesses judgment when it is rejecting a lease, once it files for bankruptcy.<\/p>\n
\u201cIt\u2019s a standard that is fairly easy to meet,\u201d he said.<\/p>\n
The process also can speed up a reorganization. Should WeWork file for bankruptcy, it would need to reject or assume its leases in a seven-month window, he said.<\/p>\n
Another factor at play is that debtors also need to have enough cash on hand to pay their lawyers, fees and to keep current on ongoing operating expenses during a bankruptcy.<\/p>\n
\u201cThere is such a thing as going too broke to go bankrupt,\u201d Marcushamer said.<\/p>\n<\/p><\/div>\n
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