WeWork Still Failing Expensively; SoftBank Struggling to Foot the Bill
Expensive golden parachutes look bad, but wary banks are really driving what does and doesn’t happen for SoftBank and WeWork’s rescue, which is why it’s hit a wall and risk for SoftBank has spiked.
The We Company (WeWork) (WE US) will have to pay $17 million to its current joint CEOs Artie Minson and Sebastian Gunningham and $1.5 million to chief legal officer Jennifer Berrent if it wants to fire them, according to documents reviewed by Financial Times.
The execs had been hired during the disastrous reign of ex-CEO Adam Neumann, who himself netted a luscious $1.7 billion as an inducement to step aside back in September (see my report WeWork Board to CEO: YouOUT, 9/25/19).
In the meantime, SoftBank Group (9984 JP) has had to change WeWork banks and offer up its own hide as co-borrower to arrange vital new credit facilities for WeWork, a deal potentially jeopardized by its own banks which refuse to help fund the tender offer for WeWork stock.
I've warned since last summer when disturbing signals from WeWork’s banks seemed to confirm my now validated estimates for much worse than expected financial condition and prospects and dramatically lower equity value near $7.5 billion versus the heady $47 billion figure floated before the failed IPO.
SoftBank’s banks are now flashing red about its risky WeWork rescue plan which will cost at least $9.5 billion.
Are we seeing an even bigger surprise: that SoftBank’s pockets aren’t as deep as we thought?
Golden Parachutes for Everybody
WeWork will have to pay $8.3 million each, $17 million total, to its current joint CEOs Artie Minson and Sebastian Gunningham and $1.5 million to chief legal officer Jennifer Berrent "if they are sacked or leave for a number of reasons, including a diminution of their duties, cuts to their pay, or involuntary relocation," according to documents reviewed by Financial Times.
SoftBank had mulled over getting rid of Minson, Gunningham, and Berrent as part of its takeover plan (see my report WeWork Bondholders Brace for SoftBank's Rescue Plan--In Silence, 10/29/19). Instead, they got even richer deals to stay put, including pay increases and loan forgiveness.
That’s pretty a sweet landing considering these execs had been hired during the disastrous reign of ex-CEO Adam Neumann. I observed a few months ago that “I’m generally wary of management teams left behind when an autocratic leader is ousted; e.g. executives that survive and even thrive in an environment so tightly controlled by an eccentric micromanager tend not to be the type of management capable of confidently fixing and building anew with fresh eyes while crafting a more collegially inspired culture” (see WeWork Board to CEO: YouOUT, 9/25/19).
Of course, Neumann himself walked away with a luscious $1.7 billion payout after being pushed out back in September (see my report WeWork Board to CEO: YouOUT, 9/25/19). They all stand to net several million more dollars via “profit interests” that kick in down the road if WeWork ever manages to close an IPO.
So apparently if you’re going to fail, try to do it on SoftBank’s watch and make sure you’re part of the team that helped wreck the bus versus expendable passengers like employees, investors, and bondholders tumbling with it over the cliff.
But while much has been written, including by me, about the egregious role played by SoftBank and other “smart money” investors who fueled WeWork’s astonishing equity value escalation against all logic, as well as the feckless Board that rubber-stamped every ill-advised move by Neumann, it’s hard to deny the integral power of investment banks pulling the strings at every level—especially now.
Dangerous Liaisons
Neumann collects his exit bounty on top of the$700 million in WeWork stock and loans he’d cashed out before the doomed IPO was even announced, facilitated by friendly banker to him and WeWork, JPMorgan Chase & Co (JPM US), which later effectively ghosted the lot of them after the IPO evaporated along with the lucrative stream of fees it had generated from them for years. Awkward.
Remember, JPMorgan is not just the longtime banker to WeWork and Neumann, it’s also been an equity investor in WeWork for more than five years (see Gravity Works As WeWork Doesn't; Now Plan B, 9/17/19). It sold WeWork’s equity, loans, and bonds during those same years as the company’s lead investment banker—even in rounds when its own asset management clients were investors. JPMorgan also provided $98 million in mortgages to Neumann and led the bank group which provided him with a $500 million credit line—backed, incredibly, by his WeWork stock—which he used to cash out at higher, pre-IPO prices and buy buildings that he leased to WeWork until his arrogant self-dealing was discovered and the resulting investor outrage forced him to terminate the deals.
Indeed, Neumann referred to JPMorgan CEO Jamie Dimon as his personal banker and it was Dimon who spent the fateful weekend in late September personally advising Neumann to step aside as CEO, which he did days later.
So, of all WeWork’s legacy banks none is arguably more informed or more deeply immersed in WeWork’s management or its core underlying performance and prospects over the last decade than JPMorgan.
That’s important since, as I long have noted, JPMorgan, along with Goldman Sachs Group (GS US) and Morgan Stanley (MS US), led the charge to drive up WeWork's equity value, pitching it to investors last year at $50-100 billion and fighting over leading its IPO when its equity was valued at a stunning $47 billion (versus my initial estimate at $5-7.5 billion which more closely tracked where it ultimately settled in October with SoftBank’s takeover).
JPMorgan also led the bank group in selling WeWork’s unregistered, unsecured bonds in April 2018 (via a woefully inadequate prospectus) when the company’s operating margins actually were shrinking dramatically with losses mounting alarmingly which wasn't revealed to investors until long after the bonds were sold and trading below par.
Sound familiar? That’s exactly what happened this year. JPMorgan led the development and marketing of the IPO and was the leading advisor helping the company to set the price amid the market frenzy it helped create for the most expensive unicorn ever to come to market.
JPMorgan also led the banking group that arranged $6 billion in new credit facilities prior to the S-1 filing and yet, as I warned at the time, terms were much more expensive versus WeWork’s existing JPMorgan-led credit facility, with its $650 million commitment nearly maxed out, and the new loans would close only upon a successful IPO that raised at least $3 billion.
This was the first clue to me that JPMorgan’s conviction about WeWork’s value and prospects stopped well short of its own selling hype when it stood to risk its own capital as a significant lender with more substantial exposure.
I’m always wary when banks get spooked because they get much more comprehensive financial and other information than we typically see in publicly available company filings (especially compared with WeWork’s pathetically inadequate S-1 filing, as I warned in The Tide Is Out and WeWork Bondholders Are Naked, 10/7/19), and they get this vital information every month.
This means JPMorgan already had a good idea when WeWork filed its S-1 in mid-August that serious trouble was brewing in the third quarter, then nearly two-thirds in, which investors wouldn’t learn about until mid-November—long after the IPO had gone up in flames.
Indeed, as it turned out, the company was in such dire shape it would run out of cash by November if the IPO failed.
And, as I noted in SoftBank Who? WeWork Picks Bank Bailout; Bondholders Beware (10/15/19), JPMorgan’s idea of a “bailout” was a hideous $5 billion debt package comprising a substantial letter of credit facility likely to be backed 100% by WeWork cash for every penny drawn plus $3 billion in new, no doubt unregistered high yield bonds, including more than $2 billion in PIK notes.
While this would immediately spike WeWork's already high leverage and increase risk exponentially for its hapless bondholders, the JPMorgan-led bank syndicate would bolster their fees, cast off further risk to claims they already hold on WeWork’s feeble assets, but not actually lend one single penny to WeWork.
So I found it particularly galling when Dimon told CNBC in a supercilious interview back in November that he felt no responsibility for himself or JPMorgan in any of WeWork’s troubles or its calamitous fall, though he did "learn some lessons" from the experience.
For example, he’s apparently only now come to realize that “private companies should also take more time to shore up corporate governance and disclosures before proceeding with an IPO.” Good idea. So next time maybe JPMorgan will know better than to help the founder/CEO lock up supermajority control, let him borrow hundreds of millions against his stock to front-run the IPO, or allow him to finance his self-dealing at the company’s expense.
It’s not clear that Dimon is bothered by his firm selling securities to equity and bond investors based on appallingly misleading financial reports that don’t even reflect current operating trends and financial condition accurately much less disclose that operations may be deteriorating precipitously every day versus information just provided to prospective investors. But JPMorgan did collect $50 million for arranging the last round of WeWork credit facilities that were not accepted, so there’s that.
Dimon also claims he never believed WeWork was worth $47 billion even though his company pitched it as worth more than $60 billion.
“Just because a valuation prints at a certain level by one investor doesn’t mean it’s the right valuation,” Dimon said. “That’s not price discovery. Price discovery is when a lot of smart people around the world knowing all the facts can kind of buy and sell all the time.”
Jamie Dimon on CNBC, 11/5/19
So Dimon is saying no privately held company JPMorgan advises can price an IPO appropriately until the company already has stock freely trading by “a lot of smart people around the world” who know “all the facts” versus the private equity investors they routinely market deals to every year, many with multiple rounds. Got it.
No wonder SoftBank has been in the market for a new lead banker for WeWork, which turned out to be Goldman Sachs. Of course, like JPMorgan, Goldman Sachs also has been a longtime equity investor and lender and investment banker to WeWork and thus is counted among the enablers that helped WeWork and Neumann spin out of control.
Changing banks doesn't solve the problem of WeWork’s alarming and escalating risk, which has spooked even SoftBank’s lenders and investors.
SoftBank’s Banks Have Issues
I’ve voiced concern for a while now that SoftBank has made little progress implementing its rescue plan for WeWork since it was accepted on October 22nd. It took more than a month to initiate the tender offer, the first step in SoftBank’s planned takeover, and that won’t be completed until at least April 1st (see WeWork Is Foundering While SoftBank Struggles With Its Bailout, 11/27/19). More troubling is that SoftBank’s banks are wary about loaning it $2.8 billion to help fund the tender given the billions in cash it already invested in WeWork which has resulted in record losses for WeWork and its Vision Fund.
In the meantime, WeWork still doesn’t have new credit facilities to bolster its rapidly depleting cash. By my estimate the emergency $1.5 billion SoftBank wired to WeWork back in October could be mostly if not completely burned up by now.
Bloomberg reported December 9th that SoftBank had arranged a new $1.75 billion credit facility for WeWork through Goldman Sachs. Sources for the deal said, “the new credit line will replace existing facilities that total about $1.1 billion, and is designed to free up cash that’s being used as collateral in the existing letters of credit.” If so, this would immediately free up another $800 million now held as restricted cash.
But there’s a catch. Goldman Sachs required SoftBank to sign on as co-borrower with WeWork, reflecting how dire WeWork’s financial condition and prospects have become. This also upends SoftBank’s carefully structured deal terms which it had designed to keep it from taking majority control of WeWork and consolidating WeWork's trashy financials into its own.
The Goldman Sachs loan terms create a problem for SoftBank. Just before Christmas Reuter’s reported that SoftBank’s negotiations with its banks for a $3 billion loan have stalled because it has hit its loan limit and the banks won’t budge.
It’s not clear what SoftBank will do next, and I find it increasingly troubling that it's having so much trouble coming up with the cash it needs and that it has been surprised it would meet such obstacles from its banks. SoftBank may even be forced to put up a portion of its prized 26% stake in Alibaba Group Holding (BABA US) as collateral, and there's no way of knowing how much cash support WeWork will ultimately require or how much longer than the expected three years it might be distressed.
In the meantime, WeWork has even fewer options given its threadbare liquidity. It's not clear when the Goldman Sachs loan will become available and terms of WeWork's takeover mean SoftBank can’t proceed with the $3.3 billion in new WeWork bonds until the tender is complete and SoftBank owns up to 80% of WeWork’s equity.
This already is delayed for another three months and potentially longer if SoftBank can’t pull together sufficient financing. The longer WeWork’s bailout remains unsettled, the more expensive the new debt will need to be to get lenders and investors to take on its escalating risks.
It also doesn’t help that WeWork is closing the final week on what no doubt was an even more disastrous fourth quarter with severe deterioration I have projected may persist for the foreseeable future (see my latest forecast in WeWork Is Foundering While SoftBank Struggles With Its Bailout, 11/27/19).
WeWork bonds have nevertheless rallied 10 points since my last report to 82.6 (12.4% ytw), shrugging off dismal third-quarter results, even worse prospects for the fourth quarter and next year, plus the persisting risk of a comprehensive capital restructuring or even bankruptcy unless the company can renegotiate tens of billions locked up in expensive long-term leases WeWork can't afford. Not to mention the prospect of being eclipsed by $3.3 billion in new debt with higher (albeit likely still inadequate) coupons and issue sizes which will afford them comparatively better trading liquidity versus existing bonds—such as it is for unregistered bonds from an appalling weak issuer. Maintain “Sell.”
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