According to a story posted in the Wall Street Journal on August 24, several owners of WeWork’s secured debt totaling $1.2 billion are holding what were called “preliminary talks about the company’s restructuring options and indicated that they would support a plan for WeWork to file for chapter 11 bankruptcy.” However, the creditors who include BlackRock, King Street Capital and Brigade Capital, have not yet provided specific proposals concerning a bankruptcy or debt restructuring to WeWork, as per sources that were not identified.
What does this news mean for WeWork tenants, known as members? This is a long run prospect. Nobody knows exactly what will happen, and we are just at the start of a process that will have many twists and turns. However, let’s take a look at what might happen if a bankruptcy plan is negotiated with WeWork’s secured creditors by working through some of the alternatives if WeWork tries to reorganize as an ongoing company. To do so I consulted Eric Haber, general counsel for my firm Wharton Property Advisors who is also a bankruptcy attorney.
A Potential Bankruptcy Scenario
Under a potential bankruptcy reorganization plan, those senior creditors would swap their debt for equity in a reorganized WeWork and the current shareholders would potentially have their stock wiped out or severely diluted. However, any successful reorganization would be contingent on WeWork being able to renegotiate enough of its above-market office leases to more favorable terms while remaining a viable business and rejecting other leases which are not profitable. The problem here is that WeWork has already been through multiple reorganizations in several years in what amounts to a de facto out of court bankruptcy proceeding, so why would the third (or fourth) time be a charm?
In an interesting twist, there is a possible roadmap for WeWork to follow in renegotiating leases that has been used by its coworking competitors. Under the competitors’ business models, the coworking operator forms a partnership with the landlord in which they share the risks and expenses involved in leasing a specific space to tenants, and also share in the upside if the space is profitable. That is in contrast to the WeWork format under which WeWork leases space directly from landlords and then operates an independent business.
For the purposes of our example, let’s assume that WeWork does have enough success in bringing its rental costs down one way or another such that the senior creditors would be interested in exchanging their debt for equity under a bankruptcy plan (a very tall order). In that event, WeWork would assume the leases that it thinks will be profitable going forward under the renegotiated terms. As a result, at the centers that are profitable, there would likely be little change for members.
However, the situation would be different where WeWork determined that it is impossible to make a profit and/or could not successfully renegotiate lease terms with the landlord. Those leases would be rejected by WeWork. Accordingly, the situation for the tenants in those locations is much more uncertain. The landlord could kick out the tenants and try to lease out the space to larger businesses. Alternatively, the landlord could allow the tenants to remain and operate the space itself (which would be difficult) or align with another coworking operation to assist in doing so.
Of course, in evaluating leases every location is different and there will be different dynamics in negotiating with each landlord. In the end, I am skeptical that WeWork can pull off a successful reorganization. The bottom line is that office leasing is a very treacherous business today. Since the pandemic, demand for space has decreased significantly due to remote work. While that drop in demand does give WeWork some leverage in negotiating with landlords who will have great difficulty replacing WeWork because it is a large tenant, the underlying economics of office leasing are still daunting.
Indeed, WeWork might not even file bankruptcy at all if it is successful negotiating with its landlords outside of court and if it does file bankruptcy, it might not be able to reorganize. In the end, the words of the late Hollywood script writer William Goldman who famously said that “nobody knows anything” about whether a movie would succeed also apply. Here, the WeWork script has not yet even been fully written. But the plot is thickening fast.