WeWork (NYSE: WE) stock is down another 50% over night on news that they’re about to file for Chapter 11 bankruptcy. We can imagine all sorts of speculative flurries in WE stock as a result - the ability of the memesters and hoddlers to play with such stories is near inexhaustible. However we’d also very strongly suggest that there’s going to be no recovery for the equity here. The landlords aren’t going to allow that. And this is about the landlords too. The idea here is to shaft those landlords - to be able to break the leases. And the thing is, weirdly, that commercial office space has such vast problems right now that the reborn WeWork could even work.
The news itself: “WeWork Plans to File for Bankruptcy as Early as Next Week” is the WSJ headline. That’s pretty much the news source for this, repeated by Reuters: “New York-based WeWork is considering filing a Chapter 11 petition in New Jersey, the WSJ reported, citing people familiar with the matter.” The important thing for us to grasp here is this line: “The company had net longterm debt of $2.9bn as of June end and more than $13bn in longterm leases, at a time when rising borrowing costs are hurting the commercial real estate sector.”
Weird as it might sound the business itself does actually have a chance here. A chance only of course. The equity will, we’d predict, go to zero. But the business has a pathway to survival.
WeWork stock price from Google Finance
So, if it’s all a disaster then how can it survive? WeWork is down 98% since the IPO, There’s already been a WE reverse stock split. Still WeWork equity is tanking.
So how can there be any future at WeWork: “WeWork (NYSE: WE) stock is up 87%. Given that many had given WE stock up for dead that’s a bit of a surprise. But there is a logic to it. If they can succeed in shafting the landlords on their leases then WeWork is indeed worth very much more. It might still be a dog of a business idea and it might not be. But A WeWork that can vary its cost base downwards by gaining access to lower rents on its leases is indeed worth very much more than one that cannot.”
And that’s what the Chapter 11 is about - shafting the landlords. For about the only business sector as badly off as WeWork itself is the commercial office space market. Vacancy rates are soaring - work from home etc - and rents collapsing. This means that landlords are really very keen on keeping a tenant in. Even if that means a fall in rents. So, WeWork does have some leverage here.
We can go into Chapter 11 and renegotiate all our leases downwards. Or free periods, something. Or we can go into Chapter 11, not gain relief from that $13 billion of lease liabilities and so go into Chapter 7 and liquidation. At which point all those landlords have empty office space in a market where near no one can gain new tenants at any price.
This doesn’t mean that WeWork will survive Chapter 11, only that they’ve a negotiating position where they could. However the thing for us out here as equity investors is that the landlords are not going to allow lease rewriting if the equity retains any value. Therefore the supposition has to be that WE stock, the equity, is going to be valueless. Even if WeWork the business can survive given the pressure it can apply on the landlords.
If WeWork can shaft the landlords on those leases enough then there’s still a viable business there. But in the process the WE equity will go to zero. So that’s one maybe and one certainty in our prediction then.