WeWork (NYSE: WE) has, as everyone expected it would, filed for Chapter 11 bankruptcy protection. There wasn’t really anything else that could be done with that company after all. The announcement: “WeWork Takes Strategic Action to Significantly Strengthen Balance Sheet and Further Streamline Real Estate Footprint” - ah, no that’s the corporate spin on it. Even if it does tell us what they’re going to do in the immediate future. “WeWork Inc. and certain of its entities filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and intend to file recognition proceedings in Canada under Part IV of the Companies’ Creditors Arrangement Act.” That’s the important bit.
One piece of good sense is that trading in WeWork stock is suspended: “Trading in the struggling company’s stock was halted ahead of the opening bell on the New York stock exchange.” Given the nonsense that the meme stock addicts and hoddlers get into with a company going into Chapter 11 these days that probably is a sensible move.
But OK, so, what are they going to do here? What’s not going to happen is that fake takeover that was announced on Friday. WeWork is not going to get bought out at $9 a share, really, it isn’t. Some might end up going to jail for pretending it was but that’s another matter.
So, what is going to happen here? The secret is this “Further Streamline Real Estate Footprint” Or, as we’ve said before, this is where the landlords get the shaft at WeWork: “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.”
Recall how WeWork operates. They take out long leases on office space. They then rent that out on short term leases to others. OK. In a stable market there could well be a margin in that. Short term rentals do tend to cost more than long. But what happens if the commercial office real estate market dives? Then you’re one foot in the air there. Your long term leases are at the old, high, rates, while you can only rent out at the new, low rates short term. You are, effectively, bust. Which is what has just happened.
How do you get out of this? You try to break those long term leases. Tell the landlords you’ve simply not got the money. Go into Chapter 11 and so be able to break the leases. Dare the landlords to not negotiate. We’ll leave your now much lower rental space. Or you reset the rent to the new and much lower levels. Go on, dare Ya!
Which is what is going to happen now. That’s the point and purpose of the Chapter 11 - to be able to shaft the landlords on their nice, safe, long term leases. Safe, aha, aha, aha.
This will only work if the majority of those landlords agree. Which they might well do - commercial office real estate is really, really bad as a market right now. But in return they’re going to demand near all to all of the equity in WeWork in exchange. The idea of there still being value in the WE equity is about as likely as Adam Neumann being invited back to run the newly reconstructed company.