WeWork said Monday it would not make two interest payments totaling about $95 million. This move is intended to boost negotiations with its lenders while attempting to reduce costs with its landlords.
The missed interest payments will undoubtedly fuel speculation about a bankruptcy filing. But WeWork says it has cash on hand and the company has a 30-day grace period to make payments that were due Monday. At the end of June, the company had $205 million in cash and access to a $475 million credit facility.
“I think they will absolutely understand our decision to enter the grace period,” David Tolley, interim chief executive of WeWork, said in an interview. He called the move “typical” as a “precursor to a conversation.”
There is no need to skip an interest payment when negotiating with lenders. But it’s a move that indebted companies sometimes use to pressure lenders to re-do deals on more favorable terms.
In the first half of this year, WeWork’s operations consumed $530 million. The coworking company warned investors in August that “there are significant doubts about the company’s ability to continue as a going concern” without taking measures such as reducing leasing costs and making its debt load more manageable.
In early September, WeWork disclosed that rental costs accounted for more than two-thirds of its operating liabilities, a major drain on cash flow that the company sought to reduce by renegotiating nearly all leases and exiting some unprofitable locations.
“What our lenders really want to know is the credit profile of the business as landlord discussions come to a conclusion,” Mr Tolley said.
Mr. Tolley said no decisions had been made on whether the company would file for bankruptcy, a move that would make it easier to shed unprofitable leases.
“We don’t know how these landlord negotiations will play out,” he said. “So we don’t know what the profitability of the company will be.”
The announcement to waive interest payments came just months after WeWork reached an agreement with its lenders, including SoftBank, to cancel or convert to equity about $1.5 billion of the company’s debt and the company by 2027 To give time to pay back a large part of it. At that time, the company expected a faster recovery in the ailing commercial real estate market.
“It has become clear — or it seems very clear to me — that that would not be enough,” Mr. Tolley said of the restructuring agreement.
The company has been trying to reduce its leasing costs for years, following what Mr. Tolley called a “period of unsustainable hypergrowth.” In August, the company hired consulting firm Hilco Global to assist with the effort. That same month, WeWork appointed a number of restructuring experts to its board. Mr Tolley was appointed interim chief executive in May after being appointed to the board in February.
Mr. Tolley has been appointed to stabilize the company as the commercial real estate industry undergoes significant change. The rise of remote work has created uncertainty about the value of office space. For example, the value of office buildings in New York City could decline by $48.75 billion in the coming years, according to a recent study by researchers at Columbia University and New York University.
Some analysts say this could create opportunities for the office-sharing business, with some companies willing to make more lenient agreements. The question is whether companies like WeWork will be financially able to benefit.
“Flexible offices may not survive in the current economic environment, but the need for flexibility is increasing, and even if the current model fails, the need for flexibility is still increasing,” analysts at ratings agency Moody’s recently wrote.
Mr Tolley sees this pressure as an opportunity for the company, provided it can reduce its leasing costs and debt. WeWork reported consolidated revenue of $844 million for the second quarter of 2023, up 4 percent year over year. The company continues to invest in its business and serve its customers.
“It is clear to me that we have reached a steady state of unhealthiness in the commercial real estate market,” Mr. Tolley said.
He added: “If anything, over the last few years it has only become clearer to the property industry – and to all corporate members who use us – that flexible offices are a crucial part of the future.”
Peter Eavis contributed reporting.