Nov 6 (Portal) – WeWork (WE.N), the SoftBank Group (9984.T)-backed startup whose meteoric rise and fall transformed the office sector worldwide, filed for U.S. bankruptcy protection on Monday after betting that companies are using more shared office space.
The move represents an admission by SoftBank, the Japanese technology group that owns about 60% of WeWork and has invested billions of dollars in its turnaround, that the company cannot survive unless it renegotiates its expensive leases in bankruptcy.
A WeWork spokesman said about 92% of the company’s lenders have agreed to convert their secured debt into equity as part of a restructuring support agreement, eliminating about $3 billion in debt.
The company, which also plans to begin a recognition process in Canada, said it believes it has the financial liquidity to continue operations as normal and that its locations outside the U.S. and Canada, as well as its franchisees around the world, benefit from this procedures are not affected.
At the end of June, WeWork had office space in 777 locations worldwide.
SoftBank said it believes WeWork’s restructuring support agreement is the appropriate measure for the company to reorganize its business and emerge from Chapter 11 proceedings.
“SoftBank will continue to act in the best long-term interests of our investors,” the Japanese company said in a statement
Shares of WeWork are down about 98.5% so far this year.
Profitability remains elusive as WeWork struggles with expensive leases and corporate customer cancellations as employees increasingly work from home. In the second quarter of 2023, when the company last reported financial results, paying for space consumed 74% of WeWork’s revenue.
In a filing with New Jersey bankruptcy court, WeWork listed assets of $15.06 billion and liabilities of $18.66 billion as of June 30.
“WeWork may use provisions of the U.S. Bankruptcy Code to get rid of onerous leases,” law firm Cadwalader, Wickersham & Taft LLP said in a notice to landlords on its website in August. Some landlords expect significant impacts.
“As part of today’s filing, WeWork is requesting the ability to decline leases for certain locations that are largely non-operational, and advance notice has been provided to all affected members,” the company said in a statement.
Under its founder Adam Neumann, WeWork became the most valuable US startup with a value of $47 billion. It attracted investments from blue-chip investors including SoftBank and venture capital firm Benchmark, as well as backing from major Wall Street banks including JPMorgan Chase (JPM.N).
Neumann’s pursuit of rapid growth at the expense of profits and revelations of his eccentric behavior led to his downfall and the failure of an IPO in 2019.
SoftBank was forced to double its investment in WeWork and appointed real estate veteran Sandeep Mathrani as CEO. In 2021, SoftBank struck a deal to take WeWork public through a merger with a blank-check acquisition company valued at $8 billion.
WeWork was able to change 590 leases, saving approximately $12.7 billion in fixed rent payments. However, this was not enough to offset the impact of the COVID-19 pandemic, which forced office workers to stay at home.
Many of its landlords, also under pressure, had little incentive to give WeWork a break from the terms of their leases.
While WeWork has had some success in attracting large corporations as customers, many of its customers have been startups and smaller companies that cut spending as inflation soared and the economic outlook worsened.
Adding to WeWork’s problems was competition from its own landlords. Commercial real estate companies that had traditionally only signed long-term leases began offering short and flexible leases to cope with the downturn in the office sector.
Mathrani was succeeded as WeWork CEO this year by former investment banker and private equity manager David Tolley, who as CEO of Intelsat helped the indebted satellite communications provider emerge from bankruptcy in 2022.
WeWork restructured its debt, but it wasn’t enough to avert bankruptcy. The company last week secured a seven-day interest payment extension from its creditors to give it more time to negotiate with them.
Shortly before WeWork filed for bankruptcy, Neumann said in a statement: “I believe that with the right strategy and team, WeWork can emerge successfully through a reorganization.”
Reporting by Greg Roumeliotis in New York and Mrinmay Dey in Bengaluru; Editing by Arun Koyyur, Rashmi Aich and Jamie Freed
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