Hipster office peddler WeWork dislikes being called a property company — preferring fluffier categorisation as community builder. Too bad. The US start-up’s plan to issue debt for the first time means pitching to cold-hearted bond investors. Assessing WeWork’s credit risk means focusing on real estate.
It also requires understanding why WeWork, one of the wealthiest private technology companies in the world, needs to borrow $500m or so after raising $4.4bn from SoftBank and its Vision Fund last summer.
Admittedly, that money has been burning a hole in WeWork’s pocket. It has already purchased Asian co-working companies SpaceMob and Naked Hub, launched a real estate investment fund, opened a gym, bought a coding school and invested in group activity arranger Meetup.
Adam Neumann, chief executive and co-founder, has form in business eclecticism, having previously attempted to sell shoes and knee pads for babies.
There is probably more investment to come. WeWork’s acquisitions have not exhausted its funding but with revenue of $886m and expenses of $1.8bn in 2017 it is far from proving itself as a sustainable business.
The bond shows how tempting borrowing rates are in the US junk bond market. This is true even for a property company that is unprofitable and has a business model reminiscent of IWG, a company that has suffered repeated downturns.
The US high yield index trades at 6.2 per cent, a fairly low 336 basis point spread to Treasuries. And bond investors are happy to ignore negative free cash flow when it comes to Netflix and Tesla.
WeWork does have substantial backing, blue-chip customers and a good plan to increase profit-sharing leases. A high yield in its first bond, adding 150 basis points or so to the index average yield, would help, too.
That could swell the offer above $500m. Even sober bond investors may not prove immune to the appeal of succulents and exposed brick.
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