WeWork, the lossmaking provider of shared office space, raised more money than planned in its first foray into the bond market, selling $702m of seven-year senior unsecured notes at a yield of 7.875 per cent.
The company initially told investors it planned to sell $500m of notes at a yield between 7.75 per cent and 8 per cent. The notes are guaranteed by US subsidiaries that held roughly 60 per cent of the company’s assets at the end of 2017.
Wednesday’s sale marks the first time WeWork has tapped bond markets for funding. While it does have bank credit facilities outstanding, the company has traditionally relied on private equity investments to raise funding. Its last funding round from SoftBank valued the company at $20bn.
“They need to diversify their capital base, and obviously this gives them access to a market they didn’t have access to before,” said Andrew Forsyth, a portfolio manager with BNP Paribas Asset Management.
Steep losses raised some concern among investors, however. The company’s net loss more than doubled to $933m in 2017, according to bond offering documents, outpacing the group’s 98 per cent annual increase in revenue to $886m.
The notes were sold at a yield 491 basis points higher than the yield on a comparable Treasury security, according to a person familiar with the deal’s pricing. That spread — which reflects market-implied credit risk — was wider than the 435bp spread on Tesla’s outstanding seven-year notes, according to Bloomberg data.
“This reminds me a little bit of Tesla,” said one investor who did not participate in the deal. “You had this big equity valuation and a relatively small debt load, but you had to believe the revenue growth was going to come. As a debt investor, these stories don’t always work out.”
Another worry for investors involved the metrics WeWork used to describe its financial performance. For example, instead of a standard “ebitda” calculation — which stands for earnings before interest, taxes, depreciation and amortisation — it reported “adjusted ebitda”, which excluded marketing and sales costs, too.
This decision was particularly concerning to some investors because “adjusted ebitda” was used to set some leverage requirements under the bond’s covenants.
Even so, investors said the offering was probably bolstered by a relatively slow high-yield bond issuance schedule. Between February and April, the total outstanding face value of debt in the ICE BofAML US High Yield Bonds Index fell 2 per cent, according to Bloomberg data.
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