The high-flying co-working giant faces reorganization as financial woes persist
WeWork, once a high-flying desk-renting start-up co-founded by Adam Neumann and heavily backed by SoftBank, has officially filed for bankruptcy. This marks a significant downfall for the company that aimed to revolutionize office real estate. WeWork’s financial troubles were exacerbated by costly leases signed prior to the COVID-19 pandemic and declining occupancy rates as hybrid working became more popular.
Late on Monday, WeWork announced that it had reached an agreement with the majority of its creditors to convert $3 billion of existing loans and bonds into equity in a restructured company. By utilizing the Chapter 11 process in the US, WeWork can exit leases with minimal financial penalties as part of its effort to reorganize over $13 billion in lease obligations.
WeWork’s CEO, David Tolley, stated that the primary focus of this process would be to address legacy leases and significantly improve the company’s balance sheet.
In its bankruptcy filing, WeWork sought to terminate 69 leases, emphasizing the critical importance of streamlining its office portfolio as part of the restructuring. The company has been actively negotiating with over 400 landlords to improve lease terms.
Notably, WeWork reassured that its office spaces were operating normally, and its international operations outside the US and Canada remained unaffected by the bankruptcy filing.
WeWork and its charismatic founder, Neumann, were once celebrated for their ability to inject technology into the traditional office space sector, achieving a unicorn status with a valuation exceeding a billion dollars. However, mounting losses due to a declining office property market and rising interest rates tarnished its reputation as an emblem of the excesses during the era of cheap financing.
At its peak in early 2019, WeWork was valued at $47 billion in private markets, and Neumann was courted by Wall Street investors eager to participate in its anticipated initial public offering. Bolstered by approximately $16 billion in funding from SoftBank and its Vision Fund, the company expanded aggressively worldwide to drive revenue growth by offering flexible real estate solutions.
He mentioned the challenge of witnessing WeWork’s struggles since 2019 and expressed optimism that the reorganization would help the company emerge successfully.
Before the bankruptcy filing, Neumann expressed disappointment at the turn of events. He mentioned the challenge of witnessing WeWork’s struggles since 2019 and expressed optimism that the reorganization would help the company emerge successfully.
The company had already been engaged in reviewing its leases, with Tolley informing landlords in September of the intent to restructure most of its leases, citing an inflexible and high-cost lease portfolio resulting from unsustainable hypergrowth.
WeWork had plans to reject leases as part of its bankruptcy proceedings, strengthening its position in lease negotiations. These leases included locations across the US and Canada, with a significant presence in New York and California.
WeWork aimed to establish itself as a lifestyle brand for the “we generation,” branching into co-living and schooling. However, despite Neumann’s vision, the company struggled to generate profits.
WeWork’s attempt to go public in 2019 was marred by concerns about heavy losses and corporate governance, which led to the withdrawal of its IPO plans, and Neumann’s departure as CEO. In 2021, WeWork and SoftBank settled a lawsuit with Neumann for several hundred million dollars.
WeWork eventually went public in 2021 through a SPAC merger with an enterprise valuation of $9 billion. However, its occupancy rate fell below expectations, and it remained unprofitable in the first half of the year.
In an effort to improve its financial situation, WeWork completed a balance sheet restructuring, but it proved insufficient. The company’s market capitalization plummeted to $40 million, and existing shareholders are expected to have their shares canceled as part of the bankruptcy. WeWork’s bonds are trading at significantly distressed prices.
This bankruptcy represents another blow to the office property sector, although industry experts noted that WeWork locations were often in second-tier buildings and struggling locations.
According to its securities filings, WeWork operates more than 700 locations globally, with over 40 million square feet available for rent, and a significant portion of that is in the US and Canada. Tolley expects the bankruptcy process to conclude in less than seven months.