WeWork CMBS Cause Jitters, Bonds Hit Record Low

It’s so big: Soul searching in the Commercial Mortgage Backed Securities market.

The $702 million in unsecured 7.875% bonds that WeWork issued in April last year traded at a record low on Friday afternoon, at 83 cents on the dollar, down 21% from 105 cents on the dollar six weeks ago before WeWork’s death spiral began. At this price, the bonds, which are due in May 2025, yield about 12.2%:

The original bet for buying that bond had been hinged on WeWork’s IPO. Folks were hoping that the company could raise $3 billion in equity capital in the IPO. This equity capital would have been the basis for a $6 billion leveraged loan from a consortium of banks. But without the $3 billion in equity capital, the loan would be way too risky and isn’t happening either. So the $9 billion the company had been counting on has moved out of reach.

WeWork’s debt would have been backed by a hoped-for sky-high market valuation in the future that would have allowed WeWork to sell ever more shares to raise ever more money, just like Tesla has been doing successfully for many years. And creditors count on this high share price.

With a high share price, a company can always raise new money and take care of its creditors. That’s why the bonds traded at 105 cents on the dollar before the IPO was scuttled. But WeWork has missed that money train. And for creditors, all bets are off.

Moody’s already withdrew its credit rating of WeWork in August 2018, because it had “insufficient or otherwise inadequate information to support maintenance of the ratings,” and washed its hands of it. Fitch downgraded WeWork to CCC+ with Negative Outlook, which pushed the rating into deep junk. And Standard & Poor’s downgraded WeWork to B- (here’s my plain-English cheat sheet for the credit rating scales of Moody’s, S&P, and Fitch).

Bets against the WeWork bond reached a record earlier this week, when short interest as measured by the amount of bonds on loan rose to $67 million, nearly 10% of the bonds outstanding, according to IHS Markit, cited by Reuters.

To short the bonds, intrepid investors have to borrow them from other investors and then sell those borrowed bonds, hoping that they can buy them back later at a lower price and profit from the difference. And they do have to buy them back, which can trigger vicious short-covering rallies, especially in something as illiquid as a WeWork bond.

Now everyone is combing through their Commercial Mortgage Backed Securities (CMBS) to see to what extent they’re exposed to WeWork. In some buildings WeWork is a big tenant, in other buildings WeWork is both the owner and a big tenant, and in that case there are two levels of risk.

According to Trepp, which analyzes CMBS, “WeWork is a top-five tenant at 36 office facilities behind more than $3.3 billion in CMBS debt across 50 deals.” WeWork loans account for about 4% of all office-backed loans in CMBS. “So that exposure is meaningful.”

About 78% of the WeWork-backed CMBS loans are fairly new, issued in the past three years, according to Trepp, “and have fairly minimal seasoning – so all of the loans are current on payment at the moment.”

“New York contains the largest WeWork CMBS footprint with total debt amounting to $1.5 billion across 29 notes,” Trepp says. California has the second largest loan exposure, at $803 million across 14 notes. Massachusetts is third with $230 million across three notes.

For example, in August, The We Company’s investment platform ARK – which had been formed in May to acquire, develop, and manage office properties to be mostly occupied by WeWork – acquired 600 California Street, a Class-A office tower in San Francisco’s Financial District for $330 million. It was the company’s first purchase in San Francisco. WeWork has been leasing 73,000 square feet in the 358,600-sqft building.

A $240 million loan used to fund the purchase has been securitized into a single CMBS (GSCG 2019-600C), with 11 tranches, of which 9 were offered, whose ratings range from AAA to B- and NR (not rated). In case of a default, the lowest tranches take the first loss.

In a deal like this, there is the risk that WeWork, the lessee, defaults on the lease; and there is the risk that the building owner, The We Company’s ARK, defaults.

“The biggest issue is not the pulling of the IPO per se, but the broader concerns about the firm’s viability,” Trepp says. “The worst-case scenario would be that the firm continues to burn through cash and can no longer support all of its lease obligations.”

“If that were followed by a period of non-payment of rent by WeWork, but physical occupancy and current payments by the firm’s sub-lessees, that would make for some interesting work for landlords and special servicers,” Trepp says.

These “special servicers” may already be licking their chops. When a CMBS loan defaults, or sometimes even when the building loses a critical tenant but the loan hasn’t defaulted yet, servicing gets switched from the master servicer to a special servicer, as laid out in the pooling and servicing agreement (PSA). The special servicer’s role is to figure out if the borrower can become current via a loan modification or a debt workout. Under many PSAs, special servicers have the right to purchase the building at a discount if the very same special servicer decides the loan cannot be brought current. So, yeah — this might get interesting.

And there are additional complications. WeWork is so large in some markets that a reduction in leasing demand from WeWork, or an outright unwinding of its leases, would put downward pressure on rents and prices in those markets, making it that much more difficult to sort through the fallout in the market from problems at WeWork.

Signs are now all over Silicon Valley and San Francisco. Read...  IPOs Crash & Burn, Debris Hits Housing, Office Markets

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  112 comments for “WeWork CMBS Cause Jitters, Bonds Hit Record Low

  1. Mike
    Oct 4, 2019 at 9:37 pm

    Great article. Holly Smoke! Scam IPOs at large these days! They were fishing for 3-9 billion capital. If I recall correctly VMware raised $400 million in initial public offering, and VMware created an entirely new industry in the technology space.

    • Vespa P200E
      Oct 5, 2019 at 9:28 am

      We-whatever was quashed by its handler DumbBank and embarrassed underwriters who initially allowed such 1-sided Neumann the prophet of trillion $ and live forever mantra, to name a few, that the WS rejected it.

      Suppose what’s good is that the greedy banksters recognized it as the scam of the century and even clown Cramer pleading no IPO on CNBC.

      • TonTon
        Oct 5, 2019 at 10:52 am

        In a stunning new development, WeWork has changed it’s name to Wee-Wee. Still awaiting confirmation of sale of this brand name from Neumann for $ 5.2 million.

        • Vespa P200E
          Oct 6, 2019 at 10:02 am

          Saw this and I think the best:

          WeWork = daycare for Millenials

  2. lt
    Oct 4, 2019 at 10:09 pm

    WeFu**ed

    I feel sorry for all the employees that had their hopes crushed with this company. But thank goodness this monster didn’t IPO and do more damage to unsuspecting retail investors (ma and pa).

    PS: Your chart has 2015 instead of 2025.

    • Rat Fink
      Oct 5, 2019 at 4:59 am

      Shall we shed a collective tear for all the management at Wework who truly believed that they were on a mission to make the world better, who worshipped at the feet of Adam and Rebekah…

      Who high-fived each other every morning when they entered the Wework utopia believing they were going to cash out Big Time on the IPO.

      How sad is that.

      A mate of mine was mentioning to me how he had a meeting at a Wework office last week. Coffee, beer, games, cool & hip people. He then went back to his uncool, boring office, to hunker down and do business.

      The turnover at Wework offices must be epic – because being cool/hip are not generally traits that result in running a successful business. As

      Wework itself is about to demonstrate

      • Vespa P200E
        Oct 5, 2019 at 10:01 am

        “He then went back to his uncool, boring office, to hunker down and do business.” I think you forgot to say “profitable”?

        Suspect many of these cool, hip, fun companies fueled by caffeine and beer late into the evening are not cash flow positive and dependent on investors/VCs money.

        History does repeat and these cash bleeding start-ups domiciled in rent-a-cube space will face the liquidity crunch when the economy slows down and VC funding dries out, and forced to bug out to state unemployment offices full of ex-WeWork tenants applying for unemployment benefits.

        • RepubAnon
          Oct 5, 2019 at 11:03 am

          It’s the typical start-up model:
          * First, someone has great idea
          * Next, they get together with their friends and put a small company together on a shoestring
          * They get big, and the venture capitalists (“VCs”) get involved.
          * Everyone gets excited about the big cash influx.
          * Because there’s so much money, they spend irresponsibly (the VC’s “professional management team” usually helps by giving themselves big perks, like weekly office parties, expensive “retreats”, etc.
          * This creates a race: can the idea be turned into a profitable venture (or sold to a big corporation) before the investors’ money runs out?
          * Most of the time, the answer is no…

          Moral: make sure any stock certificates you receive in a start-up are printed on 2-ply, soft, pleasantly-scented paper…

        • Oct 6, 2019 at 1:49 pm

          Imagine what would happen to this country if the meds were taken away, and I mean mood enhancers that make buying the dip not only possible but likely. Some say the presidents erratic behavior is due to stimulant abuse. If so he is the poster boy for a drugged out culture. The cultural divide then isn’t red or blue, but cool dudes (pot) and go getters (meth). In all the buzz around Orwell culture wonks completely forgot Huxley. If you burn out on one med, say booze. there are other meds to keep you going. It all ends with a collective nervous breakdown.

    • Oct 5, 2019 at 12:50 pm

      Honestly, how can anyone still feel sympathy for people who invest in companies they have no knowledge of, simply for the money. I’m this case it’s “just greed”, but in many others there are ethical ramifications. Sweet irony that a get rich quick scam would come under the moniker WeWork.

  3. IslandTeal
    Oct 5, 2019 at 12:28 am

    Wolf…. Outstanding article. The numbers are truly scary and the potential default ramifications are a head spinner. Thanks for staying so close on WeWork. Almost seems like the land-based version of Teeeeesla.

    • cas127
      Oct 5, 2019 at 7:20 am

      IT,

      “like the land-based version of Teeeeesla.”

      Don’t worry – any day now WeUsedToWork will announce that it will be sending the first time-share cubicle to Mars…

    • unit472
      Oct 5, 2019 at 9:59 am

      Musk maybe a bit of a con man but Tesla was a real car company with new technology. That the major car companies are scrambling to catch up with Tesla is, in large part, due to government mandates, but also because EVs might just be the future. We shall see but Tesla wasn’t pure hype and financial leverage.

      WeWork was just subleasing office space. No new technology not even a solid background in commercial real estate. How Andy Neumann was able to build such a large enterprise out of nothing makes him one of the greatest Flim Flam men in history.

      • TXRancher
        Oct 5, 2019 at 5:03 pm

        “Musk maybe a bit of a con man but Tesla was a real car company with new technology.”

        I have been running around the ranch on an electric golf car for decades.

        Improved technology maybe (batteries/motors) but new?

        • Craig
          Oct 6, 2019 at 5:02 am

          Actually like microsoft they bought in the new tech (AC motors) and motor controller software, by buying the companies and throwing $ at developers.

      • roddy6667
        Oct 5, 2019 at 8:32 pm

        WeWork is just pizza-by-the-slice on a huge scale. Just as in the food analogy, it is not infinitely scalable.

      • Greg Hamilton
        Oct 6, 2019 at 11:04 am

        It seems to me WeWork was in a way trying to bail out the commercial real estate market, particularly in New York City. If commercial real estate in New York collapses watch out below. The ramifications are huge.

      • Escher
        Oct 6, 2019 at 6:42 pm

        Yup. Don’t hold your breath for regulators or the IRS to go after him, though.

      • cas127
        Oct 8, 2019 at 4:03 am

        unit472,

        “Musk maybe a bit of a con man”

        More than a bit, I think.

        Leaving aside whether or not Tesla will survive, Musk makes himself look awful every time he flings out some BS “near term” pie-in-the-sky sci-fi project – almost always slightly in advance of a missed major milestone for the *prior* pie-in-the-sky sci-fi project.

        That’s the behavior of a huckster.

    • Placido
      Oct 6, 2019 at 8:30 pm

      And there is risk beyond the WeWork portfolio itself. In some markets, like New York City, WeWork leases a significant portion of the commercial space. If all of that suddenly floods back into the market all at once, other building owners besides the cool kids will have problems.

      I’d be combing my CBMS’ to see if I was exposed to any markets where WeWork is a dominant player. I’d previously heard NYC and London, and with this article I can add SF to that list.

  4. MC01
    Oct 5, 2019 at 1:34 am

    Regus, WeWork profitable Jersey-registered competitor, has been on the market for at least 18 months and while prospective buyers are not lacking none of them has proven willing to value the company at £3.5 billion, what Regus shareholders feel their company is worth. I am fairly confident that unless a big discount is offered Regus will be pulled from the market shortly.

    Everybody and his uncle is jumping in the serviced office business right now: I’ve been told 75% of the new office space near the Hirschgarten in Munich is of this kind and most of it is directly offered by the building owners, effectively cutting off middlemen such as Regus and WeWork. The same dynamics are playing all over the world: serviced office providers are sprouting everywhere, and we all know what that means. It’s great if you have to lease office space, but it means profits for providers will enter the death spiral so common nowadays when crazy business schemes find somebody stupid enough to finance them. Those private pension and family funds will get peanuts for their massive investments, and they’ll be the lucky ones.
    Imagine what will happen when WeWork/The We Company will truly start to resize, downsizing leases and selling properties outright: these guys are all over the place, especially in prime markets. Anybody buying/leasing such property will have every interest in filling it right away… meaning more downward pressure on profits.
    Regus shareholders are absolutely right in wanting to abandon ship.

    • Petunia
      Oct 5, 2019 at 9:03 am

      Your observation that landlords will compete directly with WeWork type of businesses is correct in my view. You can already see residential landlords AirBNBing their houses and apts when it is more profitable for them, putting them in direct competition with hotels.

      • MC01
        Oct 5, 2019 at 2:05 pm

        Private pension and family funds, among many others, have been turning to literally everything to have a steady income stream, not merely to supplement fixed yield, but to replace it.
        For example the first two Airbus A380 introduced in service belonged to a German private pension fund. They were scrapped earlier this year after Singapore Airlines returned them and no buyer or leasee could be found.
        These funds have always been very active in the traditional commercial real estate sector, but since profits there are nowhere near as good as they used to (albeit still there), they have turned to the serviced office business in mass. Please note that “serviced offices” can cover a lot of stuff, from WeWork’s table and chair in a shared space to whole floors “ready to work”

        Regus used to be so profitable because they had little competition, with a poor choice of locations and not much in the way of flexibility: they could charge as much as they wanted because the competition was nigh on inexistant. In short it was like having your choice of a Daimler Sovereign and a Morris Marina with nothing in between. Now it has all changed.

      • Joe Isuzu
        Oct 6, 2019 at 8:35 pm

        No reason for landlords not to follow once someone has shown the way. Buy an espresso machine or two, stock some fancier coffee than the usual office bull for some old fashioned coffee makers, anyone can pick up a beer tap cheap from a failed bar (and there are always failed bars as its the nature of that business). Splash around some colorful paint and find a cheap deal on some modern furniture. Hire a receptionist for a floor. That’s all cheap if it brings in a number of micro-office leases.

    • Paulo
      Oct 5, 2019 at 9:21 am

      Isn’t that the problem with many dysfunctional models these days? The Middleman? Medical services, medical insurance, and investment ‘experts’ are just a few examples.

      The term that comes to mind, ‘mordida’.

      • IslandTeal
        Oct 5, 2019 at 10:08 am

        Paulo… Very true. So many are just add-ons that take a piece of the gross. I’ve got a neighbor who has inserted himself into the janitorial supply business by selling to stupid people who don’t know what wholesale means. Dumb is everywhere.

    • Vespa P200E
      Oct 5, 2019 at 9:39 am

      Been to Regus cubicle farm in La Jolla near the tall office building with WeWork sign on top. They charged a lot to rent the conference room for a day. Guess they move/relocate based on whatever space is available as the address had changed to the less desirable building going thru a renovation.

      One thing though is that all these cash bleeding start-ups domiciled in rent-a-cube space will face the liquidity crunch when the economy slows down and VC funding dries out and bugs out. This is what happened 11 yrs ago and seen it 1st hand while working for biotech start-up.

      • Placido
        Oct 6, 2019 at 8:37 pm

        They seem to be the sort of businesses that go and get office space when times are good. Then they show all their friends how successful their business is with its new office space. But then they turn around and go back to working out of the house when the cash flow starts to dip.

    • RepubAnon
      Oct 5, 2019 at 11:16 am

      An app linking landlords offering serviced office space on an AirBnB to small businesses might have a place. WeWork’s mistake was trying to sub-lease office space (thus tying up capital and betting on lack of competition) rather than simply acting as an advertising medium connecting landlords with prospective tenants.

    • c1ue
      Oct 7, 2019 at 1:57 pm

      Regus has been around for a long, long time: well over a decade.
      That company already saw its own bubble, crash and subsequent “rebirth”.

  5. Joe
    Oct 5, 2019 at 4:33 am

    Just a landlord with prime realestate holdings in a market downturn…
    I see crash and burn ahead.
    Their competitors are already giggling and no doubt chumming the water for some deals.

  6. David Hall
    Oct 5, 2019 at 4:34 am

    U.S. shopping mall vacancies reach 8-year high – various sources.

    Retail in general had an almost 10 percent vacancy rate earlier this year.

    Coworking leases a huge amount of office space. If they fail to pay the rent, there could be problems.

    • cas127
      Oct 5, 2019 at 7:29 am

      DH,

      The interesting thing to me is what co-working subleases say about the real demand for office space…namely that it is still pretty crappy.

      Otherwise the *building owners* would be leasing the space *themselves* at traditional terms and at traditional prices.

      (Remember, WeWork has been the largest office space lessee in both NYC and SF for a while now.)

      It was lack of market demand that made WeWork an acceptable tenant (also, apparently WeWork frequently got away with *not* providing central corporation guarantees of its leases – meaning foreclosing landlords…get their own property back and – nothing – else. Not exactly an indicator of thriving office space demand).

    • Vespa P200E
      Oct 5, 2019 at 11:33 am

      The infamous Sherman Oaks Galleria mall with tribute song from F Zappa’s Valley Girl 30+ yes ago morphed itself into offices with few restaurants 15+ yrs ago. Granted ideal location for office spaces at cross-roads of 101 and 405.

    • Placido
      Oct 6, 2019 at 8:44 pm

      I once worked in an ‘office’ that was a former strip mall grocery store. An award winning sewage treatment plant was being designed there. Space is space.

      The only drawback is that an office in a strip mall doesn’t look ‘cool’.

      But, back then at least, engineers weren’t really into ‘cool’. Or at least not the sort that handle a major city’s sewage. :)

  7. Old-school
    Oct 5, 2019 at 5:33 am

    Seems like this is happening in most industries. It’s a warning sign of where we are in the cycle. We desperately need a recession as painful ad that will be to purge the losers.

    It appears central banks don’t believe recessions are a necessary part of business cycle. It’s not surprising because we have a mixed economy now and governments are not known for purging inefficiencies.

    • Joe
      Oct 5, 2019 at 6:00 am

      Pretty difficult to do with politicians ever expanding their different departments, agencies and committee’s along with all the money sucking non-profit agencies that seem to come with governments expanding.
      They tend to never cut these, just slightly lower the budgets while adding additional taxes and fees.
      When the government tries to do any meaningful cuts, the media has a full range of circus events that include the poor children your hurting.

      • Clete
        Oct 5, 2019 at 7:09 am

        “They tend to never cut these, just slightly lower the budgets…”

        I think you mean “just slightly lower the budget increases.” Nothing ever gets smaller.

        • Joe
          Oct 5, 2019 at 7:38 am

          It was popcorn eating time when new Ontario Premier Doug Ford did a massive amount of government cuts…
          The media and oppositions went absolutely ape shit.
          The media just about daily were reporting on the poor kids each day in all these individual programs that are government sponsored and expensive. They made sure that Ford was portrayed as such a monster. How dare he put the burden back on specialty programs on parents.
          He had to give in to the brutal media coverage as the federal elections were coming. He suspended parliament as the media coverage circus would have been brutal for anything being done before the election coming.

      • Vespa P200E
        Oct 5, 2019 at 11:42 am

        Having lived thru the bubble pop/purge of “mislocated” capitals 10 yrs ago, it’s painful for those who lost their jobs and their families with years of under and/or unemployments. I think there are few hundred thousand folks who lost their jobs on the last downturn still not in the workforce or dropped out completely and not counted by our “massaged” unemployment stats.

      • California Bob
        Oct 5, 2019 at 11:52 am

        Saw a breakdown of the recent jobs report: IIRC, was 2K new manufacturing jobs and 22K ‘government’ jobs. ‘Nuff said.

        • Joe Isuzu
          Oct 6, 2019 at 8:47 pm

          And that was the short-term, once a decade hiring to take the Census.

    • Frederick
      Oct 5, 2019 at 8:37 am

      True We do need a cleansing purge of the “ dead wood” just like we did in 2008 Now I’d The PTB would just stop pooping it all up we could get somewhere painful as it would be for some

  8. Old-school
    Oct 5, 2019 at 5:43 am

    I finally took a week and rented a beach house in NC. Weather was perfect.

    My looking around meter tells me economy is extremely good. Lots of people here, lots of expensive fishing boats in the water, restraunts busy, real estate prices strong. All of this in ‘shoulder season.

    Beachfront homes still pretty reasonably priced. Lot $250K plus $250K for home = $500K for 4 bdr. Taxes cheap but insurance in the $1000 per month range.

    • qt
      Oct 5, 2019 at 6:12 am

      Economy was great too in 2006!

    • Stephen
      Oct 5, 2019 at 8:17 am

      I use to live in Pine Knoll Shores in NC. Very nice NC beachfront community. The problem is that you are getting a very distorted view in these communities. It’s kind of like going to a very high end country club here in Florida and drawling the conclusion that everyone has a country club membership. In the NC beachfront communities, you are viewing the top 5% (mostly 1%) of income. This is an extremely skewed demographic. If you are not in the top 10% in America, you are probably not doing very well and are not likely to be hob nobbing on the Carolina shores. Btw, there are a few exceptions. When I lived in Pine Knoll Shores, I was a young Marine Corps officer living with two of my Marine Officer buddies. We all received a quarters allowance from the government which collectively, let us rent a very nice 3 bedroom condo. So yes, a few ‘middle class’ people can rent beach front with government assistance.

      • Bobber
        Oct 5, 2019 at 10:57 am

        A more representative sample could come from US roads, which everybody uses. Look at the automobiles and what is in them. Given the pillows and household items I see in the autos, the middle fingers, the irritation, the parked autos that never move, the beggars on the corners, and the overall quality and reliability of the automobiles, I’d say things are a lot tougher than 20 years ago for many people.

        • roddy6667
          Oct 5, 2019 at 8:40 pm

          Go to Walmart on the first 3 days of the month or any DMV office. If the economy is so great, why are so many Americans living like this? The profits on Wall Street and corporate America flow mostly to the top 5%, leaving most Americans slowly backsliding. Middle class America now has the buying power it did in 1967. What happened? Over 60% of Americans get paid on Friday, but are broke on Thursday or sooner. Considering debt, they have a negative net worth. Where does all the money go?

        • Dave Chapman
          Oct 6, 2019 at 8:27 pm

          Bobber – Yeah. I saw an unusual number of broken-down cars the last couple of weeks. Maybe it’s because, if a car breaks down the last week of the month, lots of people can’t fix it, or even pay for it to be towed.

      • Lisa_Hooker
        Oct 6, 2019 at 6:01 am

        So it took three “professional” military officer incomes to rent one condo, albeit a 3 bedroom. Could you have comfortably rented a one bedroom by yourself?

    • Frederick
      Oct 5, 2019 at 8:41 am

      Take a closer look at places like New Bern Prices are dropping and people seem to want out The last hurricane really did a lot of damage both physical and psychological The economy in most of eastern NC along the coast is pretty weak Raleigh and Charlotte are doing better because of the banking and tech sector employment in those places

    • BaritoneWoman
      Oct 5, 2019 at 8:56 am

      Was this before or after Hurricane Dorian came through the area? :)

  9. roddy6667
    Oct 5, 2019 at 5:49 am

    This is more fun than trackside seats at a train wreck.
    First, WeWork is a $47 billion IPO, to be.
    Then, it’s a $10 billion IPO, to be.
    Then, the IPO is retracted.
    Next is bankruptcy.
    Then Adam and Rebekah hiding out in their native Israel, trying to avoid extradition and a jail cell adjacent to Bernie Madoff.

    • Mars
      Oct 5, 2019 at 5:20 pm

      I would bet behind-the-scenes quit claim deeds, clawbacks and major Adam asset unwinds have begun.

  10. stan6565
    Oct 5, 2019 at 6:58 am

    Great article. Good, detailed analysis. The We-IPO Fiasco, together with the Peloton-r-us dud-IPO are a sure sign that the Ponzi-IPO bubble has run its course.

    You had another great article a few days ago, listing a number of other would-be-unicorn companies, whose market capitalisation figures are nowhere near justified by either turnover or exclusivity of their markets and are purely based on hype and mis-investment of other people’s money by the “investment managers”.

    Given that greater-fools numbers are slowly but clearly starting to diminish, there will be a lot of blood when likes of Netflix, Uber, Lyft, Juul and so on, start to unravel.

    Popcorn time.

    • PressGaneyMustDie
      Oct 5, 2019 at 7:39 am

      “Given that greater-fools numbers are slowly but clearly starting to diminish, there will be a lot of blood when likes of Netflix, Uber, Lyft, Juul and so on, start to unravel.”

      They already are unraveling.

  11. Brant Lee
    Oct 5, 2019 at 7:35 am

    I hope Airbnb doesn’t get screwed up with this money grab BS. It’s a fantastic service (well, the property owners are fantastic, that is).

    But you know, why make a good living, when you have the chance to become filthy rich?

    • Unamused
      Oct 5, 2019 at 7:57 am

      It’s less stress, and besides, you get to keep your soul.

      • RD Blakeslee
        Oct 5, 2019 at 9:18 am

        Amen

      • Yancey Ward
        Oct 5, 2019 at 9:36 am

        Ah, you haven’t heard about the Leveraged Soul Bond Fund yet.

    • Rat Fink
      Oct 5, 2019 at 8:23 am

      I’ve stayed in Airbnb apartments 3x. And all 3 were mediocre or terrible.

      Paris – the apartment was run down and on the dirty side. We arrived in the heat of summer and asked about a fan – the owner said she’d just purchased one but did not know where to buy a screwdriver so had not assembled it. Of course I always carry a tool kit when I travel so this was not a problem (actually I put it together with a butter knife).

      Hong Kong – the owner used photos that were either doctored or very dated. The apartment looked immaculate on the site but in reality was a total dump. The gate lock was busted so took about 5 minutes each entry fiddling with the key. Try that in the rain!

      We had booked two weeks in this disaster and after a few days I had had enough and called Airbnb to cancel. They initially refused to offer a full refund but then I pointed out that the owner was committing a crime (it is a crime to rent an apartment for less than a month in HK without a proper license) and that if they did not refund me the next call would be to the police then the SCMP newspaper. They immediately agreed on a full refund.

      I reported the fake photos to Airbnb and it’s 4 months after the fact and they are STILL on the listing!!!

      We moved to a 4 star hotel with massive sea views for CHEAPER than the dump!

      Dublin – we’d already booked this before the disastrous HK stay so were locked in. A decent apartment however the building was a creaking old pile of junk and it was a two floor walk up. Try that with 4 bags!

      The Verdict – NEVER AGAIN.

      As for the Airbnb business model, in many of the markets where they operate it is ILLEGAL to short term let a property. Drug dealers also generate revenue – I guess they should be allowed to list?

      Maybe Softbank should get into bed with drug dealers. It would be one of the very few businesses that they invest in that actually makes money

      Disclosure – we have a property that we short term let using a couple of these sites. We have council approval to let for up to 200 days per year. We are one of very few to have this consent (this pushes our property rates up 50%)

      • Petunia
        Oct 5, 2019 at 9:27 am

        I find the disconnect of you participating in a market whose business model you find dysfunctional interesting, particularly because it is common in the investing world. I hope you are making a profit on your temporary rental that covers, not just the expense, but also the risk you are taking with your property.

        • Rat Fink
          Oct 5, 2019 at 3:15 pm

          As I mentioned, I am one of very few with a property that is consented for short term accommodation.

          What I am doing is legal.

          What I find dysfunctional is that Airbnb is essentially encouraging and making money off of criminal activity.

          If Airbnb were to require all owners to have the proper consents to operate before they could list, then I would have no problem with their business model.

          They won’t do that – for obvious reasons.

          I checked into this when I ran into the problem in Hong Kong and found that 900 owners have actually been prosecuted for operating short term accommodation without a license.

          All have been fined and bound over. A few have been jailed. I assume these were owners with repeat violations.

          Airbnb is obviously aware of this yet they continue to list thousands of HK properties that do not have licenses.

          When we stayed in Hong Kong I didn’t mention that the owner had a laminated list of lies that we were to tell if the authorities showed up (e.g. tell them you are not paying – tell them you are friends of ours – etc…)

          I spoke to a mate who is a lawyer and he indicated that if we were to have lied to the authorities as instructed, we would likely have been charged with an offence.

          I informed Airbnb of this and told them the needed to take that listing off of their site because the owner was putting guests at risk.

          A couple of months after I checked and the listing was still there – with all the fake photos. I chased Airbnb on this and still they did nothing.

          What I did then was report the owner and property to the authorities who indicate they are investigating.

          They don’t call me Rat Fink for nothing :)

      • char
        Oct 6, 2019 at 12:11 am

        Drug dealers? You mean Juul.

    • Vespa P200E
      Oct 5, 2019 at 11:55 am

      Airbnb stole the idea from VRBO (used to be good service to rent condos/timeshares), and reduced available rentals driving folks away and raising rents in SF. The idea of renting a room/rent from complete strangers does not suit many folks, me and wife included. Read on local SF paper about declining morale as they shelved IPO.

      My brother-in-law and his pal investors” thought to get rich quick via Airbnb and bought a house in Orange County (at its peak last year) not too far from Disneyland then the reality hit home that there’re tons of competing Airbnb rentals! It became money pit as they spent money to renovate and hip looking yet high vacancy not to mention house price decline. My b-in law even lived there to manage/clean the house. They are trying to turn it into rental to stem the losses.

      • stan6565
        Oct 5, 2019 at 2:50 pm

        This is a holiday-let market. In places here in UK it is also bubbling. Saturation of offers is reducing returns, so you are already looking at 30-40 years to pay the property value through rental income, after expenses.

      • Jon
        Oct 5, 2019 at 3:59 pm

        AirBnB is one of the reasons making rental inventory small for average family to rent
        This has led to increase in rents in many places thus resulting in higher homelessness rate
        Cities can easily stop this but who does not want dollars.

        Btw.. AirBnB is borderline illegal like uber and Lyft

    • Lisa_Hooker
      Oct 6, 2019 at 7:58 am

      With credit to Pearl Bailey: I’ve been very rich and filthy rich and filthy rich is better.

      When there’s way more money than necessary and abundant wishful thinking, prices have a tendency to be bid up.

      It is much easier to hop aboard an accelerating bus than to jump off at high speed just before it crashes.

  12. walter map
    Oct 5, 2019 at 7:44 am

    WeWork’s debt would have been backed by a hoped-for sky-high market valuation in the future that would have allowed WeWork to sell ever more shares to raise ever more money, just like Tesla has been doing successfully for many years.

    It’s a business model that requires easy access to investing fools, which access the IPO was supposed to provide.

    But no IPO means no access to morons, and the business model fails unless a truly exceptional white knight kneebiter comes along to waste more money bailing them out, and there’s always a severe shortage of those.

    On the plus side, bankruptcy liquidation should go pretty easily. I’m told roast unicorn tastes like gamy horse meat, but I wouldn’t know myself.

  13. Bill Shortell
    Oct 5, 2019 at 7:45 am

    There is some speculation that WeWork, desperate to stay ahead of a bond default, is the big consumer of repos that has been rocking that market.

    Borrowing night-after-night to raise the cash to make their bond payments…

    • Rat Fink
      Oct 5, 2019 at 8:26 am

      The repo is tens of billions of USD. Wework’s interest payments are nowhere near that amount. That’s senseless speculation.

    • Petunia
      Oct 5, 2019 at 9:34 am

      WeWork not being a bank wouldn’t have access to the discount window at the fed, but Softbank, one of its investors might.

      • d
        Oct 5, 2019 at 11:16 am

        “but Softbank, one of its investors might.”

        Soft has better, and cheaper lines of credit, than US repo.

        Try “club med” region.

        Club Med including “Spain” banks of which, have some American subsidiaries, whose owners have BIG problems. Like big exposure to: Argentina, Brazil, and Mexico.

        (Disclaimer, this is personal thinking, act on it at your own risk)

      • nick kelly
        Oct 5, 2019 at 1:48 pm

        Softbank is a Japanese VC holding co. Neither a bank or American it will have no more access to the Fed’s discount window than Honda or Toshiba.

        Tesla, while unlikely, is at least a conceivable candidate for some kind of gov bailout.

        • Petunia
          Oct 5, 2019 at 2:39 pm

          The fed discount window is open to some foreign banks and securities firms. Japan has a couple of them including Nomura Securities.

        • Dave Chapman
          Oct 6, 2019 at 8:41 pm

          nick kelly – I think you are mistaken.

          The Fed’s TARP program bailed out Deutsche Bank in 2008, AFAIK, and the Fed have been very reluctant to tell us who exactly is getting the “repo” money lately.

          American banks no longer have exclusive access to the various Fed bailout programs.

    • Frederick
      Oct 5, 2019 at 3:26 pm

      I find that hard to believe The FED is a lot of things but naive or stupid they aren’t Why would they loan money to a disaster like WeWork ?

  14. Augusto
    Oct 5, 2019 at 8:54 am

    WeWork seems to be a just glorified office renovator, with Algros setting the floor plan, coffee bars (vs. coffee stations, Wow), and a New Age Guru called Neumann. Well in Calgary where the Oil industry has tanked everyone gets an office, hell you can have your own floor, and you buy your own coffee now, and the new Gurus are the Bankruptcy Trustees. My guess is you all will all be dealing with the Calgary experience soon. Too bad they don’t issue fancy stock and bond certificates any more, cause the WeWork ones would have made great Wallpaper. Hey, now, let’s think a sec, every dip is an opportunity to buy, every failure, a new launching pad, a fresh dawn comes after every storm….how about E-Bust Wallpaper, I just need a little financing, a yoga instructor and a corporate jet….

    • RD Blakeslee
      Oct 5, 2019 at 9:27 am

      Sure wish I could afford a WeWork office, instead of my 19th century oak roll-top desk with a Dell on it.

  15. gorbachev
    Oct 5, 2019 at 9:35 am

    I can see where we work could work well.

    Let me start with this.Any one can make a burger

    but mostly the fast food chains have figured out

    how to scale it and make tons from frying meat.

    Lots of folks who work alone but work all over in

    this new economy need places every where for short

    periods of time WE work can do this .Between flipping

    trading or switching they could make this possible .

    Few individual landlords could match that.We work needs

    to get back making work fun and profitable .Forget

    the get rich schemes and your superstar investors

    concentrate on your clients.

    • CreditGB
      Oct 5, 2019 at 11:21 am

      IF I were a commercial land lord, I’d have a small part of my square footage for short term WeWork type clients. Screw Neumann as a middle man, rent month to month from me at proportionately high rates, coffee and hot chocolate included. Let the short term space expand or contract based on demand for it. Heck, I’d even sublet that square footage to my Short Term LLC, also run by me, so as to protect my interests.

      • stan6565
        Oct 5, 2019 at 2:45 pm

        Short term WeWork type clients = hassle. You have to pamper them and solve their maintenance issues and so on.

        For me, fixed date commercial lease is king. Fully insuring repairing lease outside Landlord and Tennant Act (this is in UK).

        My office building now loan free, 13 years after buying.

      • Rat Fink
        Oct 5, 2019 at 2:58 pm

        Sounds like a good idea EXCEPT that the WW business model is to lose money on every desk space that they let.

        So as a landlord you are better off renting the space to WW because you get more revenue than if you rent the individual desks.

        Crazy situation eh!

    • California Bob
      Oct 5, 2019 at 12:02 pm

      re: “Lots of folks who work alone but work all over in

      this new economy need places every where for short

      periods of time WE work can do this ”

      So can Starbucks.

      • CreditBG
        Oct 5, 2019 at 2:43 pm

        So can any commercial land lord if they had any vision of any kind other than nailing down 100% long term leases. But, I guess active management is just too demanding though.

      • gorbachev
        Oct 5, 2019 at 4:54 pm

        I agree.So can your hotel or motel or airbnb or

        burger king etc.

        The point is we work can give you a great place

        to meet clients but more important is you will feel

        at home while you work.All the support needed

        to run your show is there.No feeling like an intruder.

        When you feel great you will sell great.

        • Mars
          Oct 5, 2019 at 5:39 pm

          “When you feel great you will sell great.”

          That one made me laugh, thanks!

          So did the overuse of feel, feelings, etc with no back-up using empirical data…

          My CPA/bookkeeper lets any of their clients use their Class A conference room for meetings, dayworking, etc for a nominal charge. There is decent coffee and it is spotless. I have used it a few times.

  16. JZ
    Oct 5, 2019 at 9:56 am

    So the creditors lend to WeWork NOT because it is a good company that can service debt by their operating business, BUT because it can raise money from next guy to service debt?
    People lend to Argentina NOT because Argentina will be able to repay, but because there will be IMF bailout if they default?

    The fundamental motives of capital market has changed. F the creditors, they deserve it. F the central banks to turn the capital market for business into casino and corruption.

  17. raxadian
    Oct 5, 2019 at 10:09 am

    [To short the bonds, intrepid investors have to borrow them from other investors and then sell those borrowed bonds, hoping that they can buy them back later at a lower price and profit from the difference. And they do  to buy them back, which can trigger vicious short-covering rallies, especially in something as illiquid as a WeWork bond.]

    Now why do people take the risk when the glorious USA doesn’t have negative rates? (At least not for this year)

  18. Bobber
    Oct 5, 2019 at 11:01 am

    How can WeWork bonds till be trading at 84%? WeWork’s balance sheet is missing the entire left side, in reality.

    • raxadian
      Oct 5, 2019 at 12:25 pm

      Because idiots are playing musical chairs?

    • Vespa P200E
      Oct 5, 2019 at 12:35 pm

      Probably insured in the event of default and/or shorting it as well.

  19. CreditGB
    Oct 5, 2019 at 11:12 am

    If I were a bond holder and could still get 83% of my money out of this Titanic, I’d go for it RIGHT NOW!

    Wonder how those building owners are going to fare when this ship goes down…

    • d
      Oct 5, 2019 at 11:27 am

      Earlier in time.

      There was talk that the major founding shareholders in WW, were buying and Leasing buildings, then leasing and sub leasing them to ww, at a large margin.

      When WW implodes the founders are still going to walk away with lots of money and an asset pool whose ownership will be so opaque, they will not be connected to it.

      WW is just another Corporate Fraud, in the land of Legalised Corporate fraud.

      The grossly inflated tax losses from which will be carried forward for a very long time

      • Petunia
        Oct 5, 2019 at 12:02 pm

        You could teach a course on structured financing just using WW as the example. It looks like they exploited every available option to finance themselves and entangled as many as they could in the process. Holy house of cards, Batman.

        • d
          Oct 8, 2019 at 1:06 pm

          Petunia

          QE and NIRP strike again.

      • CreditGB
        Oct 5, 2019 at 2:49 pm

        d,
        You have a point. I wonder what WeWork leases are compared to the average in each area. If you are right, and I believe you are, they would be high, perhaps very high by comparison.

        Another part of this model I can’t get. Lease high, pile in a bunch of capital, and sublet on a temp basis to lease higher default risks.

        • d
          Oct 8, 2019 at 1:04 pm

          “Another part of this model I can’t get. Lease high, pile in a bunch of capital, and sublet on a temp basis to lease higher default risks.”

          It pays the financiers of the building you actually, at the bottom of this own, with 0% down. which is all you ever wanted the scam to do.

          They lease high from themselves, When they lease from others, the primary/initial/head lease is generally low.

          Should/when WW falls over, the original founders are going to walk away Billionaires, whilst crying poverty, and nobody will be able to prove they are billionaires.

          Nobody will be able to hang much on them re fraud criminal intent, as it “Might” have worked as a business model, but for X Y Z Etc.

          They brought some buildings with 0 % down, leased them high to WW then flipped them, with the lease at big profit. Now you have to prove they did it.

          They then put that money into other buildings WW still leases, that nobody can prove they own.

          As WW winds down (unless of course it goes bang) the buildings they own will be the last WW vacates.

          You can only perpetrate frauds like WW, in markets brimming with QE and lots of NIRP money. Soft B may actually be a victim in this. I believe they may be the one to decide when the party ends for WW.

  20. CoCosAB
    Oct 5, 2019 at 12:14 pm

    “the bonds, which are due in May 2025″… if only they could last that long!

  21. Rowen
    Oct 5, 2019 at 2:24 pm

    Ironically, WeWork’s pre-IPO failure is actually a net economic good. In a system with too much debt on one side, and too much capital surplus on the other, there aren’t many ways to rebalance. Default is one of them.

    • d
      Oct 8, 2019 at 1:11 pm

      As long as the defaults are nicely spread out, they do evaporate a considerable amount of QE excess liquidity.

      If a bunch come together, beware below.

  22. JB
    Oct 5, 2019 at 4:19 pm

    this post recession decade , in the future , will be regarded as a period of wasteful capital expenditures. A period in which no long term sustainable capital goods , such as a factory, infrastructure or other were created. We will wake up one day and say ; Where did it go ? Welcome to my ted talk

  23. Oct 5, 2019 at 4:40 pm

    I’m curious how much of an affect this will have on the commercial real estate markets in LA.
    I work for a family owned tile company in Los Angeles. We have done a number of Wework projects, and we have a number of bids on projects with Wework spaces. One big type of project now is mixed use with apartments/condos on several floors, retail on the first floor or two, and an adjacent office tower … I have bids out on a bunch of these, some with labeled Wework spaces on the drawings.

    If Wework pulled out of these, the developers would need to look for new tenants to replace them. Rents are sky high all around, so they could probably replace a number of these, but too much at once could delay or derail some projects if the CRE investors don’t get the lease rates they’re looking for.

    • Vespa P200E
      Oct 6, 2019 at 10:12 am

      I think more business for you in the future when the daycare for the millenials/start-ups pulls out and new tenants want different floors. Seems like LA is attracting businesses from SF/SV due to “lower” cost of living albeit with worse traffic. As for what happens next – probably what occurred in CRE post-2008.

  24. lisa
    Oct 6, 2019 at 7:09 am

    re your: “Under many PSAs, special servicers have the right to purchase the building at a discount if the very same special servicer decides the loan cannot be brought current. So, yeah — this might get interesting.”

    What a great setup and perfect timing for the private investment groups, especially the ones such as the owners of the software application that is the base application to access data from the CENSUS BUREAU opportunity zones data, and every county and state database, etc. in the US.

    A few of the 1% are going to be zoning in for some real goodies! Of course, they’ll get to roll over at a timely basis back to Neumann and Friends when the time is right. The moat keeps shrinking, and the invisible architectural walls just get stacked higher. Of course, the little zombies get to drift around on the top, floating through the debris, that is about to turn nuclear.

  25. Iapetus
    Oct 6, 2019 at 11:31 am

    A few months ago there was an article describing WeWorks top 10 landlords as of July 2019. I’m guessing this contains some additional deals which were not financed by CMBS conduits. The current link is down, but a cached version is still available.

    https://webcache.googleusercontent.com/search?q=cache:oU7QKYxf7PEJ:https://www.cpexecutive.com/post/a-ranking-of-weworks-largest-landlords/+&cd=1&hl=en&ct=clnk&gl=us

  26. California Bob
    Oct 6, 2019 at 1:14 pm

    Saw my very first ‘WeWork’ commercial on TV yesterday. Sign of desperation?

    • Unamused
      Oct 6, 2019 at 4:56 pm

      It’s a sign you watch too much tee vee and need to take up surfing.

      • California Bob
        Oct 6, 2019 at 9:37 pm

        Too far from the ocean, now, mate. Thinking about taking up flying again, though.

  27. Queso Tejano
    Oct 7, 2019 at 11:20 am

    Interesting times.

    Playing Devil’s Advocate: let’s say most WeWork buildings are at a high occupancy. Further, if WeWork defaults, it’s possible the end “sublettors” are able to work something out with the property owners, and cutting out WeWork as the middleman. This scenario would still be bearish WeWork bonds, but the property owners, and broader commercial market, might come out OK.

    I don’t actually know the occupancy level of WeWork’s buildings but anecdotally heard they were pretty full on CNBC. Looking for why my reasoning might be wrong or any potential mitigants here.

  28. c1ue
    Oct 7, 2019 at 1:58 pm

    I’ve said before WeWork looks like a classic SPV to hide bad utilization in office buildings – a combination of Enron and just plain Ponzi.
    Sure looks to be coming more and more true.

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