Wework

 Valerie A. Potenza
  WeWork’s Debt Capacity



In the wake of the pulled IPO of The We Company (f/k/a as WeWork Companies, Inc.) the company’s ability to incur debt is of interest. In its S-1/A for the IPO, WeWork contemplated a new bank facility, to be entered into concurrently with the equity offering. That facility would have provided $2B of letters of credit and $4B of delayed draw term loans; however, only $1B of those loans would have been available “prior to receipt of financial statements for the three months ended June 30, 2020.”
With the IPO now out of the picture, WeWork is in need of cash—both debt and equity—with Bloomberg yesterday reporting that two paths are contemplate $5B of debt or an equity investment by SoftBank pursuant to which it would control the company. In addition, in its S- 1/A, WeWork disclosed that under its existing (private) credit facility that as of the end of Q2 , while it was in compliance with its covenants under the credit agreement and LC arrangements, it would not have been able to borrow in the future under its credit agreement due to financial covenants.
WeWork has outstanding $669mm of 7.875% Senior Notes due 2025, issued in April 2018. Other than the 30% equity claw (70% must remain outstanding), these bonds are only callable at their make-whole until 3 months prior to maturity—at approximately 129. In this report we take a look at debt capacity under the Senior Notes.



EBITDA
WeWork’s high yield bond deal was famous—or infamous—for its EBITDA metrics. In fact, it easily won a coveted Xtract WHYBOTYTM for Most Adjusted EBITDA of the Year. For those who do not remember, last year, WeWork ginned up two new adjusted EBITDA concepts: “Adjusted EBITDA Before Growth Investments” and the mother of all adjusted EBITDAs, “Community Adjusted

EBITDA”. Back in 2018, WeWork managed to transform a $933.5mm net loss into negative $193.3mm of Adjusted EBITDA, then into positive $49.4mm of Adjusted EBITDA Before Growth Investments and finally into positive $233.3mm of Community Adjusted EBITDA. The reconciliation on pp. 20-21 of the POM is quite something: beyond definitional addbacks and cost savings already at the Adjusted EBITDA level, Community Adjusted EBITDA goes much further and includes things likebasic marketing, general and administrative, and development and design costs. All those adjustments are reflected in the covenant definitions other than G&A expenses.
While Community Adjusted EBITDA is not used to calculate any ratios, Adjusted EBITDA before Growth Investments—the interim step between Adjusted EBITDA and Community Adjusted EBITDA—is relevant for secured and unsecured debt incurrence and investment capacity under the indenture. The company must meet certain minimum Adjusted EBITDA Before Growth Investments levels, in addition to minimum liquidity levels, in order to use growers to certain of its debt (and investment) baskets.
Secured Debt Capacity
Secured Debt analysis is straightforward. Beyond a modest general liens basket of $50mm/1% Total Assets (which would have to be paired with a permitted debt exception such as ratio debt or the general debt basket), secured debt can only be incurred under the Credit Facility basket.
The Credit Facility basket is bifurcated:
October 14, 2019
   (1)
$250mm for LC Facilities (defined narrowly), with amounts in excess thereof up to 30% of Total

  (2)
Assets permitted subject to meeting Minimum Liquidity and Minimum Growth Adjusted EBITDA targets (which respectively decrease and increase annually January 1, 2020, 2021 and 2022); and
$1B of other secured debt (bonds or loans) plus unlimited amounts that can be incurred under a 2.5x gross Secured Leverage Ratio.
(2) general debt basket (greater of $100mm/2% Total Assets); and
(3) up to $2.298B, but if more than $250mm, either:
(A) Total Leverage is less than 5x; OR
(B) the Minimum Liquidity and Minimum Growth
Adjusted EBITDA tests above can be met (same levels as for the LC basket grower above).
Using the general debt and liens baskets, the most unsecured debt WeWork can incur is $2.536B; however, this will be dependent upon meeting the Minimum Liquidity target.
Foreign Subsidiary Debt
Additional secured debt could be incurred by Foreign Subsidiaries under a dedicated Foreign Subsidiary debt basket, up to the greater of $150mm/3% Total Assets, subject to same Leverage or Minimum Liquidity/ Minimum Growth Adjusted EBITDA tests noted above. Foreign Subsidiary LC Facility debt is also permitted under a dedicated basket up to the greater of $250mm/5% Total Assets, plus an additional $250mm subject to either of the tests noted above.
Unrestricted Subsidiary Debt
While the S-1 describes the recently launched real estate platform ARK as expected to be an Unrestricted Subsidiary under the proposed new bank debt, it is not clear if it was made unrestricted under the indenture. However, WeWork had several Unrestricted Subsidiaries as of the issue date of the Senior Notes.
Going Forward
A few things to bear in mind:
•The amount of debt suggested by press reports—$5B— could not all be in the form of secured bonds/term loans
WeWork’s Debt Capacity | 2 © 2019 Xtract Research
The current Minimum Liquidity target is Unrestricted Cash of at least 0.7x total debt of the Restricted Group (calculated excluding ChinaCo) on a pro forma basis and Minimum Growth Adjusted EBITDA is $200mm.
Based on the disclosure in the S-1/A, WeWork can currently meet the Minimum Growth Adjusted EBITDA test. While actual Minimum Growth Adjusted EBITDA is not disclosed, WeWork states that “[a]s of June 30, 2019, we satisfied the minimum growth-adjusted EBITDA requirements for these incurrence-based covenant calculations under the indenture that governs the senior notes.”
The ability to meet Minimum Liquidity pro forma for the new debt is an open question as it is not clear how much capital will be contributed to the company.
The Secured Leverage Ratio uses Adjusted EBITDA in the denominator. Using S-1/A Adjusted EBITDA as a proxy for covenant Adjusted EBTIDA, it is (still) negative, so the grower is not relevant. As a result, secured term loan (or bond) debt is currently limited to $1.0B, plus $119mm under the general liens basket (using the 1% Total Assets grower based on Total Assets of $11.934B (which excludes right-of-use asset or other related assets; please let us know if you disagree).
Unsecured Debt Capacity
Unsecured debt can be incurred:
(1) under a 5x total leverage test (not relevant as Adjusted EBITDA is negative);

  of the issuer/guarantors due to the secured leverage grower in the CF basket. While there is some room for incremental secured debt of Foreign Subsidiaries it is relatively limited. We think it unlikely that the LC Facility definition could be interpreted to allow for term loans due to its narrow construction.
•The ability to achieve the pro forma Minimum Liquidity test is critical for WeWork to be able to access growers to its debt baskets.
•Other than the 30% equity claw, the notes are essentially make-whole for life, so if they have to be taken out it will be an expensive proposition.
•Covenant amendments require the consent of a majority of the note balance. This would include amendments to the financial definitions and incurrence tests which would allow for more debt.
•Minimum Liquidity loosens over time (0.3x Total Indebtedness in 2020) and $0 in 2021 and later; Minimum Growth Adjusted EBITDA increases over time ($500mm in 2020, $1B in 2021 and $2B in 2022).
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WeWork’s Debt Capacity |