SoftBank subsidiary WeWork, once the most valuable startup in the United States, is succumbing to bankruptcy

Nov 6 (Reuters) – WeWork, the SoftBank Group-backed startup whose rapid rise and fall has reshaped the global office sector, filed for bankruptcy protection in the United States on Monday after its bets on companies using more office-sharing space soured.

The move represents an admission by SoftBank (9984.T), the Japanese technology group that owns about 60% of WeWork (WE.N) and has invested billions of dollars in its turnaround, that the company cannot survive unless it renegotiates its expensive leases. . In bankruptcy.

A WeWork spokesman said that about 92% of the company’s lenders had agreed to convert their secured debt into equity under the restructuring support agreement, resulting in the write-down of about $3 billion in debt.

The company, which also intends to introduce recognition measures in Canada, said it expects to have the financial liquidity to continue operating normally and that its locations outside the United States and Canada, as well as franchisees around the world, are not affected by these measures. procedures.

WeWork had office space available in 777 locations around the world as of the end of June.

SoftBank said it believed WeWork’s restructuring support agreement was the appropriate measure for the company to reorganize its business and emerge from Chapter 11 proceedings.

The Japanese company said in a statement: “SoftBank will continue to act in the best interests of our investors in the long term.”

WeWork shares are down about 98.5% so far this year.

Profitability has remained elusive, with WeWork struggling to handle expensive leases and corporate clients canceling due to the trend toward employees working from home. Paying for space consumed 74% of WeWork’s revenue in the second quarter of 2023, the last time it reported financial results.

In a filing in New Jersey bankruptcy court, WeWork listed assets of $15.06 billion and liabilities of $18.66 billion as of June 30.

“WeWork can use provisions of the US Bankruptcy Code to extricate itself from onerous leases,” the law firm Cadwalader, Wickersham & Taft LLP said in a note to landlords on its website in August. Some owners are preparing for a big impact.

“As part of today’s filing, WeWork is requesting the ability to reject leases for certain locations, which are largely non-performing, and all affected members have received advance notice,” the company said in a statement.

Under its founder Adam Neumann, WeWork has grown to become the most valuable American startup, valued at $47 billion. It has attracted investment from major investors, including SoftBank and venture capital firm Benchmark, as well as backing from major Wall Street banks, including JPMorgan Chase (JPM.N).

Neumann’s pursuit of rapid growth at the expense of profits, and revelations of his erratic behavior, led to his ouster and the derailment of an initial public offering in 2019.

SoftBank was forced to double its investment in WeWork, appointing real estate veteran Sandeep Mathrani as its CEO. In 2021, SoftBank struck a deal to take WeWork public through a merger with a $8 billion blank check buyout firm.

WeWork was able to modify 590 leases, saving approximately $12.7 billion in fixed lease payments. But this was not enough to compensate for the repercussions of the Covid-19 pandemic, which kept office workers at home.

Many landlords, who were also feeling the pressure, had little incentive to give WeWork a break on the terms of their leases.

While WeWork has had some success in signing up large conglomerates as clients, many of its clients have been startups and small businesses, cutting back on their spending as inflation rises and economic prospects deteriorate.

Adding to WeWork’s problems is competition from landlords. Commercial real estate companies that have traditionally entered into only long-term lease agreements have begun offering short, flexible leases to deal with the downturn in the office sector.

Mathrani was succeeded as WeWork CEO this year by former investment banker and private equity executive David Tolley, who as CEO of Intelsat helped the debt-laden satellite communications provider emerge from bankruptcy in 2022.

WeWork engaged in debt restructuring, but that was not enough to avoid bankruptcy. The company last week obtained a seven-day extension from its creditors to pay the interest to buy more time to negotiate with them.

Shortly before WeWork filed for bankruptcy, Neumann said in a statement: “I believe that with the right strategy and the right team, the reorganization will enable WeWork to emerge successful.”

Shares of SoftBank, which has largely reduced its investment in WeWork over the years, fell 0.08% on Tuesday in Tokyo, outpacing a 1.3% decline in the broader market (.N225).

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