Fitch Ratings has downgraded WeWork Companies LLC and WeWork Inc.'s (collectively WeWork) Long-Term Issuer Default Ratings (LT IDRs) to 'C' from 'CCC'.
Fitch has also downgraded WeWork Companies LLC's senior unsecured notes to 'C'/'RR6' from 'CC'/'RR6'.
Fitch's rating actions follow the company's announced transaction support agreement entered into with bondholders representing approximately 62% of the company's public bonds and its largest shareholder SoftBank Group Corp., which Fitch views as a distressed debt exchange (DDE). Fitch will reassess WeWork's capital structure, liquidity and risk profile based on the outcome of the transaction support agreement and related debt exchanges to determine the company's IDR and issue level ratings post-close.
In accordance with the transaction support agreement, which is subject to shareholder approval, WeWork's total debt quantum will be reduced by approximately $1.5 billion through the equitization of approximately $1 billion of existing SoftBank debt and the discounted exchange of unsecured notes. Total debt outstanding pro forma for the recapitalization is expected to be approximately $2.4 billion. Additionally, the transaction will extend the maturity date of $1.9 billion of debt to 2027 from 2025.
Key Rating Drivers
Distressed Debt Exchange: Fitch views WeWork's transaction support agreement and related debt exchange offers as a DDE due to a material reduction in the original terms for the unsecured note holders including the 7.875% senior unsecured notes due May 2025 (7.875% notes) and the 5% senior unsecured notes due July 2025 (5% notes). Pursuant to the terms of the debt exchange offers holders of the 7.875% notes and the 5% notes will exchange into either (i) new 2L exchange notes and equity (subject to a new money commitment); (ii) new 3L exchange notes and equity; or (iii) equity at a 90% to par including $750 in principal of exchange notes per $1,000 of 7.875% notes or 5% notes and $150 of equity. The exchange is subject to a minimum participation threshold of 90%.
Approximately $1.04 billion of the existing $1.65 billion Softbank senior unsecured notes will be equitized and the remaining $609.5 million will be exchanged into new 2L convertible exchange notes and 3L convertible exchange notes at a discount to par.
Liquidity and Funding Plan: The contemplated transaction support agreement will strengthen WeWork's liquidity position. Pro forma for the transaction support agreement WeWork will have approximately $445 million of cash on its balance sheet and will have access to a new $475 million delayed draw term loan consisting of $175 million of new capital commitments and $300 million in rolled capital commitments. Fitch expects this liquidity to be sufficient for the next 12 months assuming that WeWork continues its trajectory of improving operating performance.
Negative Profitability Constrains IDR: Fitch views WeWork's sustained negative EBITDA and FCF as key limiting factors that restrict its operating and financial profile and limit the IDR to the 'CCC' rating category. Fitch is encouraged by meaningful improvements in operating losses during 2022, but the current estimates for 2022 EBITDA in the range of negative $435 million to $455 million indicate the company still faces significant challenges. These challenges may be exacerbated by deteriorating macro conditions in 2023, and, without additional restructuring, Fitch is modelling continued negative EBITDA for the next 12 to 18 months.
Derivation Summary
Fitch considers factors for highly speculative issuers in a relative fashion. WeWork's business model appears viable, while its capitalization structure is not sustainable leading to the proposed transaction support agreement and related debt exchanges. FCF remains negative but has improved over the last year. However, the company's FCF and EBITDA outlook is subject to risks and uncertainties, particularly to the extent office demand is structurally weak over the medium term. Fitch's base case assumes weakening office space demand in the next 12 to 18 months, which will continue to pressure the company's financial flexibility and liquidity position.
WeWork's proposed transaction support agreement along with the related debt exchanges provides a limited degree of financial flexibility and liquidity but may not be sufficient in the medium or longer term to protect creditors.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch will reassess WeWork's capital structure, liquidity and risk profile based on the outcome of the transaction support agreement and related debt exchanges to determine its IDR and issue level ratings.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Following the close of the transaction support agreement and related debt exchanges, Fitch anticipates downgrading WeWork's IDR to 'RD'.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Near-Term Liquidity: Pro forma for the close of the transaction support agreement WeWork will have access to approximately $920 million of total liquidity consisting of approximately $445 million of cash and $475 million available from a delayed draw term loan facility.
Issuer Profile
WeWork provides membership-based access to workspace and amenities. It has over 500,000 memberships and 600 locations (excluding China, India, and Israel, which were deconsolidated and began operating as franchises in 2021). WeWork's physical occupancy rate is 75% on a consolidated basis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
WeWork has an ESG Relevance Score of '4' for Management Strategy due to ongoing challenges to implement a strategy to achieve sustainable profitability, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
WeWork has an ESG Relevance Score of '4' for Governance Structure due to SoftBank ownership concentration, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
WeWork has an ESG Relevance Score of '4' for Group Structure due to the complexity of its structure and related-party transactions with SoftBank, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
WEWORK INC. 
