Short-Sellers Pile Into WeWork Bonds, Sending Prices To Record Lows

Shorting 'WeWork' bonds has become one of Wall Street's most popular 'pile on' trades.

The price of a WeWork bond issue that matures in 2025 has collapsed in recent weeks as WeWork's valuation plunged, prompting the office-space leasing company to call off its planned IPO. Over the past two weeks, the board has pushed out CEO and co-founder Adam Neumann (he's still chairman) and embraced other fast-moving governance changes. But that hasn't stopped short interest in WeWork bonds from climbing to record highs, making the WeWork short one of the most expensive trades to finance.

All of that pressure has sent prices to record lows, and yields to record highs.

According to IHS Markit data cited by the FT, more than $67 million of the $669 million in WeWork corporate debt (about 10% of the total) is on loan to short sellers.

The price on the 2025 bonds retreated to below 85 cents on the dollar earlier this week, a record low. But as of Thursday morning, prices had recovered slightly to just above 85 cents. That's down sharply from 105 cents on the dollar after the company first publicized its IPO plans in August.

Of course, with the company rapidly running out of cash and facing the prospect of needing bankruptcy protection as soon as next year, the fact that so many see betting against WeWork as low-hanging fruit is hardly surprising.

"It makes sense as a ‘pile on’ trade," said John McClain, a portfolio manager at Diamond Hill Capital Management. "All the sentiment, all the headlines have been bad. It’s led to a feasting on a failed unicorn."

The bonds now offer a 12% yield to maturity, just shy of the average yield on a Credit Suisse index of triple C-rated high-yield debt. On Tuesday, Fitch Ratings cut WeWork's credit rating two notches to triple-C plus, but with a negative outlook. According to Fitch's definition, triple-C indicates a "substantial credit risk" with default seen as "a real possibility." Analysts at the company projected that WeWork had $1.5 billion in cash left as of the end of the third quarter.

WeWork, which has burned through roughly $12 billion in venture capital since it was founded back in 2010, had hoped to raise $3 billion in its IPO, plus another $6 billion in debt financing from a consortium of banks led by JP Morgan. Unfortunately for WeWork, the debt financing was contingent on a successful IPO, and WeWork was forced to cancel its offering after intense lobbying by its largest financial backer, SoftBank.

In an attempt to shore up its balance sheet, WeWork has been haphazardly cutting expenses, selling off 'businesses' and slashing its head count among both executives and rank-and-file employees. The company has also slowed the pace of new lease signings to a crawl while it attempts to negotiate a much smaller loan.

The two new co-CEOs - Artie Minson and Sebastian Gunningham - who took over from Adam Neumann are also working on their own deal to secure a new financial lifeline as the writing on the wall becomes clearer: WeWork needs more capital - the company's survival depends on it.