On Friday, when we reported that the cash crunch at WeWork is far more severe than anyone had expected, and that the company needs new financing as soon as the end of November to avoid running out of money, we joked that the proposed debt package being hastily arranged by banks which could be as big as $5 billion for the company which is expected to burn up to $3 billion this year...
... is simply a DIP loan, as WeWork is now effectively insolvent.
WeWork Is Said to Discuss $5 Billion Debt Package With Lenders— zerohedge (@zerohedge) October 11, 2019
It's called a DIP Loan
Well, guess what: it wasn't a joke.
According to the WSJ, the company responsible for the entire WeWork debacle, and clogging up the entire IPO market, Japan's SoftBank, "has prepared a financing package that would give it majority (50%+) control of WeWork and further sideline its founder Adam Neumann in exchange for relieving the shared-office startup’s looming cash crunch."
In short: a DIP loan, one which primes existing creditors and squashes the existing equity.
Of course, the optics of a company which as recently as a few months ago was "worth" $47 billion effectively admitting it is insolvent absent a rescue financing...
... would not be good for SoftBank or its portfolio of other "investments", and so the WSJ reports what we already knew, namely that the board has tapped JPMorgan - whose reputation as an IPO underwriter has imploded after the WeWork fiasco - to look at ways for the company to raise billions in debt, with the bank now "in the middle of meetings with investors about participating in a multibillion-dollar debt deal."
"WeWork has retained a major Wall Street financial institution to arrange a financing,” a company spokesman told the WSJ, confirming what was already public. "Approximately 60 financing sources have signed confidentiality agreements and are meeting with the company’s management and its bankers over the course of this past week and this coming week."
One hopes that among these 60 greater fools at least one is truly the greatest when it comes to blowing good money after bad, although with WeWork now under the microscope and bringing so much baggage to any deal, the odds of a favorable outcome as not great.
The calculus for SoftBank, which already owns one-third of WeWork, is different - since it has already sunk billions in what soon may be a bankrupt entity, dumping a few more billion is understandable, and as the WSJ notes, Masayoshi Son's company "is aiming to invest several billion dollars in new equity and debt."
And since any SoftBank investment would effectively be a priming DIP, in any deal with SoftBank much of now fired CEO Adam Neumann’s voting power — already diminished from its peak but still substantial — would transfer over to the Japanese conglomerate, which would take a bigger role in turning around We’s operations.
The big question, of course, is whether these operations have any value to them at all, especially now that WeWork can no longer lose money on every deal, and is instead forced to become profitable. As such the fate of WeWork - and SoftBank - will likely determine the outcome of countless recent IPOs. As a reminder, the percentage of US-listed IPOs that lost money in 2019 is set to hit an all time high, surpassing even the 2000 record:
When, not if, WeWork "reprices" - and its equity value is wiped out - the calculus, and thrill, of investing in money-losing companies will disintegrate, leaving a lot of investors very, very angry.