Checking In On WeWork’s Cash Situation

Morning Markets: How bad is it? Bad.

WeWork is down to just a few options as its cash crisis intensifies. Precisely when the office-sharing giant will run out of money isn’t clear to externals, but it’s soon. The most common timeframe that we’re seeing is November, meaning that WeWork could run out of cash in less than a month and a half.

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It’s a nigh-shocking drop from glory for the former high-flying company that sported a valuation as high as $47 billion and managed to pick up even higher valuation estimates from banks.

There appear to be two paths ahead for the company, one stemming from its famous financier SoftBank, and one from JPMorgan. The SoftBank option, according to Reuters, looks like this:

“Reuters reported on Sunday, citing a source, that SoftBank had prepared a financing package that would significantly increase its one-third stake and further dilute the influence of co-founder Adam Neumann.”

That the new capital would prove dilutive should go without saying, The fact, however, underscores the cost of the option to existing shareholders. If SoftBank rides in with more money, expect to see existing ownership percentage crater.

Bloomberg reported that a different option, one involving unsecured debt, is being discussed. It described the package like this:

“JPMorgan Chase & Co. bankers have what might be one of the least enviable jobs on the Street today: convincing credit investors to lend to WeWork in a debt deal that practically redefines risky.

The office-sharing company is weighing a potential $5 billion debt package that could include some $2 billion of pay-in-kind bonds with a yield an eye-popping 15%[.]”

That would add to WeWork’s existing debt load, further leveraging a company that has shockingly negative cash flow and a history of staggering operating losses. I’m skeptical that WeWork can cut its way to cash flow breakeven, even with the layoffs it has planned.

The situation reminds me of a few old business chestnuts. The first being that cash is business oxygen. The moment it’s gone, you’re dead. And the second being that old saw that profitability is business freedom; that if you make your own operating capital, no one can tell you what to do.

WeWork is in danger of failing the cash test, which means that it’s anything but free. Instead, it’s about to choose massive dilution or massive leverage. And that’s if the capital-providing groups can get to terms that they find worth their time.

Illustration: Dom Guzman