WeWork mulls curbing China expansion, hit by Fitch downgrade

WeWork is considering curbing expansion plans in China in an effort by parent The We Company’s new management to control costs, the Wall Street Journal reported, citing people familiar with the matter.

After the recent departure of founder and Chief Executive Adam Neumann and shelved plans for a billion-dollar initial public offering (IPO), the company is looking to pull back on ventures in China and other less-profitable overseas market, the Journal reported.

The We Company did not immediately respond to a Reuters request for comment.

According to its website, WeWork currently operates in more than 100 buildings across 12 Chinese cities.

Separately, global credit rating agency Fitch Ratings downgraded WeWork’s credit rating on Tuesday by two notches to “CCC+”, putting the office-sharing firm deep into junk territory a day after it aborted its IPO.

“In the absence of an IPO and associated senior secured debt raise, WeWork does not have sufficient funding to meet its growth plan,” Fitch wrote in a note.

The United States-based We Company has faced widespread backlash after releasing its IPO prospectus in August, which revealed it lost $1.9bn in 2018. The company was hoping to raise at least $3bn from the public listing and aimed to borrow a further $6bn in a loan from banks that was contingent on the listing.

Fitch warned that there was a potential for WeWork’s customers, particularly big companies, to “hesitate to sign membership agreements” given the current flux. However, it said there was no evidence of this yet.

WeWork’s rating outlook is also negative, Fitch added.

WeWork declined to comment.

Monday’s decision to scrap the IPO marked the conclusion of a tumultuous few weeks for WeWork, which failed to excite investors who raised concerns about its ballooning losses and a business model that involves taking long-term leases and renting out spaces for a short term.

Fellow ratings agency Standard & Poor’s last week downgraded WeWork to “B-” from “B”.

“CCC+” and “B-” are junk bond ratings applied to corporate borrowers judged to be higher risk to lenders.

WeWork is in discussions with banks as well as its largest investor Softbank about potential alternative funding, two sources familiar with the matter told Reuters on Monday.

Fitch said it could revisit the rating if WeWork was “able to negotiate a firmly committed financing plan and demonstrate successful implementation of any turnaround plan”.

WeWork’s 7.875 percent junk bond was last trading at about 84 cents on the dollar, according to MarketAxess, a significant discount to face value, which indicated investor concerns about repayment or doubts about the company securing alternative financing.

WeWork’s new co-CEOs Artie Minson and Sebastian Gunningham, who replaced removed founder and chief executive Adam Neumann last week, have talked about the need to return to WeWork’s core business of renting out trendy office space to freelancers and enterprises. That would pull the company back from the fringe activities Neumann had forayed into, such as education.

Given that, Fitch expects WeWork “will face material restructuring cash charges as it reduces its workforce, which had reached over 12,500 in the second quarter”.

WeWork had under $2.5bn in unrestricted cash at the end of June and is due to receive $1.7bn from SoftBank in 2020, according to Fitch, which estimated that would provide for four to eight quarters of funding, without taking into account any potential restructuring costs.