Investing

Rating Agency Worries WeWork Could Run Out of Money

Douglas A. McIntyre

Published: September 27, 2019 6:39 am

Last Updated: January 11, 2020 3:52 am

Standard & Poor’s, one of the largest credit rating agencies in the world, downgraded the financial opinion of WeWork, or as it is officially known, WeWorks Companies LLC. The primary reason was that the company could run out of money next year, forcing it to radically cut back its expansion, perhaps cutting thousands of people. Specifically, S&P questioned the company’s “liquidity” as it dropped its rating from B to B−. Its outlook on the debt was listed as “negative” as the WeWork moves into next year.

The reasons for the poor review were primarily things that happened recently. One was the ouster of CEO and founder Adam Neumann, who has run the WeWork since 2010. His approach to the company’s operation led to questions of whether management of WeWork was adequately overseen by the board. The other primary reason stated by S&P was the failure of the WeWork initial public offering. Wall Street looked at the company’s losses and poor management and refused to give it a valuation anywhere close to what its private investors had.

S&P also expressed its concern that upheaval at the WeWork would make it a less attractive investment going forward. Now that WeWork has canceled its IPO, the company’s ability to raise capital has not improved. S&P researchers wrote, “Despite some improvements in governance practices subsequent to the initial filing, it is unclear whether the changes will lift investor sentiment. We also believe the company may struggle to meet its capital investment funding needs and liquidity covenant over the next 12 months.” S&P said this did not take into account whether investors put capital into the WeWork very soon.

S&P also pointed out that several factors outside WeWork’s control could hurt the company. These are factors, in fact, that could hurt many sectors across the U.S. economy. Among them are a possible recession, Brexit and trade talks with China. WeWork has substantial risk outside the United States. It has 836 locations in 126 cities spread across 29 countries, including China, the United Kingdom and the rest of Europe. Many of these are in the richest countries in the world. A recession would cut the number of WeWork tenants and potential tenants.

If recent reports are correct, the first people to pay for WeWork’s poor management are employees. This could be as many as 5,000 people, which is about a third of the WeWork workforce.