By Ruth Colp-Haber | Forbes
According to a story posted in the Wall Street Journal on August 24, several owners of WeWork’s secured debt totaling $1.2 billion are holding what were called “preliminary talks about the company’s restructuring options and indicated that they would support a plan for WeWork to file for chapter 11 bankruptcy.” However, the creditors who include BlackRock, King Street Capital and Brigade Capital, have not yet provided specific proposals concerning a bankruptcy or debt restructuring to WeWork, as per sources that were not identified.
What does this news mean for WeWork tenants, known as members? This is a long run prospect. Nobody knows exactly what will happen, and we are just at the start of a process that will have many twists and turns. However, let’s take a look at what might happen if a bankruptcy plan is negotiated with WeWork’s secured creditors by working through some of the alternatives if WeWork tries to reorganize as an ongoing company. To do so I consulted Eric Haber, general counsel for my firm Wharton Property Advisors who is also a bankruptcy attorney.
A Potential Bankruptcy Scenario
Under a potential bankruptcy reorganization plan, those senior creditors would swap their debt for equity in a reorganized WeWork and the current shareholders would potentially have their stock wiped out or severely diluted. However, any successful reorganization would be contingent on WeWork being able to renegotiate enough of its above-market office leases to more favorable terms while remaining a viable business and rejecting other leases which are not profitable. The problem here is that WeWork has already been through multiple reorganizations in several years in what amounts to a de facto out of court bankruptcy proceeding, so why would the third (or fourth) time be a charm?
In an interesting twist, there is a possible roadmap for WeWork to follow in renegotiating leases that has been used by its coworking competitors. Under the competitors’ business models, the coworking operator forms a partnership with the landlord in which they share the risks and expenses involved in leasing a specific space to tenants, and also share in the upside if the space is profitable. That is in contrast to the WeWork format under which WeWork leases space directly from landlords and then operates an independent business.
“Chapter 11 filing by a tenant often tilts the scales in favor of the tenant because the tenant can leverage the right to assume or reject leases. For instance, they can leverage this right to assume or reject leases by extracting rent concessions from landlords as a condition to assuming the lease.” – Shruti Gurudanti, Rose Law Group partner & director of corporate transactions
