With its USD bonds (10.5%) yielding more than Argentina's USD bonds (9.71%), it is perhaps no wonder that Softbank - the massive Japanese tech firm, formerly willing to invest in anything with a pulse to get yen out of Japan - has dramatically slashed its investment plans in WeWork this year.
As The FT reports, Softbank's Vision Fund, which had been a major backer of Softbank's existing investment of more than $8bn in WeWork, has reportedly scaled back plans for fresh investment the lossmaking shared-office provider.
SoftBank is in detailed negotiations to inject $2bn into WeWork this year, according to two people briefed on the deal, a much lower amount than the $16bn that had been discussed towards the end of last year.
As one wit joked, we suspect the discussion that prompted this panic move by Softbank went something like this...
“Dear sirs, what is this community-adjusted EBITDA?”
As a reminder, the 'community-adjusted EBITDA' was the valuation 'plug' that we mocked in the summer...
And Wolf Richter broke down all the details of the farcical bond issue last week...
Fitch, which rates the bonds three notches into junk (BB-), pointed out that WeWork already has existing debt consisting of a $650 million revolving credit facility and $500 million letter of credit reimbursement facility.
WeWork also has $5 billion in lease payments due over the next five years, not including any additional leases it will sign during its global expansion drive:
2018: $706 million
2019: $984 million
2020: $1.1 billion
2021: $1.1 billion
2022: $1.1 billion
Another $13 billion in lease payments come due in the years after 2022, according to Bloomberg. That’s some real money that a money-losing company must somehow obtain.
These are 10-year or 20-year office leases. They’re a fixed expense that doesn’t decline when business drops off. As such, they pose a special risk: WeWork’s customers rent their space on much shorter terms, even month-to-month. When things get tough, they can just ride off into the sunset after their short-term leases expire, leaving WeWork to sit on expensive and vacant office space with stale craft brew on tap at the lounge.
Investors in junk bonds of such cash-burning unicorns take only slightly less risk than late-stage equity investors, but have zero upside. All they get is the yield for however long the company manages to pay the coupon, and if they’re lucky, they get their money back when the bonds mature. That’s the best-case scenario. There is no upside.
So, apart from all that, what else made Softbank's visionaries decide to take a machete to their investment plans? As The FT reports, the scaling-back of the planned $16bn investment, which would have been the largest ever in a tech start-up, underlines the rapid shift in investor enthusiasm for technology shares that is now spilling into even the best-known privately held groups.
SoftBank has been instrumental in propping up private market valuations, investing billions of dollars in start-ups from ride-hailing group Uber to dog-walking app Wag.
WeWork has been one of the company’s largest bets, garnering billions from SoftBank as the group sought to dominate the fast-growing market for shared office space in cities such as New York and London even as its own losses have ballooned.
Shares in SoftBank itself have fallen by 33 per cent in the past three months. The company also suffered an embarrassing start to trading for its newly-listed Japanese mobile phone business in late December after raising $23bn from investors.
While The Ft reports that WeWork and SoftBank declined to comment, one person briefed on situation said:
"There is more hesitancy and a need to be more cautious on how they [SoftBank] are proceeding."
We suspect this will be the case for 100s of other, smaller Silicon Valley upstarts as it appears the exits are all closing fast (and the on-ramps already shut) - not helped by increasing scrutiny on Chinese investment flows also.