WeWork At Serious Risk Of Default, Fitch Warns

Fitch Ratings has downgraded coworking giant WeWork's rating regarding its ability to pay long-term debt, giving as reasons Fitch's misgivings about whether an anemic demand for WeWork's products will recover.

"While WeWork has made material progress to reduce its cash burn rate, in a scenario where demand is structurally lower, Fitch sees WeWork as potentially requiring additional liquidity sources inclusive of and beyond the full $3.3B SoftBank financing commitment," Fitch said in its statement.

In dropping WeWork a notch from CCC+ to CCC, Fitch isn't predicting that WeWork will burn through all its cash, just that such an outcome is a strong possibility, especially if economic headwinds are strong. By Fitch's reckoning, a CCC rating means that default on long-term debt is a real possibility and is only a few steps above actual default.

A better-case scenario by Fitch sees WeWork's cash burn rate come in at about $900M in 2021 and then abate enough during the next year for the company to enjoy "moderately positive free cash flow" for the year.

A worse-case scenario by Fitch posits a second coronavirus wave or simply structurally lower office demand that results in a cash burn rate for WeWork of $1.5B each year during 2021 and 2022. At that rate, WeWork would run out of money by the end of 2022.

Previously, when WeWork's cash situation came to that kind of impasse, Softbank would provide a capital infusion to keep the company afloat. That is no guarantee about what SoftBank might do in the future, however.

"While SoftBank has consistently provided additional funding sources and operational support, it is unclear that further funding would be available in a distressed scenario," Fitch noted.

WeWork and the entire coworking industry face strong headwinds. In a worldwide survey of more than 600 coworking operators and users, Coworking Insights found that 71% suffered a “significant drop” in the number of customers using spaces. Membership numbers and rents are down as well.

The coworking industry has taken to offering space by the day rather than insisting on monthly rentals as a strategy to help stay in business. For its part, WeWork has started offering such on-demand rentals to nonmembers at some locations. 

The company recently rolled out All Access, a subscription-based model that allows members to work from any WeWork location, and in October it began offering a platform it calls Business Solutions, which will provide human resources and other services to small and midsized members in the United States.

It isn't clear yet whether these initiatives will help make the company profitable. In July, WeWork Executive Chairman Marcelo Claure told the Financial Times that the company is indeed on a track toward profitability after cutting its global workforce by about 8,000 and renegotiating leases with office landlords.

WeWork has been in the red for most of its existence, and its failed initial public offering in 2019, which couldn't spell out a path to profitability, didn't reassure investors on that point.

WeWork declined to comment to Bisnow about the ratings downgrade or its future profitability.