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WeWork bankruptcy highlights real-world impact of higher borrowing costs (and mismanagement)
On Monday night, 7 November 2023, WeWork (WE US) filed for Chapter 11 bankruptcy, becoming the latest high profile US company that saw its liabilities and interest payments balloon due to higher interest rates. Cash flow could not keep up as the company struggled to recover from the impact that Covid-19 had on working habits.
WeWork provides co-working spaces for individuals and entrepreneurs. The company offers private offices, office suites, headquarters, and custom build out options to fit a variety of office needs, as well as desk spaces and conference rooms. WeWork has a global footprint. Before listing as a special purpose acquisition company (SPAC) in October 2021, WeWork made headlines due to a chaotic change at the helm just days after the company's S1 filing (similar to a pre-listing statement) was made public. Prior to the S1 filing, the company held a $47 billion valuation, but the financials seemed to not back up the valuation, a myriad of conflicts of interest were disclosed, and reports began circulating over cofounder and then-CEO Adam Neumann's chaotic behaviour. The company did end up listing, but Neumann exited, and WeWork's purported valuation fell 70%.
The fall of WeWork was multi-facetted. Higher interest rates were just the deathblow, but a flawed business model (with long-term liabilities and short-term assets as just a start), a dwindling office market, and old fashioned "hype" accounted for the steady decline in valuation since before the listing.
According to the US courts, in the first nine months of 2023, business bankruptcies totalled 17 051, up 30% y/y. While many of these bankruptcy's would have been smaller in nature, WeWork is the latest in a few large profile companies to file for protection from creditors. Within this space it seems as if most of these larger corporate failings are not purely because of higher finance costs. Rite Aid filed for bankruptcy protection last month as the impact of several Opioid-oversubscription lawsuits loomed in a period where sales were coming under pressure due to macroeconomic factors. SmileDirectClub saw sales falter when Covid-19 started and lost a court battle with former partner Align Technology over confidentiality and non-compete breaches. Bed Bath & Beyond was also liquidated earlier this year as digital competition resulted in a meaningful slump in sales.
The demise of another highly indebted and controversial name highlights the importance of limiting one's exposure to high quality companies, with strong management teams, low levels of debt, solid cash flows, clearly identifiable “moats”, and at reasonable valuations - particularly with regards to where we are in the cycle currently.
