High-yield bond market: Community theatre

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WeWork’s debut in the high-yield bond market was helped by investors effectively turning a blind eye to its costs of sales.

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WeWork in Old Street, London


Hindsight is a wonderful thing. Before the market crash of 2007 the phrases ‘no doc’ or ‘low doc’ mortgages (or ‘liar loans’) should probably have rung a few bells among market participants. So when today’s bankers and investors look back a few years from now, will there be certain phrases that they will tell themselves they should have seen as a forewarning of things to come?

If there are, there is a good chance that ‘community-adjusted ebitda’ might be one of them.

This is the term coined by workspace network WeWork when launching its first-ever high-yield bond in April. What it does is enable the company to turn the adjusted ebitda of negative $193 million of its most recent financial results into a positive community-adjusted ebitda of $233 million. 

This spectacular improvement in earnings has not been achieved in the old-fashioned way of, you know, improving performance but in the new e-way of ignoring all your sales costs. 

Deal

So the ebitda on which the bond deal is based ignores the following: interest, taxes, depreciation and amortization, marketing, administrative costs, and development and design costs. It also does not include employee cash compensation, advertising and event expenses, nor even new location costs.

It is hard, therefore, to think of much that it does include. Many in the leveraged finance market have long complained about fictitious ‘adjusted’ ebitda figures, but this deal seems to be taking things to a whole new level. One banker that Euromoney met recently expressed incredulity that a recent leveraged finance deal had seen “adjustments” increase ebitda by 60%. At WeWork, the jump is an impressive $426 million. 

The credit risk of the WeWork bond is certainly difficult to pin down – just look at the variation in the ratings. Fitch has it at double-B minus, S&P rates it single-B plus and Moody’s comes in at Caa1. When Softbank invested $4.4 billion in the network in August last year, it valued WeWork at $20 billion. 

Cash flow

Back in the real world, however, Bloomberg reckons the company has a negative free cash flow of $775 million, while its net loss more than doubled last year to $933 million. The bond prospectus states that: “We cannot predict whether we will achieve profitability in the near term or at all.”

It will clearly take more than that to put off investors, however. 

On April 25, the firm sold $702 million seven-year notes that yield 7.875% through JPMorgan and a band of eight joint bookrunners – Bank of America, Citi, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, UBS Group and Wells Fargo – and seven co-managers. The deal was increased from $500 million after the order book reportedly hit $2.5 billion.