Fitch Ratings has downgraded WeWork Companies LLC and WeWork Inc.'s (f/k/a The We Co) Long-Term Issuer Default Ratings (LT IDRs) to 'CCC' from 'CCC+'.
Fitch has also downgraded WeWork Companies LLC's senior unsecured notes one notch to 'CC'/'RR6' from 'CCC-'/'RR6'.
Key Rating Drivers
Negative Profitability Constrains IDR: Fitch views WeWork's sustained negative EBITDA and FCF as key limiting factors that restrict its operating and financial profile and limit the IDR to the 'CCC' rating category. Fitch is encouraged by meaningful improvements in operating losses during 2022, but the current estimates for 2022 EBITDA in the range of negative $435 million to $455 million indicates the company still faces significant challenges. These challenges may be exacerbated by deteriorating macro conditions in 2023, and without additional restructuring, Fitch is modelling continued negative EBITDA for the next 12 to 18 months.
Liquidity and Funding Plan: WeWork reported $460 million in cash and equivalents on its balance sheet as of the end of September 2022 as well as commitments of $500 million (undrawn as of 3Q22) in senior secured notes. Fitch expects this liquidity to be sufficient for the next 12 months, assuming that WeWork continues its trajectory of improving operating performance.
Flexible Workspace Demand Recovery: WeWork's occupancy rate has continued to improve from 46% at the end of 2020 to 72% at the end of 3Q22. Physical memberships reached 658K, which was the highest reported number over the past two years. All Access Memberships are also at the highest reported number over the past two years at 62K. Consolidated revenue growth was also strong in the first half of 2022, but revenue was $815 million in both 2Q22 and 3Q22. Whether or not this indicates a plateau remains to be seen. Companies continue to evaluate their real estate footprints in light of hybrid workplaces as an ongoing result of the pandemic. Brokers including CRE and other continue to project that flexible office space use will grow, and this likely increases WeWork's addressable market. WeWork is targeting a return to pre-pandemic occupancy levels of low- to mid-80% range, but achieving this goal in 2023 will be challenging and will likely require exiting additional low-performing locations.
Recovery and Notching: Fitch's recovery analysis assumes that WeWork would be considered a going-concern in bankruptcy and that the company would be reorganized rather than liquidated. Under its recovery scenario, Fitch expects significant defaults on lease payments, resulting in draws on the secured LC facility. This would reduce any amount available to the unsecured note holders. Guarantor and non-guarantor leases are approximately proportional to their estimated percentage of revenue. Assumed rejected operating lease claims totaling approximately $700 million would be pari passu with the senior unsecured notes. Fitch assumes WeWork has fully drawn the availability under its $500 million senior secured notes. Fitch also assumes $39 million of other loans as of June 30, 2022 are senior secured claims.
Fitch estimates WeWork's going concern EBITDA by assuming a substantially smaller footprint of continuing operations in line with the assumptions regarding rejected leases. Fitch assumes 60% of current domestic revenue and 40% of non-domestic revenue, resulting in approximately $1.5 billion. Using a normalized 33% location gross margin and an estimate of restructured overhead expense of approximately $200 million results in an EBITDA margin of approximately 20%. Fitch uses a 5x multiple, at the lower end of the 4x-7x range of emergence multiples observed in past restructurings, in reflection of the potential that WeWork's market position and brand is compromised permanently in distress and that the flexible workspace market experiences sustained structural demand declines due to long-term effects of COVID-19. After assumption of a 10% administrative claim, the distribution of value yields a recovery ranked in the 'RR6' category for the rated senior unsecured notes.
Derivation Summary
Fitch considers factors for highly speculative issuers in a relative fashion. WeWork's business model appears viable having restructured during the past two years. FCF has remained consistently negative but has improved over the past year. However, the company's FCF outlook is subject to risks and uncertainties, particularly to the extent office demand is structurally weak over the medium term.
WeWork's financial policy while supportive of providing needed liquidity may not be sufficient in the medium or longer term to protect creditors. Fitch expects under its base case that WeWork will either need to draw on its committed secured facility or raise additional funds at some point in 2023. Fitch's base case also assumes weakening office space demand in the next 12 to 18 months, which will further reduce the company's liquidity.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Approximately $3.2 billion in revenue in 2022 reflects strong rebound from 2021 results;
Slight top-line revenue decline (approximately 2%) in 2023 based on Fitch expectations of difficult macro-economic conditions, leading to some churn but modest relative to the impacts of COVID;
Location expenses moderating as the company benefits from its restructuring during the pandemic and ongoing plans to exit underperforming locations;
Overhead expense as a percentage of revenue improving to approximately 25% in 2022 and around 20% thereafter in reflection of run-rate restructuring and operating leverage;
Approximately $300 million in gross capex in 2022 and $275 million in 2023, although the company may be able to reduce this further due to successful location exits and continued trends in tenant improvement allowance collections;
Assuming a draw of senior secured notes at some point in 2023 with additional funding likely required in 2024.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that WeWork would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated;
Fitch has assumed a 10% administrative claim.
Going Concern Approach
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the valuation of the company;
Fitch estimates WeWork's going concern EBITDA by assuming a substantially smaller footprint of continuing operations in line with the assumptions regarding rejected leases. Fitch assumes 60% of current domestic revenue and 40% of non-domestic revenue, resulting in approximately $1.5 billion. Using a normalized 33% location gross margin and an estimate of restructured overhead expense of approximately $200 million results in an EBITDA margin of approximately 20% or $313 million.
EV Multiple Approach
An EV multiple of 5x is used to calculate a post-reorganization valuation. The estimate considered the following factors:
The historical bankruptcy exit multiple for companies WeWork's sector ranged from 4x-7x, with a median reorganization multiple of 6x;
Current EV multiples of public companies in the Business Services sector trade well above the historical reorganization range. The median forward EV multiple for this sector is about 10x. Historical multiples ranged from 6x-12x;
WeWork does have unique characteristics that would allow for a higher multiple in its unique brand and stake in JVs;
However, uncertainty surrounding WeWork's business model and the high degree of strategy and execution risk leads Fitch to utilize a recovery multiple that is below the sector median.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Evidence of improving FCF profile such that a liquidity crunch can be averted within the near term (approximately 12-24 months) and a pathway to breakeven or better FCF is visible longer term (approximately 24-48 months);
Increase in liquidity position could provide more leeway with respect to the concerns over the near-term liquidity crunch;
Improved visibility on ability to refinance 2025 maturities.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
More acute risk of a default perceived by Fitch, which could come in a way of tightening liquidity, discussions with restructuring advisors or an announcement related to a debt exchange.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Near-Term Liquidity: WeWork had cash and cash equivalents of $460 million at Sept. 30, 2022. WeWork's available liquidity availability totaled approximately $1.5 billion. This includes $500 million senior secured senior secured note commitment from SoftBank and $500 million of secured debt covenant capacity.
Refinancing Risk: WeWork had $669 million of principal outstanding on its May 2025 senior notes, limiting its immediate refinancing risk. The $2.2 billion senior unsecured SoftBank notes also mature in 2025. WeWork's access to the $500 million senior secured SoftBank notes expires in 2025 and the company's LC facility matures in 2024, but the company is in the process of extending this maturity. WeWork remains subject to risk that it is unable to access markets to meet liquidity needs to the extent its funding requirements exceed the proposed financing.
Issuer Profile
WeWork provides membership-based access to workspace and amenities. WeWork had more than 500,000 memberships and more than 600 locations as of Sept. 30, 2022 excluding China, India, and Israel, which were deconsolidated and began operating as franchises June 1, 2021.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
WeWork Companies LLC has an ESG Relevance Score of '4' for Management Strategy due to ongoing challenges to implement a strategy to achieve sustainable profitability, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
WeWork Companies LLC has an ESG Relevance Score of '4' for Group Structure due to due to SoftBank ownership concentration, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
WeWork Companies LLC has an ESG Relevance Score of '4' for Governance Structure due to the complexity of its structure and related-party transactions with SoftBank, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
WEWORK INC. 
