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SoftBank and JPMorgan at odds over WeWork rescue

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Via Financial Times

SoftBank and JPMorgan Chase are at odds over a multibillion-dollar rescue package for WeWork that might force the US bank to impose margin calls on co-founder Adam Neumann.

The Japanese tech group and the US bank have submitted competing plans to pump as much as $5bn into WeWork in a debt-and-equity deal that could value the group’s equity at $8bn or less, according to multiple people briefed on the matter.

The proposal from SoftBank, which has already sunk more than $10bn into the company, would significantly dilute other equity holders, including Mr Neumann.

Should Mr Neumann’s equity stake suffer a significant writedown as part of the deal, he could face a margin call from JPMorgan, UBS and Credit Suisse. They have lent the former WeWork chief executive hundreds of millions of dollars, using his stock as the main collateral, according to regulatory filings and people with knowledge of the matter.

To meet the lenders’ capital demands, Mr Neumann could be forced to pledge additional shares or cash in the margin call and sell some of the property and other assets he has accumulated. The entrepreneur has raised at least $700m through share sales and loans against his equity stake.

The stake owned by Mr Neumann and co-founder Miguel McKelvey was worth almost $13bn earlier this year, which would be worth about $2bn if the company’s valuation plummets to $8bn. After dilution, though, it would be worth far less. That does not include the value of a stake that Mr Neumann was granted in a complex transaction this summer.

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If he were unable to meet the margin call or repay the loan, the lenders would face losses. The banks had earlier this year extended a $500m credit facility to the WeWork co-founder, with $380m of that line tapped by Mr Neumann as of the end of July. JPMorgan has also lent Mr Neumann nearly $100m, regulatory filings showed.

Mr Neumann declined to comment through a spokesperson. Credit Suisse, JPMorgan, SoftBank, UBS and WeWork declined to comment.

Adding to the strain between JPMorgan and SoftBank is the fact that the Japanese group has not engaged in formal negotiations with the Wall Street lender. This leaves the bank unaware of how exactly the SoftBank proposal will affect earlier investors such as Mr Neumann, one of the people added.

The WeWork board has only a few weeks to decide on the financial lifeline it will choose as its cash crunch intensifies. Some people informed of the talks said it could ultimately settle on a mix of the two deals, with an equity and debt package that avoids a margin call on Mr Neumann.

JPMorgan is putting together a $5bn financing package that would include about $2bn in unsecured debt, structured as payment-in-kind notes and carrying a coupon of up to 15 per cent, said people who saw the terms of the offer.

The expensive capital, which is still being negotiated with investors, reflects the risk that lenders would be taking on when financing a company that expects to burn through its current funding by late November — faster than expected in the aftermath of September’s aborted initial public offering. JPMorgan has pitched the offering to about 100 institutional investors.

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SoftBank had earlier committed to inject $1.5bn into WeWork in April 2020 at a valuation of $47bn. It is now renegotiating the size, timing and valuation of that agreement, multiple people familiar with the situation said. One added that it could put some or all of this sum into WeWork faster to address the company’s cash crunch, but would look to do so at a much lower valuation.

Potential conflicts of interest among directors representing competing ownership stakes — including SoftBank and Mr Neumann — have prompted WeWork’s board to establish a special committee to evaluate its financing options.

SoftBank has hired restructuring bankers at Houlihan Lokey to advise them on how to revive WeWork, according to people briefed about the matter. The bankruptcy specialists are assessing ways to cut WeWork’s liabilities as well as determining the company’s valuation by going through its portfolio building by building, those people added. Bloomberg first reported the $8bn potential valuation.

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