(Bloomberg) -- WeWork Inc.'s first appearance in bankruptcy court on Wednesday will kick off a months-long debate about how creditors should divide the remains of a once high-flying company that can't afford to repay the more than $4 billion it borrowed.
So far, court papers show that billions of dollars of the co-working firm's debt will be converted into equity, while nearly all shareholders and owners of low-ranking bonds will be wiped out. More details are expected to be revealed as the hearings get under way, giving bondholders ammunition to challenge the company's proposed restructuring deal with senior lenders.
Once valued at $47 billion, the firm that set out to re-imagine offices as fun places to work, has been hemorrhaging cash since a botched initial-public offering in 2019. It reached a sweeping debt restructuring deal at the start of this year, before quickly falling into trouble again. Now, the company has made a restructuring proposal backed by creditors representing roughly 92% of its secured notes, and plans to “streamline” its rental portfolio of office space, it said in a statement.
SoftBank Group Corp., which has repeatedly invested in the company, stands to lose billions of dollars from the bankruptcy, but will also become a major shareholder in the reorganized firm, with the Japanese conglomerate slated to get three seats on the new board of directors, court papers show.
WeWork hasn't revealed who currently owns the rest of the debt. Wall Street giants including King Street Capital, Silver Point Capital and BlackRock Inc. backed the March restructuring, according to a regulatory filing, but it's not clear if they still own the notes.
Holders of WeWork's credit line, first-lien notes and second-lien notes will swap their debt for stock in the reorganized company, according to court papers. Whether that's a good deal for creditors largely depends on the company's success after exiting Chapter 11. Financial firms often buy debt because of the reliability of coupon payments, which will no longer be available.
Holders of third-lien notes, unsecured notes and general low-ranking claims against the company will likely get little or no recovery. Shareholders will also be wiped out, the court papers show.
Aside from debt, cutting back leases is another critical part of the plan. The company expects to slash its rent payments by $654 million next year, according to a forecast the company filed with regulators on Tuesday. Much of that saving comes from canceling leases in at least 105 locations in the US and Canada and renegotiating rent on 58 others.
In four years, rent will eat up just 52% of WeWork's revenue, compared to about 74.5% for this year, according to the forecast. Total revenue will shrink from $2.8 billion this year to $2.3 billion in 2024.
In bankruptcy, companies often push landlords to lower rents or face the prospect of having a judge cancel the lease. Any penalties for unpaid rent typically become bankruptcy claims, which means landlords often face the choice of collecting pennies on the dollar from a canceled lease or swallowing smaller rent payments.
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