This was us covering the hourly news diarrhea that came out about WeWork in the last 48 hours alone:
Which, we suppose, is better than how the company’s equity and existing noteholders must be managing:
Or the fine bankers over at JPMorgan Chase ($JPM) who are tasked with finding capital markets suckers…uh…investors…who’d be so kind as extend this steaming pile a lifeline:
So, sifting through the constant headlines, where are we at?
Okay, right. The hot mess of a liquidity profile and limited amount of debt capacity to get a deal done. 👍 Nothing to see here. All good.👌
The company reported $2.4 billion of cash at the end of June, with a first-half net loss of $904 million. At that pace, it should have been able to survive at least through the middle of 2020. But I'm told that it significantly increased spend in Q3, partially due to the lumpy nature of real estate cap-ex, believing it would be absorbed by $9 billion in proceeds from the IPO and concurrent debt deal. One source says that there's probably enough money to get through Thanksgiving, but not to Christmas.
Riiiiiight. So here are the options:
A Softbank Group new equity and debt bailout pursuant to which they get control of WeWork and napalm Masa’s former boy, Adam Neumann, in the process. This would reportedly be an aggregate $3b package “to get through the next year” — repeat, TO GET THROUGH THE NEXT YEAR — with the equity component coming significantly cheaper than the previous self-imposed $47b valuation (at a $10b valuation); or
JPM arranges some hodge-podge debt package and tests the market’s never-ceasing thirst for yield, baby, yield. The early reports were that the financing package would be $3b, comprised of $1 billion of 9-11% secured debt, $2b of unsecured PIK notes yielding 15% (1/3 cash pay, 2/3 PIK), and letter of credit availability. Wait, 15%?! How does a company with no liquidity even pay that? That’s why the PIK component is so critical: it would simply add 2/3 of the interest due to the principal of the debt. Said another way, the debt would compound annually and creep past $2.5b in two years. Per Bloomberg, “The $2 billion of proposed unsecured debt may carry an additional sweetener for investors: equity warrants designed so that investors could boost their return to around 30% if the company gets to a $20 billion valuation, according to the person who described the structure.” Because debt won’t dilute equity like Softbank’s equity-heavy proposal would, WeWork insiders (read: Neumann) apparently prefer the JPM approach. Regardless of what insiders prefer, however, is whether the market will be receptive to what one investor dubbed, per Bloomberg, “substantial career risk.”
We’re old enough to remember when WeWork’s notes rebounded a mere five days ago for reasons that were wildly inexplicable to us then and even more so now.
So, to summarize, who are the big winners? IWG/Regus ($IWGFF)(long?). We’re pretty sure they’re loving what’s happening here; we have to imagine that the inbound calls have to be on the upswing. Also, the restructuring professionals. Whether you’re Weil Gotshal & Manges LLP (Softbank), Houlihan Lokey ($HLI)(Softbank), or Perella Weinberg Partners (WeWork’s Board of Directors), you’re incurring more billables/fees than you expected to mere days weeks ago. Somehow, some way, the restructuring pros always seem to come out ahead. And, finally, Goldman Sachs ($GS). Because there’s nothing more Goldman-y than them selling their prop stock right out from under a proposed IPO.
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🚘New Chapter 11 Bankruptcy Filing — Yueting Jia (Short Money Hemorrhaging Electric Vehicle Startups)🚘
So, we’re not used to seeing individuals file for chapter 11. We’re REALLY not accustomed to seeing individuals file for chapter 11 while listing $500mm-$1b in assets and $1b-$10b in liabilities. We’ll just throw that out there. But these are interesting times and since the private markets have become the new public markets, we suppose it’s not too outlandish to see private companies — and their backers — with extraordinary balance sheets (cough, WeWork). And, by extension, bankruptcy filings.
Indeed, Yueting Jia, is an exceptional case. A serial entrepreneur, Mr. Jia is the founder of multiple businesses over the years — most notably the LeEco streaming service and Faraday Future, a much-hyped electric vehicle company that fashions itself as a would-be competitor to Elon Musk’s Tesla Inc. ($TSLA). Faraday is owned by Smart King Ltd., an entity in which Mr. Jia holds significant equity — equity that backs personal guarantees he’s made over the years. It’s on account of those guarantees (and several direct loans) that Mr. Jia may now add the “debtor” designation to his resume. It’ll look nice next to his other recent labels: pariah and refugee. Like we said, this is an interesting “case.”
So about those personal guarantees and loans…they’re pretty prettttttttttty extensive. There’s $279mm to Shenzhen Yingda Capital Management Co. Ltd. and $233mm to China CITIC Bank Co. Ltd., followed by at least 18 other large creditors whose security is dramatically under-secured. In other words, Mr. Jia has earned that “debtor” status.
So, what’s the plan? Well, literally, Mr. Jia has already proffered a plan that would, in exchange for broad releases of he and his wife from any claims and liability, provide certain creditors with beneficial interests in a liquidating trust. As proposed, the liquidating trust assets will include “economic rights … representing 10% of [Smart King’s] equity interest” and “a preferred distribution right in connection with 30.8% of [Smart King’s] equity interest (owned through Pacific Technology Holding LLC…and collectively owned by [Mr. Jia] and the management through the Partnership Program…,which will entitle him to a priority distribution of up to US$815.7 million (subject to certain adjustments), right after the return of capital to the management, a special distribution of 10% of the remaining amounts and thereafter, a normal distribution of 20% of the balance owned by Pacific Technology.” Wait. What? What, exactly, will creditors be getting?
Let’s take a step back. Faraday Future is one of those “yogababble” companies that Scott Galloway has recently talked about — a company chock full of mission statement bullsh*t. Per Mr. Jia:
“The Company was founded with the vision to disrupt the traditional automotive industry and create a shared intelligent mobility ecosystem that empowers everyone to move, connect, breathe and live freely.”
Founded in 2014, so far Faraday Future has disrupted nothing other than the balance sheets of Mr. Jia and several other investors. It’s “pre-revenue” which is Silicon Valley bro-code for not making any f*cking money and it hasn’t delivered any cars yet. In terms of assets, the company is really just a bucket of intellectual property and some model pre-production prototypes of its signature FF 91. Suffice it to say, then, that it hasn’t changed the way anyone moves, connects, breathes or lives. At least not yet. We suppose the good thing is that burning cash ($1.7b) doesn’t negatively affect the environment. Small victories.
Anyway, back to the plan. It’s rather circular. Mr. Jia’s equity interest in the company “is his primary asset.” His primary asset requires new funding to survive. The only way it can get funding is, according to Mr. Jia, if his restructuring is consummated quickly, everyone just moves on, and the company can then hunt for liquidity. Otherwise, it will follow Mr. Jia into bankruptcy. He straight up says:
“If, as a result of not being able to consummate the Restructuring in a timely manner, the Company's business is not able to once again pursue its business plan, it is likely that it will not be able to continue as a going concern, it may be forced to liquidate its remaining assets and/or initiate bankruptcy proceedings….”
And then the value of the Mr. Jia’s assets will likely be nothing. So, he’s basically saying to his creditors, “agree to this restructuring to give the company a hope and prayer of raising money because without it, the company is screwed, I’m screwed, you’re screwed AND, as a cherry on top, the company’s other investors, employees and creditors are screwed.” Such a hot mess.
Hang on. Why would the company be screwed? Per Mr. Jia:
“As of July 31, 2019, the Company's current liabilities amounted to US$734.3 million, with outstanding note payables of US$402.1 million to related-party lenders and third-party lenders, respectively. The Company has defaulted on some of the notes, and is currently in negotiation with such lenders for extensions or conversion of notes into equity. Several other notes will mature by the end of 2019. For example, the Company's secured note of US$45.0 million issued to certain purchasers pursuant to the note purchase agreement with U.S. Bank National Association will become due on October 31, 2019, to which the Company is seeking an extension from the lender.”
It’s currently in default, that’s why. It needs the Series B financing to help restructure its existing debt.* Which makes this EVEN BETTER: he’s offering his creditors interests in a Trust funded by stock which is currently behind debt that is currently in default!!
So, naturally, the company is also subject to a severe working capital deficit. It has burned through $580.9mm since 2018 with a total accumulated loss of $2.15b as of July 2019. It has approximately $6.8mm of cash on hand.
But, don’t worry. Entrepreneurial optimism remains nonetheless. Per the plan documents, Mr. Jia remains optimistic that a deal will get done, that a subsequent $850mm Series B financing will get done by January 2020, and that that will be enough to bridge the company to an IPO in 2021. This is, of course, after the company (i) beta tests its product, (ii) builds out its CA-based manufacturing facility, (iii) firms up its supply chain, (iv) completes all testing and validation, AND (v) delivers its first 100 units of the FF 91 to the market in early Q2 ‘21. This is all great because then we can see where Professor Gallaway puts the company on this spectrum:
As an inducement to voting in support of this plan, Mr. Jia provides “hypothetical figures” based on his and company management’s assumptions. Naturally, he caveats that “they may prove to have been incorrect or unfounded.” You bet your a$$ they might.
By way of comparison, Nio Inc. ($NIO) actually ships cars already (3500 in Q2 ‘19) and has a 1.68b market cap (currently trading at $1.60/share).** Tesla is at 46.4b. Both companies are also hemorrhaging cash.
We seem to be suffering an epidemic of pompous change-the-world hyper-optimistic startup funders with a proclivity for burning heaps and heaps of other people’s cash. And, in the rarest of cases, even their own.
*Notably, that $45mm piece reflects secured notes held by ex-Skadden attorney, Jack Butler, through his firm Birch Lake Holdings. The notes are secured by tangible and intangible assets (which, presumably, includes all of the IP, the only thing here that, as we writ this today, probably has any value whatsoever). An earlier $15mm term loan provided by Birch Lake was paid off in September. It had an impressive 15.5% interest rate (with a default rate of 21.5%).
**Nio also has senior unsecured notes due in 2024 that are bid around 30 — deep into distressed territory.
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We recently added “Super Pumped: The Battle for Uber” by Mike Isaac, “What it Takes: Lessons in the Pursuit of Excellence” by Stephen A. Schwarzman, “The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company” by Bob Iger, and “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea,” by Netflix co-founder Marc Randolph.
Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.