September 13, 2019 / 8:39 PM / 2 months ago

WeWork loan modified to reduce lender risk ahead of IPO

NEW YORK, Sept 13 (LPC) - The US$6bn of senior secured credit facilities for WeWork that are contingent on the office sharing startup pushing through an increasingly difficult equity raise have been changed to reduce lenders’ risk ahead of its imminent initial public offering (IPO), sources close to the matter told Refinitiv LPC.

Eleven banks were initially asked to make commitments of US$750m-US$800m in early August. But as doubts grew about WeWork’s valuation and new banks were invited to join the credit, changes were made to make lenders more comfortable with the large tickets, sources said.

A cash collateralization was added to a US$2bn letter of credit, after lenders demanded additional protection. In a cash collateralization, the banks require the borrower to deposit cash in an amount equivalent to the size of the loan (in this case the letter of credit) as collateral.

The added security came on the heels of other protections the JP Morgan-led bank group had originally requested as conditions to lend. Four other banks have joined the lead banks with commitments between US$250m-US$500m.

The We Company, WeWork’s parent, may seek a valuation as low as US$10bn, according to Reuters, down from January’s US$47bn valuation after burning through US$2.36bn of cash in the first half of the year.

“Banks wanted a more tightly structured deal,” a banker close to the financing said.

The loan, which is contingent on the company raising at least US$3bn in the IPO, also includes a US$4bn delayed draw term loan.

The initial group of banks consisted of nine lenders – JP Morgan, Goldman Sachs, Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, HSBC, UBS and Wells Fargo.

Bank of Montreal, Mizuho, Credit Agricole and Deutsche Bank have also now joined the transaction, according to a second source close to the situation. The banks will also serve as underwriters of the IPO, according to an amended prospectus the company filed on Friday.

“They invited everyone they could,” the first banking source said. “We looked at it. It didn’t make much sense for us. I’m not sure they’re going to sell it quite as well as they think.”

As soon as the IPO launches, expected as early as September 16, another round of syndication meant to reduce the banks’ US$1bn in initial exposure could be offered to investors, the first banking source said.

The US$1bn in first-available loans will be subject to a ticking fee to encourage the company to quickly replace the amount with cheaper financing in a different market. The replacement financing is likely to include a US$1bn term loan B to be sold to institutional investors on a best efforts basis, a bond, or a combination of both instruments, the second banking source said.

“The banks don’t want to hold this risk for too long,” the second source said.

WEWORK REWORK

The changes, which mean that the letter of credit facility is now secured by the cash and proceeds of the IPO instead of being equivalent to the now riskier term loan, suggest that lenders are more comfortable with the credit.

The additional collateral on the letter of credit, which effectively reduced the banks’ risk by a third, was added to the set of protections banks required to lend, which include the minimum IPO proceeds and a set of liquidity requirements before the company has access to the delayed draw funds.

Pricing on the letter of credit has also dropped to 100bp from roughly 225bp over Libor, reflecting less risk in the company and the banks’ slightly reduced fees. The delayed draw pays 475bp over Libor.

On the delayed draw, only US$1bn will be available initially (subject to the ticking fee); another US$1.5bn will become available, potentially, after results for the June 30, 2020 quarter are published; and the last US$1.5bn, again potentially, will become available after the 2020 year-end results.

WeWork will be required to maintain a minimum amount of liquidity (including the letter of credit cash collateral) of US$2.5bn through June 30, 2021, US$3bn through September 30, 2021 and US$3.5bn through December 31, 202`1 and thereafter, according to an amended prospectus filed on September 13.

Lenders are banking on the fact that they will be able to net ancillary business from the IPO and including subsequent funding exercises that could include institutional loans and bonds.

“Banks are super gung-ho because they think they’re going to make fees on the IPO. If there were no fees, no one would be doing this,” the second banking source said.

Aside from the IPO fees, lenders stand to make 2-3% in bank fees, which will bring revenues of US$100m-US$160m. Banks will make additional fees of 1-1.5% if they sell debt into the institutional loan market, which equates to roughly another US$60m.

The company’s IPO is still hanging in the balance, however, as SoftBank, the biggest external investor in WeWork, is urging the loss-making property group to shelve the IPO to protect a US$2.5bn investment made earlier this year. A sub US$20bn valuation would force SoftBank to inject another US$1bn to anchor the US$3bn-plus IPO to limit dilution of its ownership. (Reporting by Michelle Sierra. Editing by Tessa Walsh and Kristen Haunss)

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