WeWork’s saviour doesn’t have such deep pockets

SoftBank Group Corp.’s $9.5 billion bailout has rescued WeWork from the threat of bankruptcy. But make no mistake: The unicorn’s free-spending days are over. Its saviour is far from a bottomless pit of money.
While WeWork had an eye-watering $22bn of debt at the end of June plus $47bn of looming lease-payment obligations, its rescuer, Softbank, isn’t in such great shape either. SoftBank is a junk-rated issuer, with the equivalent of $62 billion in net debt.
The Japanese company has done an excellent job of reinventing itself. Last December, S&P Global Ratings removed its negative outlook after SoftBank listed its domestic telecom unit. Moody’s Investors Service, meanwhile, relabeled the company as an investment firm. That means investors have started to evaluate SoftBank’s debt by comparing it to the market value of its investments, rather than to the company’s cash flow.
Against the 26.6 trillion yen value of its portfolio, SoftBank’s 6.7 trillion of net debt looks comfortable. Much of that is attributable to a 26% stake in Alibaba Group Holding Ltd., now worth about $116 billion. Last month, Moody’s shrugged off the resignation of Adam Neumann as WeWork’s CEO, noting that even a 50% devaluation of We Co. would only be about 1% of SoftBank’s investment portfolio. Likewise, SoftBank would be able to absorb potential writedowns of as much as $7 billion at the Vision Fund because of the value of its Alibaba stake.
The WeWork rescue package is changing the game, though. In a statement, Moody’s adopted a stronger tone and drew the spotlight back to SoftBank’s cash management. The agency would consider a downward rating action if cash held at the conglomerate could no longer cover two years of debt maturities, it warned.
So far, this has been a breeze for SoftBank. As of June quarter, the company held 1.2 trillion yen of cash, comfortably more than the 550 billion yen of debt maturing over next two years.
It’s going to get tighter. SoftBank’s cash rose to about 2.5 trillion yen as of July, thanks to a tax refund and the sale of shares in Chinese ride-hailing unicorn DiDi Chuxing Inc. to the Vision Fund. Against that, SoftBank has to fund a WeWork bailout costing the equivalent of about 1 trillion yen and pay 1.3 trillion yen of debt coming due in the 2021 fiscal year.
Like WeWork, SoftBank is anything but a cash cow. Subsidiaries from US telecom provider Sprint to British chipmaker ARM Holdings don’t generate much. As a result, SoftBank has to live off what’s on hand, proceeds from new bond sales, or dividends from its 66.5%-owned Japanese telecom business.
It could be argued that SoftBank got WeWork at a distressed price and that once the shared-office startup’s liquidity crisis has passed, its valuation will rebound from the bailout tag of less than $8 billion. Don’t bet on it. If WeWork needs further significant financial support, the saviour may struggle to provide it. SoftBank, meanwhile, looks likely to keep its bankers busy with plenty of refinancing work in the years ahead.
—Bloomberg

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder