WeWork said on Monday that it would not make two sets of interest payments totaling about $95 million, a move meant to jump-start negotiations with its lenders at the same time it tries to cut costs with its landlords.
The missed interest payments will undoubtedly spur speculation of a bankruptcy filing. But WeWork says it has the cash on hand, and the company has a 30-day grace period to make the payments, which were due Monday. At the end of June, it had $205 million in cash and access to a credit line worth $475 million.
“I believe they will absolutely understand our decision to enter into the grace period,” WeWork’s interim chief executive, David Tolley, said in an interview. He called the move “typical” as a “precursor to a conversation.”
Skipping an interest payment is not necessary to negotiate with lenders. But it is a move sometimes used by indebted companies to put pressure on lenders to restrike deals under more favorable terms.
In the first half of this year, WeWork’s operations consumed $530 million. The co-working company warned investors in August that “substantial doubt exists about the company’s ability to continue as a going concern,” without taking measures like decreasing its lease costs and making its debt load more manageable.
In early September, WeWork said its lease costs made up more than two-thirds of its operating liabilities, a heavy weight on its cash flow that it was trying to alleviate by renegotiating nearly all of its leases and pulling out of some unprofitable locations.
“What our lenders will really want to understand is the company’s credit profile when the landlord conversations reach a conclusion,” Mr. Tolley said.
Mr. Tolley said no decisions have been made about whether the company will file for bankruptcy, a move that would make it easier to shed unprofitable leases.
“We don’t know how that landlord negotiation is going to play out,” he said. “So we don’t know what the level of the profitability of the company is going to be.”
The announcement it was skipping interest payments came just months after WeWork struck a deal with its lenders, including SoftBank, to cancel or convert into equity about $1.5 billion of the company’s debt and give the company until 2027 to repay a large portion of it. At the time, the company expected the troubled commercial real estate market to return more quickly.
“It has become clear — or it seems very clear to me — that that wasn’t going to be enough,” Mr. Tolley said of the restructuring agreement.
The company has been trying to whittle down its lease costs for years, after what Mr. Tolley has called a “period of unsustainable hypergrowth.” In August, it hired the advisory firm Hilco Global to help with those efforts. The same month, WeWork appointed a number of restructuring experts to its board. Mr. Tolley was appointed interim chief executive in May after being appointed to its board in February.
Mr. Tolley has been tasked with stabilizing the company just as the commercial real estate industry undergoes a significant transformation. The rise of remote work has cast uncertainty on the value of office space. The value of office buildings in New York City, for example, could fall $48.75 billion in the coming years, according to a recent study by researchers at Columbia and New York Universities.
Some analysts say that could give rise to opportunities for the office-sharing business, with some companies eager to make more pliant arrangements. The question is whether companies like WeWork will be in the financial position to take advantage of that.
“Flexible office may not survive in its current economic environment, but the need for flexibility is increasing and even if the current model fails the need for flexibility is still increasing,” analysts at the ratings agency Moody’s wrote recently.
Mr. Tolley views that pressure as an opportunity for the company, assuming it can downsize its lease expenses and debt. WeWork reported $844 million in consolidated revenue for the second quarter of 2023, an increase of 4 percent year-over-year. The company says it continues to invest in its business and serve its customers.
“It’s clear to me that we’ve arrived at a steady state of unhealthiness in the commercial real estate market,” Mr. Tolley said.
He added: “If anything, over the last few years, it has only become more clear in the real estate community — and to all the corporate members who use us — that flexible office is a critical part of the future.”
Peter Eavis contributed reporting.