WeWork to Sell $500M of Bonds in Debut Sale

The bulk of executive compensation is in either outright equity ownership, or increasing bonuses based on equity price increases. Equity can be viewed as a call option on the enterprise value of the firm [1].

If you own a call option, you can increase its value by either making it 1) more in the money (by directly increasing the enterprise value, i.e. by generating value 'the honest way') or 2) increasing volatility directly, either by taking real economic risks (investing in more assets) or utilizing leverage (debt). Here we see both.

Note that financial investors in a company can be perfectly OK with results that boost the bottom line today, but lead to disaster down the road, so long as they're convinced there will be a short-term boost in the share price (at which point they exit and sell to the next sucker).

[1] https://www.fields.utoronto.ca/programs/scientific/09-10/fin...

It's really just a matter of sorting out where the notes one is considering are in the pecking order and estimating the probability of the issuer going bankrupt to put reasonable bounds on expected return of principle if they fail. A similar estimate can then be made on the probability of default or restructuring for the notes under consideration.

Given that information and a big enough coupon, a quarter-Kelly or half-Kelly bet may not be unreasonable.

At this point there are too many unknowns to make that case however. We'll have to see what coupon they decide on and enumerate the things that could knock them out or severely limit their free cash flow.

To your quote from the CEO, it's not a great way to market debt issues tbh. WeWork really isn't any different from any other REIT and one does not lend a REIT money because they are great people.

Just like companies have moved their computing to the cloud, the bet by WeWorks is that office space itself can be thought of in the same way. Sure, companies having their own office space will never go away just like on-prem will never go away, but for a specific type of company, WeWorks is betting that it's a niche that's still big enough to justify their $20 billion valuation.

They do add some value; basically, having an office manager, and for a sole proprietorship who may be big on plans but short on time, it may be better to exchange money for WeWork amenities, rather than spending time dealing with office stuff, eg going to supermarket to stock the office with snacks.

WeWorks isn't selling office space by the sq foot, but similarly, Apple doesn't sell computers by the gigabyte of RAM either. They sell being a part of a sexy glamorous office full of other people seizing life by the horns and living life to the fullest, including meetups, and happy hours, and an app. Gotta have an app. People don't do the boring office job that your parent's did, at a WeWorks space. (Whether or not people are doing the same boring office job is besides the point, that's what they're selling.) By building their brand, and offering convenience and consistency, the goal is to just be where sole proprietorships and tiny companies work, during this fad, and the next.

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https://www.usatoday.com/story/tech/news/2017/10/24/wework-b...

"Better" than WeWork does not mean WeWork isn't also better than existing patterns. I put "better" in quotes because cheaper is not always better.

I have a single private office at WeWrok in downtown LA for $650. Is that a good deal or bad deal?

Do you feel like you need to ask me what size my office is to answer? If you do then you fundamentally misunderstand what WeWork is selling.

Yes WeWork buys square footage, but that is not what they are selling. Google does not sell search (eyeballs), Amazon does not sell products (logistics), Github does not sell code storage (collaboration), and Apple does not sell computers.

This holds true for every successful company in the world until the innovators dilemma[0] overtakes them.

It's meaningless to compare sats.

[0]: https://en.wikipedia.org/wiki/The_Innovator%27s_Dilemma

From the article: WeWork is issuing seven-year, senior unsecured bonds

Because if the company goes bankrupt, bond-holders get paid before shareholders.

As such, bond-holders are always in a less-risky position. You'll always recoup some of your money during bankruptcy. (Don't estimate the value of the shelves and furniture!) While shareholders only get some $$ if the bonds are fully paid off.

> In the case where bond holders do well, wouldn't shareholders do better?

Not always. Bond holders will do well if the share-price stays steady or even negative. The company may stagnate over the next 7 years, at which point holding bonds would have been a better investment. The company is legally obligated to pay bondholders at its highest priority, until bankruptcy.

The Bonds aren't sold yet, but will likely be in the range of 4.5% to 5% (depending on market conditions during the sell-date). Over 7 years, the company needs to grow its share price by 36% for equity to beat a 4.5% bonds, or 40% to beat the 5% bond. Doable for sure, but its not too hard imagining a situation where they fail this benchmark and the bonds end up the superior choice.

For example: GNC's stock price doesn't help its shareholders, but the bond-holders would be doing fine.

There is no new technology in WeWork and there are no legal ways to create or corner markets in real estate; people have been trying for millennia. Unless they have a highly scalable revenue stream hidden somewhere, we can expect that their valuation will, at best, grow on a similar curve to other REITs.

If I owned their equity, it would be because I got it super cheap and expected them to start paying a dividend sometime soon.

I would not own their debt except through a broad based ETF. It's really hard to make long term profits on junk bonds except by playing the law of averages.

In fact, this is one way that companies die in a recession: credit spreads blow up (i.e. risky debt is much more expensive than good debt). That makes it difficult for struggling companies to refinance maturing debt, and they go under.

There's even a class of debt called CoCo bonds (contingent convertibles) that turn into equity if the company is struggling. The idea is to avoid the maturing debt scenario I described above. In practice, they're a horrible product for investors. Equity-like risk with bond-like returns.

when major banks/investors refused to deal with BBB or lower they called it 'Junk'. When they realized 1) the credit risk can be safely managed with modern financial theory and instruments 2) there was money to be made ... they quickly adopted it and had to figure something out to drop the 'Junk' pejorative.