What's going on?
Coworking space rental company WeWork reported 2018 results on Wednesday that rattled investors in its bonds…
What does this mean?
For a monthly fee, WeWork offers freelancers, startups, and entrepreneurs shared office space – and, increasingly, other stuff. With over 400,000 members in 27 countries, WeWork brought in $1.8 billion in 2018 – more than double 2017’s revenue. But the company also doubled its losses to $1.9 billion.
Rising losses at fellow unicorns Uber and Lyft don’t seem to be a huge worry for their investors as the two drive toward becoming public companies, snapping up profitability-boosting rivals along the way. But it’s a different story for WeWork’s backers.
Why should I care?
The bigger picture: WeWork works differently.
WeWork’s business model comes with some hefty risks: the company has to sign long leases in order to secure office space it then rents out to customers on a month-by-month basis. If there’s an economic downturn and all those freelancers either cut costs by moving back to Starbucks or shut down entirely, then WeWork’s still on the hook. As the largest office tenant in places like notoriously expensive Manhattan, WeWork’s rent bills are nothing to joke about.
For markets: WeWork’s debt is unpopular.
As a private company (for now), WeWork doesn’t have to make as many public disclosures about its finances. But the company does have bonds traded on public markets, and rising losses mean less cash with which to pay bondholders interest – and, eventually, repay the bonds in full. WeWork’s bond prices fell on Wednesday as investors sold, likely in recognition of the heightened risk. Other debt, meanwhile, became more popular: investors bought US government bonds, and their prices rose accordingly, as a base interest rate cut this year suddenly seemed more likely (existing bonds become more attractive when interest rates go down, as their payouts are better than future bonds’ will be).