WeWork Inc. skipped interest payments totaling $95 million due on Monday on five of its bonds, triggering a 30-day grace period. This comes two months after the struggling co-working start-up warned that “substantial doubt exists” about staying in business and one month after WeWork CEO David Tolley said the company “will seek to negotiate terms with our landlords” for underperforming locations.
“As such, today we entered into the 30-day grace period provided to us under our secured notes’ indentures and withheld the associated interest payments,” WeWork wrote in a press release on its website on Monday.
A regulatory filing shows the co-working firm withheld $37.3 million of cash and $57.9 million of interest payments on the following notes, all due in 2027:
The filing continued, “The Company has a 30-day grace period to make the Interest Payments before such non-payment constitutes an “event of default” with respect to the Notes.”
It added: “The Company has the liquidity to make the Interest Payments, and may in the future decide to do so.”
If WeWork has enough liquidity to service its debt, why would it miss payments?
Perhaps a conversation the WeWork CEO had with The New York Times can shed some light on this question:
“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,” NYTimes noted.
In early September, Tolley said the co-working start-up “will seek to negotiate terms with our landlords” and “part of these negotiations, we expect to exit unfit and underperforming locations and to reinvest in our strongest assets as we continuously improve our product.”
A month before that, WeWork shares crashed after the company stated in a filing:
…as a result of the Company’s losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is contingent upon successful execution of management’s plan to improve liquidity and profitability over the next 12 months, which includes, without limitation:
- Reducing rent and tenancy costs via restructuring actions and negotiation of more favorable lease terms;
- Increasing revenue by reducing member churn and increasing new sales;
- Controlling expenses and limiting capital expenditures; and
- Seeking additional capital via issuance of debt or equity securities or asset sales.
WeWork shares have been in freefall for most of the year.
Covid killed the flexible office industry. WeWork might be on its last leg.
Banks are more vulnerable to the housing market now than they were in 2007.
Most people in the mainstream will scoff at that statement. They’ll tell you that the situation is very different today. After all, we don’t have a big problem in the subprime mortgage market. We’re not seeing a big spike in defaults. That’s true. The problem is different this time. And it’s actually worse.
Most people will acknowledge that there are problems in the real estate market. Home sales continue to decline as mortgage rates climb. Pending home sales fell more than expected in August, with the National Association of Realtors’ Pending Home Sales Index falling to the lowest level since September 2022.
Meanwhile, home prices have fallen off the peak we saw in 2021, but they haven’t declined as much as you might expect because housing inventory remains tight.
So, what’s the problem?
As Peter Schiff explained in a recent podcast, the problem this time is the mortgages themselves.
The banks are in worse shape and more vulnerable to the housing market now than they were in 2007 when everything collapsed and we had the financial crisis.”
The problem in 2007 and 2008 was defaults. As interest rates rose, people couldn’t afford to pay their mortgages. That forced banks to foreclose. With the real estate bubble deflating, banks couldn’t recoup their loans by selling the houses.
The problem was the banks had loaned out a lot of money with zero down or negative AM, and then housing prices went down, and then people started defaulting. Because of the defaults, the banks lost money. But the vast majority of mortgages didn’t default. It was just a large enough percentage that it caused insolvency at these banks.”
Because we have a fractional reserve system, banks don’t have nearly enough reserves to cover even a small number of their loans.
Today we have a much different scenario.Peter says it’s worse.
It’s not about default now. In fact, defaults would actually help. The banks would actually be better off if people defaulted on the mortgages. The problem is the mortgage itself. The banks are losing money on the mortgage.”
Banks wrote these mortgages when interest rates were extremely low. A 3% mortgage wasn’t uncommon a few years ago. Now mortgage rates are above 7%.
The banks are losing money on every mortgage that’s outstanding. So, even though people are still paying their mortgages, the bank is still losing.”
In 2009, the Fed slashed interest rates. That meant all the mortgages the banks owned that didn’t default went up in value. Those mortgages appreciated because the Fed slashed interest rates.
So, even though some mortgages that went bad, the mortgages that didn’t go bad, which were the vast majority, appreciated in value. Even with that, we still had the financial crisis.”
Today, there aren’t a lot of defaults. People aren’t struggling to pay a 3% mortgage. And while home prices have declined, most homeowners aren’t currently underwater. Even if they are, people aren’t selling. They don’t want to give up a 3% mortgage for a 7%-plus mortgage. That’s why inventory remains tight and that is holding prices up.
As Peter points out, a 3% mortgage is a huge asset for the borrower. But it’s a huge liability for the lender. So, defaults would benefit the banks. They could theoretically repossess the home and resell it to somebody else and write a mortgage at a much higher rate.
So, this is a very different crisis. But it’s worse because they’re losing money on every single mortgage they have whether or not they go into default. … So, this is bigger. It is a bigger problem for the banks. They’re losing more money, and they will lose more money now than they did in 2008.That means we’ll need an even bigger bailout. All these ‘too big to fail’ banks have an even bigger problem now than they did then, and it’s going to take an even bigger round of QE to bail them out. The problem is how’s the Fed going to do that when inflation is as high as it is and going higher?”
Banks face another problem in this high interest rate environment. They’re losing depositors. Investors want yield. They can pull their money out of the bank and put it in money markets with a 5.5% yield. Peter said this is “the ultimate in crowding out.”
Everybody wants to take their money out of the banks, and the banks in theory could loan that money to the private sector, but they want to take that money out of the banks and put it in a money market that’s loaning the money to the government. … So, private businesses can’t get credit because all the credit is going to the government to finance these massive deficits.”
The fact that banks continue to borrow money from the Fed’s bailout program reveals the problems bubbling below the surface.
As Peter put it, the crisis is easy to see. But most people in the mainstream don’t see it.
Blackstone has limited investor redemption requests from its $68 billion real estate trust for high-net wealth investors for the eleventh consecutive month while the Federal Reserve pushes interest rates to two-decade highs, which has only sparked turmoil in regional banks earlier this year and an ongoing commercial real estate crisis.
According to a letter obtained by Bloomberg, Blackstone Real Estate Income Trust (BREIT) recorded investor outflows for September at $2.1 billion, or 28% less than what was requested to withdraw in August. The good news is that withdrawal requests are the lowest since October 2022.
However, BREIT only returned $625 million, or about 34% of what was requested — as the massive real estate trust continues to gate redemptions to prevent outflows. Last month was the 11th straight month of restrictions for BREIT.
About 80% of the BREIT fund has exposure to rental housing, industrial, and data centers.
We were the first to publish an investor letter by BREIT urging money managers with wealthy clients in the fund to keep clients calm (view letter here).
In March, we pointed out (“New “Big Short” Hits Record Low As Focus Turns To $400 Billion CRE Debt Maturity Wall”) that the regional banking crisis kick-started CRE turmoil. JPM, Morgan Stanley, and Goldman Sachs have all joined the CRE gloom parade.
A more recent note from Morgan Stanley expects CRE office prices to slide 27.4% from peak to trough in 18 to 24 months this cycle, not that far off from the –34.9% during the GFC in 34 months, which will range from a decline of 15% for apartments to a stunning plunge of 40% for office.
REIT indexes via Bloomberg show how high-interest rates pressure the CRE space.
Meanwhile, Barclays’s analyst Lea Overby said the office tower market “will take a long time to work out,” adding she isn’t too worried about the threat of the overall CRE market because “debt is spread across a wide enough array of investors to absorb losses.”
BREIT concluded in the letter: “A shareholder who began submitting repurchase requests when proration began has received approximately 97% of their money back and the semi-liquid structure is working as intended.”
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