Back in May, we reported that Just days after it began trading, WeWork’s freshly minted $702 million bond issue crashed as the massively over-subscribed junk bond issue (rated B+ by S&P) sees dramatic buyer’s remorse. The high yield bond, which sold for par just days earlier, was trading with a 95 handle, which, as Bloomberg reports, stands in sharp contrast to the outsized orders the company saw when it marketed its debt in primary markets last week.
The company had initially sought to issue $500 million of the securities, but decided to upsize once the orders came pouring in. The seemingly odd-lot number of $702 million was chosen in part because the company considered it a lucky number, another person said.
WeWork’s deal underscored the risks investors have been willing to take in the new-issue market as they struggle to find high-yielding assets. The office-space leasing company joined a wave of high-flying cash-burning firms that had recently tapped debt markets, including Uber, Netflix and others.
And while Bloomberg at the time put this down to simply “buyer’s remorse” – we suspect it has more to do with the company’s financials actually being exposed to the cold light of day. What is WeWork’s EBITDA? Simple – whatever you want it to be (via ‘community’ adjustments):
Here, for the first time we saw not just one adjustment to adjusted EBITDA, but an adjustment to the adjustment to the adjustment, and it was called “Community Adjusted EBITDA”, which by the miracles of non-GAAP “accounting”, pushed the company’s EBITDA from negative $193 million to positive $233 million.
What is more bizarre, is that somehow this grotesque adjustment of numbers had slipped by the rating agencies, who were happy to slap the company with a solid B+ish rating.
Well no more, because on Wednesday – four months after the bond was issued – Moody’s dropped its ratings of WeWork and its inaugural bond, saying it didn’t have enough information to continue grading the company’s creditworthiness, according to Bloomberg.
But wait, it had enough information just 4 months ago when it proudly stamped a B3 rating on the company. Why the change.
The rating agency published its unsolicited assessment in April that ranked WeWork’s $702 million of unsecured debt in the lowest speculative-grade tier. Moody’s rated the company B3, or six steps into junk, and its seven-year unsecured bond one notch lower at Caa1. That was lower than the grades assigned by Moody’s rivals S&P Global Ratings and Fitch Ratings. Fitch Ratings grades the notes BB-, meaning “speculative” but with adequate financial flexibility, while S&P Global Ratings assigned them B+, or “more vulnerable to nonpayment.”
The company’s bonds currently yield 8.3%, well above the highs hit in early May, when the yield blew out about 1% higher. The average bond yielding that amount carries a rating between B- and CCC+, according to Bloomberg Barclays index data.
It wasn’t clear why Moody’s – the rating agency with the lowest opinion of the office space leasing company – withdrew its rating, but it could be an indication that finally rating agencies are getting tired of the bizarre – and in this case, ridiculous – adjustments that companies increasingly come up with to lipstick their pig, and present their company in a far better light than reality. The question is whether other rating agencies will follow suit, and whether Moody’s will extend its rating withdrawals to other companies next.
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