BY RICHARD BEALES

WeWork’s financial arrangements are becoming like one of its crowded shared-office spaces. The provider of hot desks and the like may borrow up to $4 billion before its planned initial public offering. Maybe adding to its pot of cash will make the money-losing firm’s path to profitability more credible, and so attract yet more cash. But that logic has big flaws.

The company, backed by Japan’s SoftBank and valued at $47 billion in its last private funding round, is working with Goldman Sachs, JPMorgan and others on a potential debt facility, according to news reports. The structure would be funded with payments from buildings that make money, effectively securitizing future cash flows – and it could increase to $10 billion over time as more sites are added.

The interest rate would probably be less than the 7.9% WeWork pays on the roughly $700 million of traditional junk bonds it sold last year. The idea behind the new facility is that the company, which lost $1.9 billion last year, will have extra cash to fund its rapid growth. Some potential IPO investors may take comfort in a higher level of available and committed cash, a tally that stood at just under $6 billion at the end of March.

Yet sharp, broad-based real-estate downturns do happen even if WeWork, founded in 2010, hasn’t lived through one yet. Any potential investor in the company’s stock should worry that the best of its assets might already be in hock to lenders like Goldman Sachs and JPMorgan.

Moreover, there’s a Panglossian circularity to the funding argument: WeWork loses money because it’s investing in growth; that requires cash; so the company borrows money to boost its pile of greenbacks; as a consequence, investors should be happier giving it still more. The disconnect is that profitability may only come – if at all – when growth slows dramatically. And providing extra funding to expand is at least as likely to defer breaking even as to achieve it.

A big, expandable debt facility gives WeWork breathing room to delay its IPO until the market timing seems right. That flexibility is valuable to the company. The benefit for potential new shareholders is less obvious.

First published July 8, 2019