WHEN WeWork announced a multibillion-dollar rescue package earlier this year, the company’s management hailed it as a fresh start for the long-struggling global network of shared office spaces.

The deal would cancel burdensome interest payments, provide funding for years to come and support a revamped plan for profitability, they said at the time.

Just eight months later, the coworking company is on the verge of filing for bankruptcy. Shareholders, including Masayoshi Son’s SoftBank Group, are likely to see their equity stakes wiped out, while most creditors may recover just pennies on the US dollar.

The disruption wrought by Covid-19 and a surge in telecommuting ultimately proved too much. WeWork, which never posted a quarterly operating profit in its history, could not cut costs fast enough to support its operations. Exactly how much investors are able to recoup – and the future of WeWork itself – now hinge on its ability to discharge scores of long-term leases the company signed during its headier days.

“WeWork’s primary assets are its lease contracts with clients, and its primary liabilities are its lease contracts with landlords,” said CreditSights special situations analyst Evan DuFaux. “That means the company is likely to reorganise in Chapter 11 and continue operating in order to provide any meaningful recovery to bondholders.”

WeWork’s filing – expected as soon as this week – will cap one of the more high-profile falls from grace in recent corporate history. Just four years removed from a US$47 billion valuation, it’s perhaps the ultimate testament to the pitfalls of the venture capital mantra of growth at all costs.

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For a brief shining moment, WeWork appeared to have a chance to make magic out of its cheap financing and abundant hype.

The company’s business model centred around signing multiyear office leases, sprucing up locations with kombucha taps and free yoga sessions, and subleasing space to freelancers and small businesses for as short as a month at a time.

After borrowing billions at low-interest rates and scoring equity investments at eye-watering valuations, by 2019 it had become the biggest private occupier of office space in Manhattan and London, operating millions of square feet in dozens of countries.

It looked like investors would clamour for a chance to participate in a proposed initial public offering that year.

But as regulatory filings revealed the extent of WeWork’s financial missteps, a slow horror dawned on would-be backers. Spending at the firm was profligate, and losses were shocking.

What’s worse, it became apparent that founder Adam Neumann was lending and leasing to himself in a quagmire of conflicted interests.

Within months, Neumann was out, WeWork almost ran out of cash, and SoftBank agreed to bail the company out.

Under new management, WeWork sold off side businesses, exited less-profitable buildings and eventually went public via a special-purpose acquisition company in 2021 at a fraction of its former valuation.

One thing remained the same, however: the losses.

The pandemic battered the company’s business. Customers cancelled leases and stopped paying rent as workers stayed home.

Management kept pushing back estimates for profitability as it became apparent workers were not returning to their offices as quickly as anticipated. Losses from continuing operations totalled US$4.6 billion and US$2.3 billion in 2021 and 2022.

In March, the company struck a deal with investors to cut about US$1.5 billion of net debt and secure more than US$1 billion of capital commitments.

Yet ultimately, the company could not escape the burden of its high lease expenses (which make up about two-thirds of its operating costs), many of which were for pristine locations in America’s priciest cities.

Prior to the expected bankruptcy filing, lease expenses were on pace to cost more than US$2 billion this year, according to company filings, partly reflecting the fact that many of WeWork’s leases were signed in 2018 and 2019 when rents were at their peaks.

Hedge fund bet

WeWork now is a shell of its former self – but one that SoftBank and hedge funds including King Street Capital Management and Brigade Capital Management may still be keen to take control of in bankruptcy and own upon its exit.

The company will likely reject a number of its leases through the bankruptcy process, with the ability to renegotiate or cancel those contracts one of the biggest advantages of going to the courts, according to Craig Ganz, a lawyer with Ballard Spahr who specialises in bankruptcy and real estate.

“Let’s remember the debtor is already in a distressed scenario so there is no true win here,” he said. “But there is an opportunity for a debtor to reduce its geographic footprint or lower its liabilities through the bankruptcy proceedings.”

WeWork is likely to continue on as a smaller company following the anticipated bankruptcy process, market watchers say.

“WeWork’s model was priced for growth, so it was purposely set up to lose money for years,” according to Triton Research chief executive officer Rett Wallace, who has analysed WeWork’s finances since its first public filings.

But “when the real estate market turned”, amid interest rate hikes and the pandemic’s disruption to work trends, “pricing got worse, tenant churn was higher and occupancy was lower. And when a dynamite consumer proposition meets bad economics, the economics are going to win every time”. BLOOMBERG