A Blog by Jonathan Low

 

Sep 5, 2018

WeWork And the Disappearing Bond Rating

Which is another way of saying that 17 years after the dotcom collapse and 10 years after The Great Financial Crisis, ostensibly 'hard' accounting-based information remains as pliable as a soft, wet noodle. JL

Jamie Powell reports in FT Alphaville:

Moody's, in horror at WeWork's financials -- which to be fair, are creatively presented -- decided to withdraw its rating. In an age of gasping at private company valuations, this is a comforting narrative for Silicon Valley skeptics. Moody's initial rating was unsolicited; it didn't charge WeWork for the rating. And what better free publicity for Moody's than now suggesting that they have the soberest view on one of the most talked about bond offerings this year? Cynics may of course point out that it is telling that the one rating agency that didn't get paid had the most negative view on the company's financials.
WeWork, everyone's favourite liability mismatching experiment, was in the news thanks to its inaugural bond offering. This time however, it had little to do with a “Community-Adjusted Ebidta” metric. Well, not directly anyway.
In short, Moody's announced it had decided to withdraw its unsolicited Caa1 senior unsecured rating on a $702m bond issued by the co-working office space company in April. Simultaneously, Moody's withdrew its B3 rating on the company. Both ratings had placed WeWork firmly in the “not prime”, aka “junk,” pile.
This was Moody's reasoning, via the FT:
Moody’s has decided to withdraw the ratings because it believes it has insufficient or otherwise inadequate information to support maintenance of the ratings
WeWork told the FT it had abstained from providing the relevant financial data to Moody's as it had already paid competitors Fitch and S&P for its rating prowess. Too many cooks spoil the broth and all that.
There are two possible explanations for Moody's actions.
One is that Moody's had the most negative rating on the bond -- Fitch rates the bond at BB-, while S&P have it a B+. And now, in horror at WeWork's financials -- which to be fair, are creatively presented --it has decided to withdraw its rating. In an age of gawping and gasping at private company valuations, this is a comforting narrative for Silicon Valley skeptics.
The other, and perhaps more reasonable explanation, is that WeWork simply refused to play ball with Moody's. Readers may note the initial rating was unsolicited. In other words, it didn't charge WeWork for the rating. And what better free publicity for Moody's than now suggesting that they have the soberest view on one of the most talked about bond offerings this year?
Cynics may of course point out that it is rather telling that the one rating agency that didn't get paid had the most negative view on the company's financials.
But WeWork needs to be resourceful if it is conquer the global office rental market and truly become a “state of consciousness”, in chief executive Adam Neumann's famous words. Maybe WeWork simply thought it wasn't prudent to be paying three ratings agencies when its cash can be deployed productively elsewhere, such as on its annual festival -- SummerCamp.
As for the WeWork bond, prices fell 1.2 per cent yesterday, following a smaller decline Tuesday:

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