By David Benoit, Maureen Farrell and Liz Hoffman
Banks jockeying for a role in WeWork's public debut wooed
founder Adam Neumann with sky-high valuations that would make him a
billionaire many times over. Their loans to the company told a
different story.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and other
banks arranged giant fees and strict protections that reflected
their concerns about WeWork's unproven business model and Mr.
Neumann's unpredictable behavior.
When Wells Fargo & Co. signed on to a $6 billion loan
earlier this year, Mr. Neumann said: "If the largest lender in this
country can get comfortable with this, then everybody should."
Yet Wells Fargo, the fourth-largest U.S. bank, only started
lending to WeWork after an executive at the bank promised to keep
an eye on Mr. Neumann, according to people familiar with the
matter.
Banks harbored significant doubts about We Co., as the WeWork
parent is known, even as they pitched its stock to investors,
according to interviews and documents reviewed by The Wall Street
Journal. Running out of cash, the company was rescued last month by
Japanese conglomerate SoftBank Group Corp. in a deal that bounced
Mr. Neumann.
WeWork's unraveling has hit hardest the wallets and reputations
of SoftBank and other venture-capital investors who enabled Mr.
Neumann and his company's rise. But with its money and credibility,
Wall Street also fed the company's breakneck growth and its image
as a superhot technology company.
WeWork's model -- leasing office space, outfitting it with
touches like free beer and fruit-infused water, then subleasing it
-- required a constant supply of credit. Landlords demanded bank
letters that guaranteed several months of rent upfront. These
letters could be recycled as the short-term pledges expired.
JPMorgan was one of the biggest lenders to WeWork and to Mr.
Neumann, who counted CEO James Dimon and asset-management chief
Mary Erdoes, whose division had lent to Mr. Neumann, among his
confidants.
In 2015, JPMorgan led a group of banks extending a $650 million
loan to WeWork. Two years later, the company went back for another
$500 million, and Wells Fargo joined the group.
Wells Fargo bankers acknowledged internally that WeWork's
business model was unproven but agreed to lend $100 million if the
company set aside cash as collateral, according to people familiar
with the matter and a memo reviewed by the Journal.
WeWork would be a profitable client in Silicon Valley, where
Wells Fargo doesn't have a strong presence, they argued in the
memo. It also could land the bank a role in WeWork's IPO and future
stock sales, which the bankers estimated could bring in $12 million
in fees, according to the internal memo about whether to approve
the loan.
An internal committee initially rejected the loan, raising
concerns about the company's prospects and Mr. Neumann's style, the
people said. Roy March, the head of Wells Fargo's Eastdil
real-estate unit, assured executives he was close to Mr. Neumann
and would personally mentor him, the people familiar with the
situation said. Perry Pelos, a top Wells Fargo executive,
ultimately signed off after several appeals, the people said. Wells
Fargo sold most of Eastdil this year.
This summer, as WeWork prepared to go public, Mr. Neumann told
friends a new round of bank financing would "blow the market away,"
according to a person familiar with the matter. He had been meeting
with Mr. Dimon and Goldman CEO David Solomon, people familiar with
the conversations said.
Bankers at JPMorgan and Goldman, meanwhile, were vying for roles
in the company's IPO. They had told Mr. Neumann it could be worth
as much as $60 billion (JPMorgan) and $90 billion (Goldman),
according to people familiar with the matter. Lining up a loan
would help them win the assignment.
JPMorgan proposed a $6 billion loan that required WeWork to
raise $3 billion in the stock market by the year's end. The package
included a $2 billion line of credit it could use to continue to
sign deals for new space.
Goldman proposed $3.65 billion in loans, secured by income from
WeWork's buildings, people familiar with the matter said. The deal
would allow WeWork to borrow more if it hit certain milestones --
up to $10 billion over time -- and didn't require the company to go
public, some of the people said. WeWork executives wanted more
money upfront, they said.
JPMorgan won.
The bank pushed other lenders to commit at least $750 million
apiece toward the $6 billion total, dangling a role in the IPO,
according to people familiar with the negotiations. Some bankers
worried JPMorgan's initial terms were too lenient and demanded
WeWork set aside more cash to back the loan, the people said.
Eventually, the $2 billion line was 100% collateralized, meaning
WeWork would have to pledge a dollar of cash for each dollar it
borrowed, the people said. Goldman, Wells Fargo and six other big
banks agreed to participate.
The lenders would split about $250 million in fees upfront,
according to people familiar with the deal, a high sum for a
low-risk arrangement. A day after it was finalized, WeWork said it
had chosen JPMorgan and Goldman to lead its IPO. The other banks
got junior roles.
The IPO ran into trouble almost immediately after documents were
filed in August. Investors balked at WeWork's growing losses and
unusual financial arrangements between the company and Mr. Neumann.
Bankers offered shares at a lower price; investors still didn't
bite.
The company pushed Mr. Neumann out as CEO and called off the IPO
in September, which killed the loan deal. WeWork, suddenly
dangerously low on cash, found the banks unwilling to reup.
It turned back to JPMorgan, seeking a $5 billion lifeline,
people familiar with the matter said.
This time, the bank refused to lend its own money without
gauging demand from investors, people familiar with the matter
said. It eventually offered the full $5 billion itself.
WeWork took SoftBank's money instead.
Mr. Dimon defended his bank's dealings with WeWork in a
television interview this week.
"We helped WeWork get to a proper conclusion," Mr. Dimon said.
"Now it has a chance to succeed."
Eliot Brown contributed to this article.
Write to David Benoit at david.benoit@wsj.com, Maureen Farrell
at maureen.farrell@wsj.com and Liz Hoffman at
liz.hoffman@wsj.com
(END) Dow Jones Newswires
November 08, 2019 05:44 ET (10:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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