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Rating Action:

Moody's rates WeWork CFR at B3, notes at Caa1; outlook is stable

25 Apr 2018

$500 million of new notes rated

New York, April 25, 2018 -- Moody's Investors Service ("Moody's") assigned to WeWork Companies, Inc. ("WeWork") a B3 Corporate Family rating ("CFR"), B3-PD Probability of Default rating ("PDR") and Caa1 rating to its proposed senior unsecured notes. The rating outlook is stable.

RATING RATIONALE

"WeWork has billions in cash and deep-pocketed private equity backing, but spending on its ambitious global growth plans mean it will likely be years before there are consolidated profits or free cash flow," said Edmond DeForest, Moody's senior credit officer.

The B3 CFR reflects WeWork's limited operating history, lack of historical profits and Moody's expectation for no free cash flow over the next few years. WeWork plans very high annual capacity and membership growth in each of the next few years, including through entry into many new markets, notably in Asia and South America. Risks to WeWork's plans include its ability to maintain high occupancy, stable per-member pricing and realize scale benefits which will lower its per unit investment requirements as it expands rapidly. WeWork will need to be very resilient in maintaining short term lessee occupancy during a downturn to cover their longer term lease obligations. Although WeWork has experienced high member growth and retention over the past few years, its operations are concentrated in only a few markets, such as New York City, where its office-space-as-a-service business model has proven successful. Additional support is provided by over $2.5 billion of cash pro forma for the net proceeds of the proposed senior unsecured notes as of December 31, 2017, a suite of proprietary technologies, portfolio of related service businesses and a diverse roster of equity investors including affiliates of SoftBank Group Corp.

WeWork leases well-located office space, often at or above market rents. By achieving high occupancy of its high-density office space configurations quickly through the sale of flexible memberships to a wide variety of customers, including large enterprises, small to mid-sized business and sole proprietors, WeWork has been able typically to recoup up-front building-level investments within 12 to 18 months of opening. The ratings reflect Moody's concern that WeWork may not achieve similarly rapid lease ups and high retention in new markets. Additional credit concerns include a lack of clear competitive differentiators from other existing and potential office-space-as-a-service providers. That said, WeWork's almost $1 billion of revenue as of the end of 2017, success in achieving building-level profits and free cash flow where it operates today and high equity valuation leave it well positioned as a disruptive first mover in what may prove to be a large "gig economy" office space market.

Good liquidity is provided by WeWork's $2.5 billion cash balance pro forma for the proposed notes offering as of December 31, 2017 and $1.15 billion of unrated senior secured bank revolving credit and letter of credit facilities due 2020. Moody's assessment of liquidity also incorporates the assumption that the large negative free cash flow expected over the next few years could be reduced quickly if new location openings are slowed or halted.

The Caa1 senior unsecured rating reflects the B3-PD PDR and a Loss Given Default assessment of LGD5, reflecting their junior position in the debt capital structure behind the $1.15 billion senior secured revolving credit and letter of credit facilities. Operating leases are generally incurred by wholly-owned location-specific single --purpose entities. Certain domestic leases are secured by letters of credit issued under the secured facilities equal to up to the average of one year's rent.

The stable ratings outlook reflects Moody's anticipation that if WeWork achieves its financial plans, it will generate positive adjusted EBITDA (as defined by the company) before growth investments by 2020 and free cash flow by 2022.

The ratings could be upgraded if Moody's anticipates WeWork will maintain high occupancy, solid member growth, strong pricing power, declining per-unit growth investment costs and steady-state free cash flow (cash flow from operations before growth investment expenses less maintenance capital expenditures and estimated cash costs and capital investments required to replace subscriber churn) to debt around 5%. Expectations of balanced financial policies and robust, diverse liquidity sources would also be important considerations for higher ratings.

Moody's could downgrade the ratings if pressured occupancy rates, pricing declines, limited available desk growth or higher than planned per-unit growth costs delays the expected achievement of expanded profitability rates and positive free cash flow. Diminished liquidity could also lead to lower ratings.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

..Issuer: WeWork Companies, Inc.

.... Corporate Family Rating, assigned at B3

.... Probability of Default Rating, assigned at B3-PD

....Senior unsecured, assigned at Caa1 (LGD5)

Outlook, is stable

WeWork, based in New York City, provides office space as a service and related services. Moody's expects 2018 revenues of around $1.5 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edmond DeForest
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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