Wall Street gave Adam Neumann up to $500 million he was going to pay back after WeWork's IPO. Now that the offering is pulled, banks are scrambling to hammer out a solution.
- WeWork co-founder Adam Neumann is working with banks to consider new terms for a loan that he took out before the company filed to go public, according to people with knowledge of the matter.
- Neumann has already drawn down $380 million from the loan. He can no longer pay the loan with proceeds from selling WeWork shares publicly, since the co-working company has abandoned its IPO for now.
- Neumann may be required in the talks to put up some of his properties or other assets as collateral for the loan, one of the people said.
- Read all of Business Insider's WeWork coverage here.
Adam Neumann is in talks with banks about getting new terms on a credit line after WeWork's public offering was canceled, according to people with knowledge of the matter.
Neumann and the lenders on the loan - JPMorgan, UBS and Credit Suisse - are considering new terms that may require the WeWork cofounder to put up some of his other properties or assets as collateral, one of the people said. In some cases, such an agreement is known as a personal guarantee.
Neumann arranged a $500 million credit line with the banks before WeWork filed to sell shares to the public, and he's on the hook for repaying the $380 million that he already withdrew. Talks are ongoing and could still fall apart or change, the people said.
"No terms have been set," a spokeswoman for Neumann said Friday.
Neumann's initial plan was to repay the loan by handing over newly issued public shares or using cash from selling the shares in the open market, one of the people said. In the absence of a public offering, Neumann and his lenders have had to consider other options, the person said.
Both parties also have had to consider WeWork's future. In January, WeWork was valued at $47 billion. But between the end of 2018 and middle of this summer, Fidelity, which has exposure to WeWork through its massive Contrafund, slashed the valuation by roughly a third, according to a regulatory filing. And since Aug. 14, when WeWork filed its prospectus, some public market investors and WeWork bankers think the value may be as low as $10 billion, according to some media reports.
It's not clear when Neumann first set up the credit line and Business Insider couldn't determine what sort of haircut, or the amount of discount applied to the WeWork shares used as collateral, the banks originally gave to Neumann's stake.
Normally, on a loan like this, lenders would see a decline in value of WeWork's magnitude and require the borrower to post additional collateral. The practice is known as a margin call. The company's prospectus explains how it would work.
"If the price of our Class A common stock declines to a level that results in a margin call, absent a repayment of the loan, Adam would be required to pledge additional shares of our Class A common stock or cash as collateral," the filing states, declining to provide the number of shares Neumann pledged, which he owns himself and through an LLC that he manages.
Elsewhere, the filing states that a margin call "must be instituted by the lenders following certain declines in our stock price." It's not clear if the lenders have updated the value they gave to WeWork's shares or made a margin call.
Spokespeople for WeWork, JPMorgan, UBS, Credit Suisse declined to comment.
Neumann's personal finances may be challenged by the loan's new terms. Scott Galloway, a fierce WeWork critic, had speculated about whether Neumann had personally guaranteed the credit line in a video recently shared on Twitter, suggesting that it could mean trouble for Neumann if he had.
A personal guarantee would mean that Neumann agreed to use other assets, such as property and other investments to repay the loan if the shares weren't enough.
When making such loans, lenders often require such a provision, according to Bill Woodson, head of wealth and family office services at Boston Private who added that he had no knowledge of Neumann's arrangement and wasn't commenting on WeWork specifically.
And when underwriting it, they consider two things: how soon the illiquid assets may become liquid, such as through an IPO; and what other assets the borrower has to repay the loan, which the lenders can get access to through a personal guarantee.
Even so, loans like these that are large and backed by illiquid assets are still pretty rare, he said.
"It is an exception every time," Woodson said. "The reason it is an exception," he said, is as a lender "you bear a significant amount of risk if for some reason that person can't create the liquidity."
Or if the value of the stake suddenly plunges. The credit line is scheduled to mature September 18, 2020, according to the prospectus.
- Additional reporting by Rebecca Ungarino