(Bloomberg Opinion) -- Compared with stock buyers, bond investors are usually considered a rational bunch. They scour through a company’s financials, measure its cash flows and calculate their odds of recovery in the event of a default. So when it comes to WeWork’s $669 million junk-rated debt due 2025, which pays less than an 8% coupon, you can’t help but wonder: Who owns these things? This is a company that managed to burn through more than $2 billion of cash last year, thanks to an expansion spree. Its Ebitda margin, at -75%, effectively says that for every dollar the co-sharing work-space operator earns, it manages to spend $1.75. WeWork’s biggest backers are getting cold feet, and the once hotly anticipated IPO of its parent company, We Co., is being delayed. Now, some board directors are planning to push CEO Adam Neumann to step down as chief executive, Bloomberg News reported over the weekend. Sure, WeWork’s bond price has fallen; yet considering all the drama, it’s been fairly firm, oscillating between 95 cents and 105 cents on the dollar. What explains this reserve of faith? One factor could be a “change of control” clause in WeWork’s prospectus. If it’s triggered, the company will be “required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest to the purchase date.” Imagine the lucrative capital gain: As of Monday morning, WeWork’s 2025 bond was trading at 95.8 cents. Could SoftBank Group Corp., with a 29% stake, take over the troubled company? Founder Masayoshi Son, for one, has lost faith in Neumann’s leadership skills. So a change of control is on the way, right? Not so fast. Just like its stock, whose multiple-class voting rights give Neumann disproportionate control, WeWork’s bonds also work against company outsiders. The wording of its change of control trigger is as vague as can be: Adam Neumann, our co-founder and chief executive officer, holds more than 75% of the outstanding shares of our Class B common stock, which represents more than 65% of the total voting power of our outstanding capital stock … if Adam were to sell a sufficient number of his shares of our voting stock, the sale could constitute a change of control event under the indenture that will govern the notes and the credit agreements governing the Bank Facilities. What is considered “sufficient”? WeWork doesn’t explain in its very succinct bond prospectus. This isn’t how things go in the rest of the world. WeWork plans to rely on junk bonds – just like video-streaming giant Netflix Inc. – to fund itself for the foreseeable future, a company insider has told analysts. But take a look at how specifically Netflix defines its change of control clause for an April dollar-bond issue: It occurs, among other things, if the company becomes aware of a new “beneficial owner” with more than 50% of the voting stock, or if there’s a merger. In the bond world, the threshold that determines control can be pretty low. Hong Kong-based real estate developer SOCAM Development Ltd., for instance, considers the clause triggered if its key man Vincent Lo “and other permitted holders together own less than 35 percent” of the issuer. Whatever the level is, WeWork should define it. My hunch is that even if Neumann loses his CEO job and is forced to sell some of his voting shares, cash-strapped WeWork will argue against the implementation of this trigger. A change of control would not only force WeWork to exercise a put option on its $669 million bond, but to retire its bank facilities early. As of the end of June, the company had $1 billion of stand-by letters of credit outstanding. As we can see: … under the Bank Facilities, a change of control (as defined therein) constitutes an event of default that permits the lenders to accelerate the maturity of borrowings and other credit extensions under the Bank Facilities and the commitments to lend or otherwise extend credit would terminate. So when the fight for WeWork’s operating control unfolds in public, institutional investors could find themselves arguing, too. You might say that they should have seen this coming: In a world of negative and zero rates, risky borrowers are in the drivers’ seat. To contact the author of this story: Shuli Ren at sren38@bloomberg.net To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder. ©2019 Bloomberg L.P.
The bonds have been relatively steady despite negative news about the company and still are less than junk - rated debt issued by Chinese property developers . Its 2025 bond was trading at 95.8 % on the market on Monday morning , according to Bloomberg . The price may have been propped up by a change of control clause that requires the company to repurchase all outstanding bonds at 101 % of principal plus interest Bloomberg suggests . However , the wording of the clause is opaque and unclear on what would trigger a change , prompting questions about bondholders ' motivation .