WeWork’s credit rating, already rated as junk, has been downgraded on concerns that the pandemic could seriously weaken demand for office space.
Ratings agency Fitch dropped WeWork’s long-term issuer default rating Thursday one notch from CCC+ to CCC. Both scales are non-investment grades, otherwise known as junk or high-yield status, representing a real possibility that the company will default on its credit obligations.
“The downgrade reflects Fitch’s concern over the viability of WeWork’s business model in light of a potential lasting shift by companies to a hybrid office model that leads to permanently lower office space demand,” the ratings agency wrote.
“While WeWork has made material progress to reduce its cash burn rate, in a scenario where demand is structurally lower, Fitch sees WeWork as potentially requiring additional liquidity sources inclusive of and beyond the full $3.3 billion SoftBank financing commitment,” the agency continued.
Fitch and other ratings agencies dropped WeWork’s rating from investment grade to junk bond status in October of last year after the company’s aborted IPO. The next rating two notches down on Fitch’s scale — CC — would mean that the ratings agency believes that a default seems probable.
WeWork’s bonds that mature in 2025 were most recently trading at about 63 cents on the dollar, according to Trace data cited by Bloomberg News.
Fitch noted that WeWork has taken some steps toward strengthening its balance sheet this year, including improving its cash-burn rate, exiting obligations to build out new locations and trimming overhead through staff reductions.
SoftBank earlier this summer committed another $1.1 billion to the office-space provider.
But that may not be enough if the office market does not recover from the pandemic. In Manhattan, only 10 percent of workers have returned to their offices; even in cities with less restrictive lockdown policies, like Houston, that number is still below 50 percent.