question:summarize in 250 words: R The We Co. CASE SUMMARY: WeWork Seeks to ‘Drastically’ Reduce Funded Debt, Optimize Commercial Lease Portfolio Through Equitization Restructuring Under RSA With Secured Noteholders Tue 11/07/2023 15:13 PM Share this article: Relevant Documents: Voluntary Petition First Day Declaration Order Scheduling First Day Matters Cleansing Materials Cash Collateral Motion Summary Chapter 11 cases premised on RSA with 92% of secured noteholders Debtors seek to reduce funded debt by 3 billion through equitization of LC facility, first lien notes and second lien notes, and significantly reducing retail store footprint Company seeks use of cash collateral to fund cases; RSA provides for a 750 million DIP term loan C facility and cash collateralized letter of credit facility Parallel Canadian restructuring proceedings initiated New York City-based flexible office space provider WeWork and numerous affiliates filed chapter 11 petitions last night, Monday, Nov. 6, in the U.S. Bankruptcy Court for the District of New Jersey, reporting 10 billion to 50 billion in both assets and liabilities. The debtors executed a restructuring support agreement with SoftBank - in its capacity as noteholder, equityholder or letter of credit obligor - along with an ad hoc group representing approximately 87% of the company’s Series I first lien and second lien notes and Cupar Grimmond, a Series III first lien noteholder. In the aggregate, the RSA is supported by holders of approximately 92% of the company’s prepetition secured notes. The RSA is premised on “the full equitization of the Company’s 1L Notes, 2L Notes, and the LC Facility,” which the debtors say will reduce their approximately 4.2 billion in funded debt by approximately 3 billion. In parallel, the debtors are optimizing their extensive lease portfolio, intending to initially reject over 60 leases while continuing negotiations with more than 400 landlords, according to the first day declaration of CEO David Tolley. As disclosed in cleansing materials filed this morning, the debtors project that their lease portfolio rationalization will drive positive cash EBITDA in 2024 and beyond. Tolley says that the debtors engaged in extensive prepetition efforts to achieve profitability after conducting a de-SPAC transaction to go public, including amending over 590 leases, reducing future rent obligations by more than 12 billion and conducting a notes exchange to obtain funding commitments and reduce debt. Nevertheless, these efforts were insufficient to overcome “legacy real estate costs and industry headwinds,” and the debtors extensively engaged their creditors and equityholders, ultimately culminating in the RSA and filing chapter 11. The debtors are funding the cases at the outset through the use of cash collateral, interim approval of which will be considered as part of their requested first day relief, and under the RSA have a committed DIP financing term sheet for up to 750 million consisting of a senior secured DIP term loan C and cash collateralized LC. The debtors also have committed exit financing consisting of a new first lien exit term loan facility as well as a binding commitment from SoftBank to provide cash collateral for a new LC facility. The term sheets for the DIP financing and LC facility are not included in the RSA. The first day declaration states that as of the petition date, the debtors hold approximately 164 million in cash across debtor-owned bank accounts. According to the debtors, the headline terms of the RSA consist of: Equitization of drawn DIP term loan C claims (other than up to 100 million of drawn term loan C DIP claims satisfied with loans under a new first lien exit term loan facility), prepetition LC claims, first lien notes claims and second lien notes claims into reorganized equity; Cancellation of all other prepetition debt and equity interests (other than any interests held by SoftBank reinstated in exchange for SoftBank contributing its claims); Issuance of a new first lien exit term facility equal to the lesser of (a) the total amount of all drawn DIP term loan C claims and (b) 100 million plus, in each case, the DIP term loan C fee claims; A DIP term loan C facility that rolls up all outstanding and undrawn prepetition LCs on a dollar-for-dollar basis that is generally pari passu with prepetition LC and first lien notes claims; and A binding commitment by SoftBank to provide cash as collateral for a new LC facility. The RSA calls for the majority of post-reorganization equity to be distributed to holders of first lien claims comprising prepetition LC facility claims and first lien notes claims. The remaining post-reorg equity would primarily be allocated to holders of second lien notes claims and DIP lenders. The contemplated DIP equity distribution is based on amounts drawn under the DIP facility minus 100 million. The aforementioned equity allocations are subject to dilution by a 1.25% LC equity allocation and a yet-to-be-determined management incentive plan, or MIP. Third lien notes claims would receive the value, if any, of the secured portion of their claim, and any deficiency claim would share with unsecured notes claims and general unsecured claims a pro rata share of no less than the liquidation value of the unencumbered assets held by the company party against which the respective claim is allowed. All other interests would be canceled. Among the RSA’s milestones are a Feb. 4, 2024, deadline for the debtors to file a plan and disclosure statement, with an outside date of Feb. 24 for the bankruptcy court to enter an order approving the disclosure statement. March 5 is the outside date for the confirmation order to be entered and the effective date to occur. Under the restructuring term sheet, the new board would include seven directors: three appointed by SoftBank, two appointed by members of the ad hoc noteholder group, one independent to be mutually agreed upon, and the CEO. The debtors are commencing Creditors Companies’ Arrangement Act insolvency proceedings in Canada. WeWork’s locations outside of the United States and Canada are not part of the proceedings, nor are WeWork’s franchisees around the world. The first day hearing is scheduled for tomorrow, Wednesday, Nov. 8, at 11 a.m. ET. Reorg will be providing live coverage of the first day hearing via our live blog platform, which can be accessed through the live blog portal HERE (when logged in to Reorg). The debtors’ capital structure as of the petition date is shown below: The cases have been assigned to Judge John K. Sherwood (case No. 23-19865). The debtors are advised by Kirkland & Ellis and Cole Schotz as bankruptcy counsel, PJT Partners as investment banker, Alvarez & Marsal as restructuring advisor, Hilco Real Estate as real estate advisor and Deloitte Tax as tax advisor. Munger Tolles & Olson is legal counsel to WeWork Inc. under the direction of the special committee, with Province as financial advisor. The ad hoc secured noteholder group is advised by Davis Polk, Ducera, Greenberg Traurig and Freshfields. SoftBank is advised by Weil and Wollmuth Maher & Deutsch. Cupar Grimmond is advised by Cooley and Piper Sandler. Epiq is the claims and noticing agent. Background / Events Leading to Bankruptcy Filing WeWork, a New York City-based flexible office space provider, was founded in 2010 by Adam Neumann and Miguel McKelvey, who opened the company’s first location in New York’s SoHo neighborhood. The company quickly expanded, growing to 23 locations across eight cities and opened its first international locations in the United Kingdom and Israel within four years. The rapid expansion continued in 2016 with locations opened in Australia, Canada, China, Mexico and South Korea. In 2017, WeWork raised 4.4 billion from SoftBank at a 20 billion valuation, and by Dec. 31, 2018, WeWork had reached more than 400,000 memberships across 425 locations in 100 cities and 27 countries. In early 2019, WeWork reached its “peak valuation” of 47 million, after raising 2 billion from SoftBank. However, upon the company’s S-1 filing in August 2019, that valuation “came into doubt” with “heavy attention” on WeWork’s negative earnings and corporate governance, which caused WeWork to withdraw its IPO plans two months later. WeWork’s failed IPO “had a number of repercussions,” including Neumann’s resignation and relinquishment of majority voting control, as well as a liquidity crisis before SoftBank stepped in to provide a 5 billion rescue financing package. At that time, WeWork made certain management team alterations and developed a new strategic plan differing from its prior, rapid-growth model and focusing on an extensive lease rationalization program, cutting “uncontrolled” costs and existing unprofitable, noncore businesses. The company then encountered major operational headwinds caused by the Covid-19 pandemic, which “struck and wreaked havoc on the commercial real estate landscape, particularly in major cities where WeWork has a large footprint,” causing “material reductions” in new sales and “considerable” customer churn. Despite the business challenges that arose as a result of the pandemic, the company renewed efforts to go public after membership growth and occupancy rebounded from 2020 lows. The company ultimately went public in October 2021 via a SPAC deal at a 9.5 billion equity valuation. The company continued its operational restructuring efforts, noting that since 2019 it has successfully amended more than 590 leases, reduced future rent obligations by over 12 billion and cut selling, general and administrative expenses by approximately 1.8 billion. Nevertheless, WeWork remained unprofitable and in May 2023 completed an exchange that enhanced its liquidity, cut interest expense and extended maturities. Despite efforts to improve its capital structure, WeWork could not overcome its rent burden and industry headwinds. The company engaged Kirkland, PJT, Alvarez & Marsal and Hilco Real Estate and commenced a “comprehensive review” of the company’s commercial lease portfolio and entered into negotiations with “substantially all” of its landlords to reduce WeWork’s overall rent obligations and identify the most unprofitable leases. At the same time, the company’s advisors began negotiations with SoftBank and other major funded debt holders in efforts to reach agreement on a potential restructuring transaction, ultimately resulting in execution of the RSA and commencement of the chapter 11 cases. The debtors’ largest unsecured creditors are as follows: 10 Largest Unsecured Creditors Creditor Location Claim Type Amount U.S. Bank Trust Company National Association New York 7.875% Senior Notes Due 2025 170,734,270 The Alter Group Wilmette, Ill. Lease Termination Fees & Related Litigation 11,880,802 U.S. Bank Trust Company National Association New York 5.00% Senior Notes Due 2025 9,471,342 Westfield Fulton Center LLC New York Accrued Unpaid Rent 8,170,257 400 California, LLC Beverly Hills, Calif. Accrued Unpaid Rent & Related Litigation 7,835,182 The Platform LLC Detroit Lease Termination Fees 5,133,719 FRF/K 81 Prospect Owner LLC New York Accrued Unpaid Rent 5,016,774 Mori Trust Co., Ltd. Tokyo Accrued Unpaid Rent & Lease Termination Fees 4,839,248 260-261 Madison Avenue LLC New York Accrued Unpaid Rent & Related Litigation 4,594,400 2 Ninth Avenue Partners, LLC New York Accrued Unpaid Rent 4,321,260 The case representatives are as follows: Representatives Role Name Firm Location Debtors' Co-Counsel Edward O. Sassower Joshua A. Sussberg Steven N. Serajeddini Ciara Foster Kirkland & Ellis New York Debtors' Co-Counsel Michael D. Sirota Warren A. Usatine Felice R. Yudkin Ryan T. Jareck Cole Schotz P.C. Hackensack, N.J. Debtors' Investment Banker NA PJT Partners NA Debtors' Restructuring Advisor NA Alvarez & Marsal North America NA Debtors' Tax Advisor NA Deloitte Tax NA Debtors' Real Estate Advisor NA Hilco Real Estate NA Legal Counsel to WeWork Inc. Thomas Walper Seth Goldman Munger, Tolles & Olson Los Angeles Financial Advisor to WeWork Inc. NA Province NA Co-Counsel to SoftBank Gary T. Holtzer Gabriel A. Morgan Kevin H. Bostel Eric L. Einhorn Weil, Gotshal & Manges New York Co-Counsel to SoftBank Paul R. DeFilippo James N. Lawlor Steven S. Fitzgerald Joseph F. Pacelli Wollmuth Maher & Deutsch New York Financial Advisor to SoftBank NA Houlihan Lokey NA Co-Counsel to the Ad Hoc Group Eli J. Vonnegut Natasha Tsiouris Jonah A. Peppiatt Davis Polk & Wardwell New York Co-Counsel to the Ad Hoc Group Alan J. Brody Greenberg Traurig Florham Park, N.J. UK Counsel to the Ad Hoc Group NA Freshfields Bruckhaus Deringer NA Financial Advisor to the Ad Hoc Group NA Ducera Partners NA Counsel to Cupar Grimmond Tom Hopkins Cullen D. Speckhart Logan Tiari Michael A. Klein Cooley Los Angeles U.S. Trustee Fran Steele Peter D’Auria Office of the U.S. Trustee Newark, N.J. Debtors’ Claims Agent Kathryn Tran Epiq New York Restructuring Support Agreement The debtors’ RSA term sheet includes the following summary of the proposed treatment for classes of claims and interests under the anticipated RSA plan: Class 1 - Other secured claims: Each holder would receive treatment consistent with section 1129(a)(9) of the Bankruptcy Code. Unimpaired; deemed to accept. Class 2 - Other priority claims: Each holder would receive treatment consistent with section 1129(a)(9) of the Bankruptcy Code. Unimpaired; deemed to accept. Class 3A - Drawn DIP TLC claims: Each holder would receive a pro rata share of the loans under the new first lien exit term facility on a dollar-for-dollar basis and, if drawn DIP TLC claims exceed 100 million, a pro rata share of the “DIP TLC New Equity Distribution.” The term sheet defines the “DIP TLC New Equity Distribution” as a percentage of new equity equal to: (i) the “Adjusted Drawn DIP TLC Claims” (the amount of drawn DIP TLC claims minus the lesser of (a) the total amount of all drawn DIP TLC claims and (b) 100 million) divided by the sum of total first lien/DIP claims plus “Adjusted 2L Notes Claims” (70% of second lien notes claims), (ii) multiplied by 2. The DIP TLC new equity distribution is subject to dilution by the management incentive plan and the new LC equity allocation of 1.25% of new reorganized equity. The percentage of the drawn DIP TLC equity distribution cannot result in a lower recovery for all holders of both first lien Series 1 notes claims and second lien secured notes claims taken as a whole than if (x) all adjusted drawn DIP TLC claims were treated as first lien notes claims and (y) such holders had received no recovery on account of their second lien notes claims. Impaired; entitled to vote. Class 3B - Undrawn DIP TLC Claims: Each undrawn DIP TLC claim would be exchanged on a dollar-for-dollar basis into the new LC facility. Impaired; entitled to vote. Class 3C - DIP TLC fee claims: Each holder would receive, for every dollar of DIP TLC fee claim it holds, one dollar of principal face amount of the new first lien exit term facility. Impaired; entitled to vote. Class 4 - Prepetition LC facility claims and first lien notes claims: Each holder would receive its pro rata share of the “1L Equity Distribution.” The term sheet defines “1L Equity Distribution” as the percentage of new equity equal to (x)(i) prepetition LC facility claims plus first lien notes claims divided by (ii) total first lien claims plus “Adjusted 2L Notes Claims” (70% of second lien notes claims), multiplied by (y)(i) 100% of new equity minus (ii) the drawn DIP TLC equity distribution. The first lien equity distribution is subject to dilution by the management incentive plan and the new LC equity allocation of 1.25% of new reorganized equity. Impaired; entitled to vote. Class 5 - Second lien notes claims: Each holder would receive its pro rata share of the “2L Equity Distribution.” The term sheet defines “2L Equity Distribution” as the percentage of new equity equal to (x)(i) “Adjusted 2L Notes Claims” (70% of second lien notes claims) divided by (ii) total first lien claims plus adjusted second lien notes claims multiplied by (y)(i) 100% of new equity minus (ii) the drawn DIP TLC equity distribution. The second lien equity distribution is subject to dilution by the management incentive plan and the new LC equity allocation of 1.25% of new reorganized equity. Impaired; entitled to vote. Class 6 - Third lien notes claims: Each holder of would receive treatment in a manner consistent with section 1129(a)(9) of the Bankruptcy Code for the secured portion of its claim, if any. To the extent the third lien claim exceeds the value of the collateral and is deemed an unsecured deficiency claim, the holder would receive its pro rata share (along with unsecured notes claims and general unsecured claims) of the liquidation value of the unencumbered assets held by the company party against which the claim is allowed. Impaired; deemed to reject. Class 7 - Unsecured notes claims: Each holder would receive its pro rata share (along with third lien deficiency claims and general unsecured claims) of the liquidation value of the unencumbered assets held by the company party against which the claim is allowed. Impaired; deemed to reject. Class 8 - General unsecured claims: Each holder would receive its pro rata share (along with third lien deficiency claims and unsecured notes claims) of the liquidation value of the unencumbered assets held by the debtor against which the claim is allowed. Impaired; deemed to reject. Class 9 - Parent interests: Parent interests would be canceled, released, discharged and extinguished, and holders would not receive any distribution on account of such interests (except equity interests held by SoftBank for which SoftBank contributes its claims in exchange for the retention of its equity interests). No such contribution or retention by SoftBank would occur if it would increase the amount of cancellation of indebtedness income realized by the debtors or otherwise have an adverse tax effect on any of the debtors. Impaired; deemed to reject. Class 10 - Section 510(b) claims: Section 510(b) claims would be canceled, released, discharged and extinguished, and holders would not receive any distribution on account of such claims. Impaired; deemed to reject. Class 11 Intercompany claims / intercompany Interests: Each intercompany claim and interest would be canceled, reinstated, converted to equity or otherwise set off, settled or distributed at the option of the debtors with the consent of the required consenting stakeholders. Either unimpaired or impaired; deemed to accept or deemed to reject, as applicable. As noted above, under the restructuring term sheet, the new board would include seven directors: three appointed by SoftBank, two appointed by members of the ad hoc noteholder group, one independent to be mutually agreed upon, and the CEO. The RSA does not specify the percentage of reorganized equity allocated to a management incentive plan. The restructuring term sheet provides that the plan would include debtor and nondebtor releases for the debtors, consenting stakeholders, DIP TLC issuing banks, DIP TLC agents, other agents and their related parties, subject to an opt-out right. The plan would include exculpation provisions in favor of the debtors, independent directors, the official committee of unsecured creditors and official committee members. The RSA includes the following milestones: Nov. 9: Entry of interim cash collateral order; Dec. 11: Entry of final cash collateral order and final DIP TLC order; Feb. 4, 2024: Filing of chapter 11 plan, disclosure statement and disclosure statement motion; Feb. 24, 2024: Entry of order approving disclosure statement; and March 5, 2024: Entry of order confirming chapter 11 plan and occurrence of the effective date. Cash Collateral Initially, debtors will use their prepetition lenders’ cash collateral to fund business operations, pay landlords and vendors, support member programs, and to fund working capital needs, capital expenditures and chapter 11 administrative expenses, among other things.The debtors say that the prepetition secured parties have consented to the use of cash collateral. The debtors would provide the prepetition secured parties with adequate protection, according to priority, in the form of adequate protection liens, Bankruptcy Code section 507(b) superpriority claims, payment of certain first lien secured party professional fees and expenses, and debtors’ financial reporting obligations, all in accordance with an approved budget. The adequate protection liens would attach to avoidance actions and the proceeds thereof, subject to entry of a final order. The debtors also propose waivers of the estates’ right to seek to surcharge collateral pursuant to Bankruptcy Code section 506(c), the “equities of the case” exception under section 552(b) and of the equitable doctrine of “marshaling” and any other similar doctrine with respect to any of the prepetition collateral and adequate protection collateral for the benefit of any party other than the prepetition secured parties. The Oct. 31 forbearance agreement and satisfaction letter with SoftBank under the credit agreement extended the debtors’ liquidity runway to allow for an orderly chapter 11 filing, removed the requirement that the debtors repay all outstanding balances under the LC facility and cash collateralize 105% of all undrawn amounts under the LC Facility within five days, and authorized the debtors to continue to use cash collateral on a consensual basis. “Because of the swift and decisive action taken by the Debtors and their stakeholders in advance of the Petition Date, and because of the support of the Consenting Stakeholders, the Debtors do not require debtor-in-possession financing at the outset of these chapter 11 cases,” Tolley notes. As of the petition date and pursuant to the satisfaction letter, WeWork owed SoftBank over 1.6 billion under its LC facilities after Softbank paid 180 million on the senior tranche, 543 million on the junior tranche and 51 million in fees, in addition to posting 809 million if cash collateral for the undrawn senior tranche. The debtors entered bankruptcy with 164 million of cash and projected to burn 119 million of cash flow over the next 13 weeks, resulting in a cash balance of 45 million as of Feb. 2. Over the next 13 weeks, the debtors forecast cumulative cash receipts of 283 million, rent of 217 million, other operating costs of 167 million and professional fees of 17 million. The debtors’ cash collateral budget is shown HERE. The lien challenge deadline is 60 calendar days following formation of an official committee of unsecured creditors and 75 calendar days after the petition date for parties in interest with requisite standing other than the UCC. DIP TLC and Exit Facilities WeWork intends to seek approval of a senior secured 750 million DIP term loan C facility and cash collateralized letter of credit facility. The terms of the DIP financing are in an undisclosed DIP term sheet. The exit term loan facility of up to 100 million on account of the first 100 million of drawn DIP TLC claims (plus the dollar amount of the DIP TLC fee claims) includes the following terms and conditions: (a) 8.5% fixed-rate cash interest, paid quarterly; (b) four-year tenor; (c) no call protection; (d) free transferability but must be sold in its entirety; (e) customary covenants; (f) first lien claim on all assets, ranking pari passu with the new LC facility (including pari passu at each guarantor entity); and (g) such other terms and conditions as are agreed by the required consenting stakeholders. Other Motions The debtors also filed various standard first day motions, including the following: Motion for joint administration The cases will be jointly administered under case No. 23-19865 (JKS). Motion to establish trading procedures WeWork seeks to establish trading procedures for its existing classes of common stock or any beneficial ownership thereto and to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors say they have about 7.6 billion of U.S. federal NOLs. Motion to pay prepetition employee wages and benefits The debtors seek authority to pay approximately 5.9 million in prepetition compensation and benefits claims held by about 1,500 employees. Motion to use cash management system The company has 1,004 bank accounts, of which 560 are owned and controlled by the debtors, and the remaining 444 are owned by nondebtor affiliates. The debtors’ primary cash management bank outside of the Asia-Pacific cash management system is JPMorgan Chase Bank. Its primary cash management banks in the APAC cash management system are HSBC Bank and JPMorgan. Cash management banks in the nonpool EMEA cash management system used in the United Arab Emirates, Russia, Norway, Hungary, Poland and the Czech Republic include JPMorgan, Citibank Europe, Unicredit Bank, PKO Bank, AO Raiffeisenbank and Skandinaviska Enskilda Banken. Motion to pay prepetition claims of critical vendors Motion to maintain insurance programs Motion to establish notice and case management procedures Motion to enforce worldwide automatic stay Application for expedited consideration of first day matters Motion to approved procedures to assume or reject executory contracts Motion to reject certain unexpired leases and abandoned personal property Motion to extend time to file missing schedules Motion to file consolidated list of creditors Motion to pay prepetition taxes and fees Motion to provide utilities with adequate assurance Application to appoint Epiq as claims agent Motion to maintain customer programs Motion authorizing WeWork Inc. to act as foreign representative Share this article: This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). 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