
SoftBank and WeWork Are as Bad as Each Other - LordAtlas
https://www.bloomberg.com/opinion/articles/2019-09-11/softbank-and-wework-are-as-bad-as-each-other
======
cs702
Wow, it's _high leverage_ on top of _unusual leverage_ on top of _high
leverage_. Quoting from the OP:

"Boil things down and WeWork is a leveraged real estate company[a] propped up
by a leveraged pool of late-stage venture capital (the Vision Fund)[b], which
is in turn controlled by a leveraged telecoms and technology company
(SoftBank).[c]"

It's like Peter borrowing a large amount of money to invest with Paul, who
then, unusually, borrows on top of Peter's investment to invest with Mary, who
then borrows another large amount of money on top of Peter's investment to
invest in her own scheme. What happens if Mary can't pay back?

\--

[a] WeWork has borrowed and wants to borrow more to finance operations, both
in the form of corporate debt and in the form of long-term lease commitments:
[https://www.sec.gov/Archives/edgar/data/1533523/000119312519...](https://www.sec.gov/Archives/edgar/data/1533523/000119312519220499/d781982ds1.htm)

[b] The Vision Fund has borrowed money on top of Softbank's investment:
[https://archive.is/o/9I97g/https://www.ft.com/content/b6fe31...](https://archive.is/o/9I97g/https://www.ft.com/content/b6fe313a-4add-11e7-a3f4-c742b9791d43)

[c] Softbank has borrowed money to invest in the Vision Fund:
[https://archive.is/o/9I97g/https://www.bloomberg.com/news/ar...](https://archive.is/o/9I97g/https://www.bloomberg.com/news/articles/2019-02-17/softbank-
says-leverage-not-a-problem-rating-firms-not-so-sure)

~~~
benj111
As far as the debt in the vision fund is concerned, that all seems to be held
by investors who already have skin in the game. For the company this seems to
be fundamentally safe? the interests of shareholders and bond holders are
aligned, bond holders won't be clamouring to wipe out the shareholders and
visa versa.

I'm sure you'll find some leverage if you look at Softbanks debt holders also.

~~~
baybal2
I find good parallels in how today's "high finance" begins to resemble late
Soviet Union's economy.

There was an extreme amount of pointless and doomed enterprises, but given
just how much "national capital" was invested, and how much credibility
economic planners had at stake for their imagined economic theories, an
absolutely ridiculous amount of self-deception was made.

And from that on, lies and economic data falsification went into a downward
spiral. The amount of "funny money" being going around state institutes in a
convoluted scheme of mutual bailouts, reciprocal investment deals, capital
parking arrangements, "kickback backed credits," and LBOs (Yes! The Union had
LBOs, at least on paper) began to outnumber the amount of cash going exchanged
in the tiny real economy by triple digits.

~~~
benj111
Ignoring the last paragraph, you just seem to be describing a bubble, which
the vision fund could well turn out to be.

Its just human nature, no political or economic system is immune.

~~~
vkou
What the grandparent poster described in the first two paragraphs is a typical
large company. You could replace the words 'late Soviet Union' with 'almost
any Fortune 500 firm', and it would be an accurate description of its internal
economy.

------
gringoDan
Between WeWork and Uber (which is trading at a valuation below its raise in
May 2016), SoftBank's Vision Fund isn't looking so hot. How will this affect
other companies who took money from SoftBank?

I wonder if some of these companies have painted themselves into a corner by
accepting such high valuations. Each round of financing is coming from greater
and greater fools...except the public markets are not as foolish as SoftBank
and sovereign wealth funds. This isn't going to be good for the employees who
want some liquidity.

------
avemuri
They also own close to a majority stake in OYO, with pretty much the same
story. OYO is also entering coworking now after Softbank had to scale back on
their planned wework investment. The common thread seems to be that real
estate has a massive market size, in trillions, making it easier to tell a
bigger and bigger story and boost valuations.

~~~
avisser
It stopped being cool hiring 10 engineers and a nice space in San Francisco,
burning $250k / month.

Or maybe there's so _much_ VC money that it's someone's job to invest _all_ of
it. And you can't do that $250k at a time.

Someone surely is incentivized to make these investments outside of any long-
term payback. Perhaps they fear investors will take their millions back if it
stays fallow too long?

~~~
onlyrealcuzzo
I think a reason these valuations "seem" out of line to most people is because
there is simply so much money sloshing around. No one has time to write
million dollar checks anymore. Almost anyone who has that much capital has so
much capital that it doesn't make sense. More and more capital is focused on a
smaller and smaller sets of companies.

------
benj111
" Son may turn out to be the Victor Frankenstein of the cheap-money era. He’s
helped create a monster that could do him serious harm."

Why is it that all Frankenstein metaphors are poor? This one at least doesn't
confuse the monster and the creator. In the story it's Frankenstein trying to
destroy the monster, not the other way around.

In the spirit of productive discourse I'd suggest the sorcerers apprentice as
a better comparison.

~~~
ineedasername
Not only that, but the Creature was rather intelligent and civilized to an
extent, it's actions the result of the abandonment by its creator that it
suffered at a critical moment. An abandonment cause by horror at a physical
appearance, which in turn caused the Creature to be horrible in actions as
well as appearance.

I'm not sure I've ever seen it adequately used as a metaphor that rose above
the "Oooh, it's a monster!" level.

~~~
plink
In this metaphor, it’s unlikely that either WeWork or Uber could be taken
aback by suddenly viewing their reflections in a mirror. The horror is common
knowledge to everyone, excepting perhaps the money blinkered investors.

------
thorwasdfasdf
I worry that once WeWork fails, it will discourage other companies/innovators
from getting into the realestate sector which desperately needs more
innovation and progress.

~~~
jonknee
It might also discourage other companies from getting into the fraud/scam
sector, which would be great.

~~~
ska
That seems optimistic.

------
neonate
[http://archive.is/9I97g](http://archive.is/9I97g)

------
bogomipz
The article states: >"Neumann bought properties and rented them to WeWork"

Does anyone know where the money to buy properties came from? Was this his own
money? VC money?

~~~
vkou
Loans backed by his shares in WeWork, and by promises of rental cashflow from
letting the properties out to WeWork.

This makes a fantastic amount of money for everyone involved, as long as
WeWork stock is valued > the price of toilet paper, and as long as demand for
shot-term office real estate continues to be high. If either of these
assumptions fail to hold, there are going to be very serious problems.

There's no conflict of interest in this sort of self-dealing, none
whatsoever...

~~~
bogomipz
Wow - borrowing from Peter to pay Paul. I'm curious if you or anyone else
knows who underwrote such a loan? I'm guessing it wasn't a commercial bank?
Where does the money come from to do the debt servicing on those loans?

~~~
vkou
The debt servicing comes from the rental income. You submit to the lender a
business plan of how you are going to use the borrower money, how your shares
act as collateral, and how you will use the cash flow of the rental income to
make interest payments.

It's no different then any other corporate loan.

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tibbydudeza
"fair value of holdings" ... yikes ... magic pixie dust.

