Fitch Ratings downgraded its long-term issuer default rating on coworking giant WeWork Cos. to B from BB-, and assigned a long-term issuer default rating of B to its parent, The We Co.
The outlook is stable. The rating agency also downgraded the company's senior unsecured note rating to B-/RR5 from BB-/RR4, and assigned a BB/RR1 issue rating to its senior secured delayed-draw term facility.
Fitch downgraded the ratings following The We Co.'s Aug. 14 filing for an IPO.
The rating agency attributed the downgrade to WeWork's underperformance as compared to what it expected at the time of the initial rating, specifically with respect to its progress toward a normalized margin.
Fitch noted that WeWork indicates profitability as a managed outcome and that it will defer its inflection point several years out from where the rating agency initially expected it to be. Fitch believes that WeWork is deferring the inflection point by raising capital after its bond offering and pro forma to the IPO and senior secured transactions.
Fitch expects weaker revenue growth for WeWork in the near term amid lower average revenue per physical member, or ARPPM, although the rating agency said this could be offset to a degree by decreased location operating rents in geographies where ARPPM is lower.
The rating agency said it now expects ARPPM to decrease further instead of normalizing and expects the company's growth in China and Latin America to represent a sizable portion of its business over the long term.
Fitch also believes that the company's willingness to maintain the CEO's control will expose the company to key-person risk.