JPMorgan has a years-long, multi-faceted relationship with WeWork. Here’s what questions Wall Street analysts will have for the bank when it reports earnings next week.
- Earnings season for big banks kicks off next Tuesday, with JPMorgan among the firms turning in third-quarter results.
- JPMorgan has worked with WeWork and its co-founder Adam Neumann in several capacities, including would-be lead underwriter on a recently failed IPO.
- No analysts we talked to called out specific expectations for JPMorgan writedowns on WeWork. Some said questions about the IPO are expected given its high profile.
- WeWork-related topics that could draw attention include JPMorgan’s lending situation with the company, and how it’s valuing WeWork investments. Other issues like rate cuts and net interest income are also in the spotlight.
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Earnings season for big banks kicks off next week, and JPMorgan is due to report on Tuesday.
In light of WeWork’s failed IPO, we asked analysts who cover the bank how its long history with the co-working giant could play out in third-quarter results.
The WeWork-related topics most likely to draw attention will be JPMorgan’s credit situation with the company, as well as how it values the WeWork shares it’s invested in.
JPMorgan was set to be lead underwriter on the We Company’s failed IPO, had put together a financing package continent on the offering, has arranged bank facilities for the company, and is among lenders that lent to now-former WeWork CEO Adam Neumann. Funds managed by JPMorgan were early WeWork investors.
“I absolutely think that it will come up. The relationship was significant, it was a huge, high-profile IPO that was canceled, and reputationally, the deal being canceled with JPMorgan as the lead is not positive,” James Shanahan, analyst at Edward Jones, told Business Insider.
WeWork is seeking a $1 billion lifeline from SoftBank, its biggest investor, which it hopes to parlay into a $3 billion debt deal with JPMorgan, according to a Reuters report on Monday. WeWork’s new co-CEOs are meanwhile planning huge job cuts and looking to sell non-core businesses.
To be sure, JPMorgan and other banks are also grappling with factors like Fed interest rate cuts and general macroeconomic and political uncertainty. Analysts are looking for color on those topics and potential impacts on net interest income, loan growth, and trading and investment banking revenue.
And some said WeWork is not setting off any alarm bells, especially given JPMorgan’s sheer size.
“It’s a headline, don’t get me wrong. But when you have a balance sheet the size of theirs, where total assets now are $2.7 trillion, and total loans are about $950 billion, it’s not something that’s going to derail the company,” RBC Capital Markets analyst Gerard Cassidy told Business Insider.
Morgan Stanley analysts devoted a section of a big-bank earnings preview to potential WeWork writedowns. But they believe JPMorgan would avoid a hit because of how it has accounted for private investments.
JPMorgan did not immediately respond to a request for comment.
Analysts will have their eyes on any potential credit-related issues tied to lending to WeWork and Neumann.
“If there’s any earnings implication within third-quarter results, it would have to be credit-related,” said Shanahan.
Neumann has referred to JPMorgan CEO Jamie Dimon his “personal banker,” according to Vanity Fair, and Business Insider reported that Dimon and Neumann met in late September to hammer out how to get the IPO and financing back on track (that was before WeWork pulled the offering entirely.)
“It’s something that we’re all paying attention to of course — it’s not too often that you find out ahead of time who has the credit relationships with large companies,” Cassidy said. WeWork’s S-1 filing detailed the co-working company’s and Neumann own borrowing from JPMorgan and others.
“It wouldn’t surprise me if the question comes up, and it wouldn’t surprise me if we hear a response that ‘we don’t talk directly about relationships with our customers,'” Cassidy said.
Last week, we reported Neumann is working with banks to consider new terms for the $500 million credit line he took out from JPMorgan, UBS, and Credit Suisse before the failed IPO. He’s drawn down $380 million, and the credit line is backed by WeWork shares.
“Presumably there’s some equity value in WeWork still, and that would be theoretically recoverable. But that’s where I would see some issues for JPMorgan — if they determine that some portion of the outstanding debt that they have with WeWork is presumed to be uncollectable or impaired in some way. You may see loss provisions,” Shanahan said.
Neumann also borrowed $97.5 million from JPMorgan across products including mortgages secured by personal property.
One place to keep an eye on is the bank’s total delinquent or non-performing loans. Should the relationship with WeWork and Neumann result in that total as a percentage of overall loans rising, the bank could address that change.
“That might be something that would get called out. But we don’t expect it to be delinquent,” Cassidy said.
When Jefferies announced results in late September, it took a writedown of $146 million on its WeWork stake.
Jefferies said in a statement the writedown as of the end of August reflected uncertainty around timing and pricing of an IPO, and that “as the facts at We become clearer, further adjustments may be made.”
That caught the eye of large-cap bank analysts at Morgan Stanley. They wrote in an Oct. 4 note that it’s possible banks like JPMorgan and Goldman Sachs, both early investors in WeWork, could take similar hits.
However, they said because of how JPMorgan appears to be valuing WeWork shares, they did not envision a writedown this quarter. The note’s key questions for JPMorgan’s analyst call included the bank’s loan growth and credit outlook, IBD pipeline, and “how to manage conflicts in the business model,” among other factors.
Those analysts did estimate a $264 million WeWork writedown in Goldman’s investing and lending business, which houses the firm’s own bets, saying Goldman typically takes “event-driven” write-ups or write-downs.
Pulled IPO, knock-on effects
With the WeWork IPO shelved, JPMorgan is no longer positioned to rake in about $100 million in fees from that offering, plus a $50 million structuring fee for $6 billion in debt from various lenders contingent on WeWork raising $3 billion by the end of 2019.
But those fees wouldn’t have been booked until they were received by JPMorgan, so any fee income from an IPO and JPMorgan structuring financing would have accrued in the fourth quarter.
To the extent that the failed IPO process reflects an opportunity cost in terms of compensation or other expenses, there’s likely to be little visibility or impact.
“Because JPMorgan is so large, I would be surprised if they had to call out the costs associated with taking the company public and the offering was pulled,” Cassidy said, noting that while WeWork was going to be a “good-size offering,” it’s not big compared to JPMorgan’s total balance sheet.
WeWork had been valued at $47 billion in its last SoftBank-backed funding round, but according to media reports mulled massive valuation cuts to pull off going public.
Then there’s the question of what knock-on effects WeWork’s flop and rocky public debuts for money-losing companies like Lyft and Uber could have on other planned IPOs.
“I think the markets could support IPOs, but not when there’s been such a poor track record recently,” Shanahan said.