In class we discussed the unique role played by Special Purpose Entities (SPEs, also sometimes called Special Purpose Vehicles or SPVs), and in particular within the context of the We Work IPO and the decision taken to postpone its equity offering. In the Files 1(in the attachment) you will find a publication issued by Price-Waterhouse-Coopers (PWC) on the topic of SPVs. Please read the publication and then answer the following questions. Please do not be concerned with how long or how short your answers may be simply answer in a concise way with what you believe to be appropriate responses. You may discuss possible answers with others in class if you wish to do so, but the work you submit must reflect your own personal views.
The title of the publication is The next chapter, Creating an understanding of Special Purpose Vehicles. Why the reference to The next chapter what was the previous chapter that is implied here?
Why do you think PWC is providing this publication?
Within the 398 pages of its S-1 filing for the SEC which provides information relating to its IPO, We Work mentions SPEs twice, and in one of those instances cites that the parent company is guaranteeing about 10% of $45B in lease obligations, which means that the remaining 90% of obligations will not be supported by the parent company in the event of a distress situation. Because of this level of risk unsupported by the parent company, leasing companies will charge We Work higher lease costs which We Work will hope to pass on to tenants it is able to find. Ultimately, We Work shareholders will bear the risk of whether the company is able to find tenants for the lease obligations it has created. Below are the two references in the S-1 related to the SPEs (and if you are interested you can find the full S-1 filing in the Files 2(in the attachment) but you are not required to review it):
From page 27: While our leases are often held by special purpose entities, our consolidated financial condition and results of operations depend on the ability of our subsidiaries to perform their obligations under these leases over time. Our business, reputation, financial condition and results of operations depend on our subsidiaries ongoing compliance with their leases. We may determine that it is necessary to fund the lease payments of our subsidiaries beyond the terms of our limited parent guarantees (if applicable), in which case any difficulty of our subsidiaries in performing their obligations under our leases could affect our liquidity.
From page 122: The future undiscounted fixed minimum lease cost payment obligations under operating and finance leases signed as of June 30, 2019 were $47.2 billion. A majority of our leases are held by individual special purpose entities. As of June 30, 2019, we provided credit support in respect of leases in the form of corporate guarantees of $4.5 billion, outstanding standby letters of credit of $1.1 billion, cash security deposits to landlords in the amount of $268.3 million, and surety bonds issued of $183.9 million, although we may be obligated to make all required rental payments. In addition, individual property lease security obligations on any given lease typically decrease over the life of the lease, although we continually enter into new leases in the ordinary course of our business.
With reference to pages 8 and 9 of the PWC publication, what do you think are the top Key Risks and Key Benefits with respect to the We Works proposed use of SPEs in relation to its lease obligations? Do you think these were adequately explained in the We Work S-1? The initial market discussion of where We Works IPO might trade was at about $40 per share, and today it is thought to perhaps be closer to $20 per share do you think that this fluctuation may be due to the way We Work disclosed information related to the SPEs?
To recap, these are the questions you are being asked to address
The title of the publication is The next chapter, Creating an understanding of Special Purpose Vehicles. Why the reference to The next chapter what was the previous chapter that is implied here?
Why do you think PWC is providing this publication?
a. With reference to pages 8 and 9 of the PWC publication, what do you think are the top Key Risks and Key Benefits with respect to the We Works proposed use of SPEs in relation to its lease obligations?
Do you think these were adequately explained in the We Work S-1?
The initial market discussion of where We Works IPO might trade was at about $40 per share, and today it is thought to perhaps be closer to $20 per share do you think that this fluctuation may be due to the way We Work disclosed information related to the SPEs?
