What’s Going On Here?

WeWork has skipped some of its rental payments, and that’s had knock-on effects for bond investors.

What Does This Mean?

• Clearly, stay-at-home orders mean there aren’t many people paying WeWork to rent office space.
• Rental and mortgage payments are similar to bonds in that they both pay a regular income for a specific amount of time. Investors, then, might want to benefit by buying into “commercial mortgage-backed securities” (CMBS). So when the company decided not to pay its rent on some properties, other payments reliant on that income – like CMBSs’ – suddenly found themselves at risk.

CMBS are fixed-income investment products that are backed by mortgages on commercial properties. An MBS is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy. 

Why Should I Care?

For markets: Stand together, fall together.

• Given the company’s sheer size, WeWork caused bigger-than-normal ripples in the bond market.
  • One particularly risky CMBS (more than 50% office of which is rented by WeWork) – has lost almost 30% of its value.
• That’s likely down to the often short-term nature of WeWork’s leases: the company is now more at risk of rising vacancies than traditional office buildings, which tend to lock in tenants for longer.

The bigger picture: Great views, purgatorial location.

• Investing in real estate is often thought to be a relatively safe haven, even in a downturn. But since real estate stocks and bonds are more liquid markets that quickly reflect property firms’ changing fortunes, those investments are much more at risk of dips in value.
  • Investors in mall operator Intu, for one, only received 30% of the rent it was owed in March.

Content source: Finimize. (2020) Awkward Silences. Available at: https://www.finimize.com/wp/news/awkward-silences/ [Accessed on May 13, 2020]