Troubled WeWork is in no condition to withstand coronavirus

Even before coronavirus struck, WeWork had established itself as a cautionary exemplar of the 21st-century economy: how dreams of being an iconoclastic “disruptor” can turn to dust.

The shared-office space company was forced to abandon a $20bn float last September after investors balked at the eccentricities of its co-founder and then chief executive, Adam Neumann, and expressed doubts about the financial viability of what lay beneath its slick marketing.

Now, some analysts believe WeWork could become a casualty of the current crisis, hit by falling demand from tenants. In a presentation to investors on Thursday, the company said it could not reasonably estimate the impact of Covid-19 on its financial position “but we anticipate that it will likely have a negative impact”.

Analysts were less circumspect. “You couldn’t pick a company that was more impacted by Covid-19 than WeWork,” said John McClain, portfolio manager for US investment firm Diamond Hill Capital Management, pointing to the US firm’s model of taking out long leases from property companies and then parcelling them out on short-term sublets to other companies seeking office space.

“They broke the golden rule … They have fixed costs for a long time while their customers can cancel their contracts. They are just going to go to straight cash-burn mode.”

WeWork expanded rapidly under the stewardship of Neumann, but this was based on a leasing model that deferred the rents it owed landlords in return for higher payments later on. In October, Neumann was forced to leave the company in the wake of the failed flotation, and its largest shareholder, SoftBank, stepped in with a financial rescue package. But despite cutting staff and cancelling expansion plans, it has continued to lose money.

Last week it was reported that SoftBank was reconsidering plans to increase its stake in the business, throwing into doubt the $1.1bn slice of a $3.3bn cash injection that was tied to the purchase.

In a letter to employees, WeWork’s chairman, Marcelo Claure, and new chief executive, Sandeep Mathrani, said that the remaining $2.2bn investment was unaffected. The letter said “there should be no doubt in SoftBank’s support of WeWork”.

But Alex Snyder, at US investment management firm CenterSquare, said that money might not be enough. “Even with SoftBank’s resources, WeWork’s life is finite if this pandemic-induced crisis persists,” he said. “Can WeWork sustain a few months of being shut down? Probably. A year? Probably not.”

WeWork said more than four in 10 of its clients were large businesses committed to contracts averaging 23 months.

However, McClain said its small and medium-sized clients would be a problem for WeWork, as many were struggling and likely to look to cut costs if they did survive. On top of this, he questioned whether people would want to work in the large open-plan offices the company typically provides.

John Colley, associate dean at Warwick Business School, said he did not expect SoftBank to go ahead with the cash injection. “I don’t think they’ve got very long. I can’t imagine that SoftBank will make the final payment and then the banks will be in touch with them,” he said. “I don’t see them making it out of this.”

Colley said the company had two problems. “At the moment they can’t operate but they are still going to be racking up all the rents and premises costs. What’s worse is that people have discovered that working from home is not so bad.”

Snyder said he did expect most customers to return but he acknowledged that “a potentially large subset” had learned to work remotely and would continue.

McClain said the cost of the company’s bonds had fallen to a level that indicated it was likely to default this year, and that this would happen “irrespective of whether SoftBank were going to provide the capital”.

WeWork declined to comment on its financial situation, but said that it had taken measures to protect employees and members from coronavirus. It said its buildings were open across Europe and most of North America, with extra cleaning and hygiene provision in place.

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Sunak’s self-employed subsidy to fight Covid-19 has faults but is fair

A notable feature of Britain’s highly flexible labour market is the high number of people who are self-employed. More than five million people work for themselves – and the number has been rising steadily since the financial crisis just over a decade ago.

Some self-employed workers are extremely highly paid but the majority are by no means coining it in. Many of them have just seen their income disappear after the government quarantined vast chunks of the economy as a result of Covid-19.

So when Rishi Sunak announced last week his plan to subsidise the wages of employed workers it was inevitable that the chancellor would have to come up with something comparable for the self-employed as well.

UK government to pay 80% of wages for those not working in coronavirus crisis

To be sure, a self-employed scheme presents more challenges, because some workers have more than one job and are both employed and self-employed. The Treasury wanted to make sure it had a mechanism for delivering financial help and ensure that any plan was fair to both the employed and self-employed.

In the end, the scheme for the two groups looks quite similar. Any self-employed person affected by the government shutdown will be able to claim a direct cash grant worth 80% of their profits averaged over the past three years up to a maximum of £2500 a month. Those with profits of more than £50,000 a year will not be eligible.

If every self-employed person claimed the grant it would cost the exchequer in the region of £16bn but not everyone will lose their livelihood. The Resolution Foundation think tank estimates that the price tag will be around £10bn – relative small change in the context of the £100bn-plus of spending pledges the chancellor has already announced over the past two weeks.

When the crisis is over, the chancellor served notice that the self-employed can expect to pay the same tax and national insurance as employed people. Equal treatment now means equal treatment later, he strongly hinted.

Sunak is aware that the scheme, drawn up in haste, has its faults. Among them is the length of time it will take for people to get the grant – June at the earliest – the lack of support for those who have only recently become self-employed and the real possibility of fraud. But in the light of the sharp rise in the number of claimants for universal credit and the horrendous jump in jobless claims in the US, the chancellor could not afford to let the best be the enemy of the good.

The chancellor was candid about the challenging times ahead. The economy was softening even before the Covid-19 pandemic. Even with an unprecedented amount of financial support from the state, jobs are going to be lost. For many, it is already too late.

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Amazon struggles to halt tide of coronavirus profiteers

Amazon is struggling to prevent profiteering as “bad actors” attempt to cash in on coronavirus fears by raising prices of masks and sanitisers by as much as 2,000%.

The US company said it had removed “tens of thousands” of listings but analysts have likened the situation to a game of whack-a-mole with products reappearing soon after deletion.

“There is no place for price gouging on Amazon,” the company said. “We are disappointed that bad actors are attempting to artificially raise prices on basic need products during a global health crisis and we have recently blocked or removed tens of thousands of offers.” Staff were monitoring listings around the clock, it added.

With many products sold out or being rationed in stores, shoppers have turned to online retailers to order masks, hand sanitiser and even hazmat suits. Other websites including eBay, Walmart and Etsy have also struggled to get a handle on profiteering by sellers.

The rogue listings belong to the third-party sellers which generate about half of all sales on the Amazon site. These sellers list items directly on its marketplace and in some cases use the company’s logistics to get their products to customers. Traders who break the company’s “fair pricing policy” risk having their accounts suspended or their selling privileges removed.

Last month the World Health Organization expressed concern about some misleading Amazon listings, including fake coronavirus treatments – leading to the removal of more than 1m products from the site.

A search for “coronavirus” on the website now brings up disparate products ranging from £9 nasal sprays that promise to treat the “cause of virus infections” to £20 medical ID bands and testing kits for dogs and cats.

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Analysts and investors lose their bearings in the coronavirus fallout

“Make this stop.” The headline on Bank of America’s rejig of its economic forecasts for Europe summed up the mood in financial markets.

City analysts and investors have lost their bearings. How do you make sensible estimates about the financial fallout from a virus with the potential, as in parts of China, to bring economic activity to a standstill?

Spreadsheets that plot the interplay of interest rates, government spending and corporate earnings are unreliable when the main risks are unknowable. How far will infection spread, and for how long, and how effective will prevention policies be? And, just as importantly for calculating economic impacts, how much damage would draconian containment measures do? Closed schools and factories and travel bans have heavy short-term economic costs.

For what it’s worth, Bank of American’s pundits now reckon global economic growth will slip from 3.1% to 2.8% in 2020, but that counts as cheerful versus some predictions. Others are already predicting outright global recession, which almost nobody was forecasting just a week ago.

In the circumstances, it’s hard to describe this week’s stock market plunges as irrational. Comfortable assumptions have been overthrown suddenly. The S&P 500, the main US index, hit an all-time high only 10 days ago, with most investors seemingly happy to believe the coronavirus crisis would be a China-only affair that would be overcome quickly.

Once that complacent view was shattered, violent stock market moves were almost inevitable.

Look at British Airways-owner IAG as a small example. “Given the ongoing uncertainty on the potential impact and duration of Covid-19, it is not possible to give accurate profit guidance for 2020 at this stage,” the airline said on Friday, stating the obvious.

So what’s a fair price for its shares? They’ve fallen 25% in a week but almost any level can sound vaguely reasonable because the range of possible outcomes is suddenly vast. The worst disruption could pass within a month; alternatively, the entire airline industry could face a summer wash-out followed by years of upheaval if, as some suggest, the coronavirus ushers in a new era of de-globalisation in which companies shorten their supply chains.

In aggregate, this week’s stock market falls have been staggering. The approximate 10% fall in the MSCI All Country World Index – a proxy for all the world’s stock markets – equates to the evaporation of more than $5tn (£3.86tn) of stock market value.

The FTSE 100 index, London’s blue-chip index, has fallen 11% in a fashion that recalls 2008 after the collapse of US investment bank Lehman Brothers. As then, markets were initially slow to react to a major global event but then sold off steadily. The FTSE 100 fell only 3.9% on the day after Lehman’s failure but then plunged 27% in stages over six weeks.

In stock market terms, there are two key differences from 2008 – and neither is encouraging if you believe the coronavirus has the potential to spread fear for a long time yet.

First, as the S&P 500’s recent all-time high illustrates, this shake-out has started from elevated levels. Back in September 2008, when Lehman fell over, the credit squeeze had begun and stock markets were already about 20% off their peaks. This time, the change of direction has been screeching: the S&P’s move into “correction” territory, regarded as a 10% fall from a recent high, happened over six trading days – a record.

Second, back in 2008, central banks and governments rode to the rescue with a package of measures to save the global banking system and reignite growth. In the current era of trade wars and geopolitical tension, international cooperation feels far less likely to happen.

In any case, purely financial measures look the wrong tool for fighting the fallout from a healthcare crisis.

Bond markets already expect a cut in US interest rates, but rates are already below 1% in much of the western world, including in the UK and eurozone. And cheaper money doesn’t help an otherwise strong UK manufacturer that only needs a bespoke component that is stuck in a closed Italian factory.

Mohamed El-Erian, chief economic adviser at German insurer Allianz, put the point this way: “Central banks can counter financial dislocations but are unable to restart economic activity as they don’t reach the underlying disruption.”

Financial remedies might, of course, be more helpful once recovery has started after any coronavirus-created downturn. Credit guarantees, buying corporate bonds, ordering banks to be forgiving on loans – in other words, post-2008 policies – could accelerate the bounce-back.

But one has to hope that stage is never reached: it would imply a lot of economic damage beforehand.

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Market in turmoil over fears of a coronavirus-induced global recession

On the Monday after Lehman Brothers collapsed in September 2008, the FTSE 100 fell 3.9%, which we now know was a woefully complacent first take on events. London’s blue-chip index, then at 5,204, went on to shed another 1,400 points in the following six weeks.

It’s a point to remember when looking at the coronavirus “carnage” on stock markets this week. Short-term share price movements, such as Thursday’s 3.5% decline in the FTSE, don’t tell you much when truly big global events happen. Even the 8% fall this week feels severe but could anyone claim to be surprised, given the current coronavirus news flow, if the decline soon became 16%?

As in the weeks after Lehman’s collapse, investors crave reassurance when none is possible yet. It is almost certain, so the experts tell us, that an effective vaccine will be developed within a year or so, but the idea that the spread of the coronavirus could trigger a global recession this year, as thinktank Capital Economics suggests, is plausible speculation.

So too is Goldman Sachs’ warning that US companies could record zero earnings growth this year if coronavirus becomes widespread. Wall Street’s spreadsheets currently contain no projections remotely close to that outcome.

Equally, of course, it’s hard to estimate how much gloom is already priced in. China-reliant supply chains are creaking, as Apple and Microsoft and others have warned, but the hard-to-measure rate of recovery is what matters on that front.

It is, though, possible to say central bankers won’t be much help to investors or the economy any time soon. They, like everybody else, don’t know the scale of what’s coming. In any case, as Sir Jon Cuncliffe, a deputy governor of the Bank of England, said, monetary policy can’t do much about a “pure supply shock”, such as goods not arriving in the UK. Investors, one could say, are even more than in the dark than they were in 2008.

Persimmon shareholders have dodged a bullet

David Jenkinson will depart housebuilder Persimmon with shares in the company worth roughly £45m, his prize from the same absurd incentive scheme that bestowed £75m on his predecessor as chief executive, Jeff Fairburn.

Perhaps Jenkinson, only a year after replacing Fairburn, wants to spend more time with his winnings. Or perhaps he’s just recognised what was blindingly obvious to outsiders: Persimmon’s claims to cultural reform, and its pledge to improve the quality of its houses, lacked credibility while a veteran of the old regime was at the helm.

Any doubt on the latter point evaporated with the damning independent report that the board, to its credit, published last December: in short, Persimmon had been building too many shoddy homes that had fire risks; box-tickers ruled the roost; and the company saw itself as “land assembler and house-seller rather than a housebuilder”.

Customers now come first, says chairman Roger Devlin, and, if you look closely at Thursday’s full-year numbers, there is circumstantial evidence to support the boast. An extra £213m was invested in “work in progress”, the cost of actually finishing the job, rather the handing homes to buyers when they’re full of snags.

Harder evidence of true reform, and commitment to reputational improvement, can only judged over time. It is why Devlin would do well to appoint a non-insider to replace Jenkinson. Better still, go for somebody from outside the housebuilding industry, an insular sector that enjoys nothing more than marking its own homework.

In the meantime, Persimmon’s shareholders should count themselves lucky. In a normally functioning market, there would be a heavy price to pay for pursuing a strategy that short-changed customers but made executives as rich as Croesus. Instead, Persimmon is still achieving pre-tax profits of £1bn and still has a return on capital employed of 37%. Help to buy has a lot to answer for.

Bonus first, results later at Reckitt Benckiser

How executive pay also works: jackpot rewards are handed out before the costs of the chief executive’s vainglorious acquisition emerge.

Rakesh Kapoor earned about £100m during his eight years at Reckitt Benckiser, the Dettol-to-Durex consumer goods giant, but it’s only now that shareholders can see how his big bet from 2017 turned out.

Mead Johnson Nutrition, a baby milk firm bought for £13bn, ruined Reckitt’s full-year numbers on Thursday with a £5bn impairment charge. The acquired business is decent, it’s just that Reckitt paid far too much. Kapoor’s team thought more Chinese babies would be born, the company told its shareholders with a straight face.

“We look forward to a new decade,” proclaimed new boss Laxman Narasimhan. So, presumably, does Kapoor in comfortable retirement.

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