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.

Jamie Dimon

  • 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. 

Read more:
Wall Street gave Adam Neumann up to $500 million he was going to
pay back after WeWork’s IPO. Now that the offering is pulled, banks
are scrambling to hammer out a solution.

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. 

Read more:
JPMorgan and UBS private wealth execs explain why they’re doing
more private share-backed lending to Silicon Valley. Both banks
have lent to WeWork CEO Adam Neuman

Lending relationships

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. 

WeWork shares

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.


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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.