Reuters / Kate Munsch
- WeWork marks the start of the zombie company collapse, according to New Constructs' David Trainer.
- The coworking giant recently filed for bankruptcy after shares plunged more than 99% in value.
- There are likely hundreds of zombie companies that risk facing the same fate as WeWork, Trainer suggested.
WeWork's collapse is just the beginning: there's likely a wave of zombie bankruptcies that are about to hit the market, according to Wall Street veteran and investment research firm manager David Trainer.
The New Constructs CEO pointed to the demise of WeWork spanning the past few years, with shares crashing over 99% in value since making their debut on the stock market in 2021.
That led the company to file for bankruptcy this week — a fate will likely be realized for other "zombie companies," Trainer said, referring to firms that are unprofitable, often heavily indebted, and "burn through ridiculous amounts of cash."
"WeWork's bankruptcy is just the beginning and we expect many more zombie companies to claim bankruptcy," Trainer said in a note on Wednesday.
Trainer estimated that there were likely hundreds of so-called zombie firms, many of which went public in 2021, during the stock market's IPO boom.
WeWork was one such company that flashed early warning signs, Trainer suggested. The coworking giant was originally valued at $47 billion in 2019, which made it the "most ridiculous IPO" of the year, Trainer said at the time. Just before going public in 2021, the company's valuation was then slashed to around $10 billion.
His warnings echo that of other Wall Street forecasters, who have warned for a wave of bankruptcies and distressed debt to hit the market as tighter financial conditions and higher interest rates take a toll on over-borrowed zombie firms.
Bond yields, which influence borrowing costs across the economy, have eased since notching a 16-year-high in recent weeks. But investors are still expecting interest rates to stay higher-for-longer, which could spell trouble for heavily borrowed firms.
Bankruptcies and defaults could peak sometime between now and the first quarter of 2024, Charles Schwab estimated. Fitch Ratings forecasted high-yield bond defaults to hit 4.5%-5% by the end of this year, while Bank of America estimated a $46 billion wave of distressed debt coming in 2024 as corporate defaults continue to accelerate.
"WeWork's bankruptcy is just the beginning of the zombie company collapse," Trainer later added. "Investors need to focus on companies that actually make money and have viable business models. Burning cash is not a business model."
It's worth noting though that WeWork filed for Chapter 11 bankruptcy protection on Monday, which allows a company to stay in business while it gets its finances in order. The company's press contact did not immediately respond to Insider's request for comment.