Subway debt sale apparently breaks record

Subway’s debt sale is proving popular, according to Bloomberg. | Photo: Shutterstock.

Subway may have lost its status as the world’s largest restaurant chain by number of locations, but it has reportedly set another record, albeit a much less well-known one.

The company is selling $3.35 billion in asset-backed bonds to finance Roark Capital’s acquisition of the network. According to Bloomberg, once the sale is completed, it will be the largest securitization of the entire company in history.

Whole enterprise securitization (WBS) is a complex form of debt in which companies pledge their assets, including revenue streams, as security. They are popular among franchise restaurants, whose main advantage is the royalties obtained from franchisees.

This allows them to borrow at lower rates than they otherwise would and encourage mergers and acquisitions in the restaurant space.

The form was popularized by companies such as Domino’s and Dunkin’. Fat Brands used securitizations to make a nearly $1 billion acquisition in late 2020 and early 2021. The Wall Street Journal explained it well in 2016.

By using securitization, Subway can borrow at lower interest rates than it otherwise would, a key factor given rising interest rates and lenders’ likely concerns about the overall health of the brand.

Although the interest from potential buyers was not as great as the company would have liked, there is great potential interest in the bonds sold by Subway. According to Bloomberg, the bond offering is already oversubscribed.

According to law firm White & Case, this could ultimately be good news for the restaurant mergers and acquisitions market, especially if buyers and sellers realize that this instrument can be used to finance large-scale transactions.

This helped push Subway’s sales across the finish line. Subway was launched early last year. However, due to the price and the chain’s shrinking U.S. location base, it lacked the number of buyers to support a solid valuation.

Debt markets also left some buyers unable or unwilling to pay the price Subway’s owners expected. Securitization has clearly helped fill part of this gap.

Subway was ultimately sold last year to Atlanta-based Roark for a reported price of $9.6 billion, one of the largest industry deals of all time. This sale was finalized earlier this year.

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