Subway sandwich chain raises largest bond of its kind

Investors clamoured for a piece of the debt package financing the takeover of sandwich chain Subway, with money managers placing large orders for the record-setting $3.4bn bond offering.

The Connecticut-based company famous for its foot-long subs on Thursday raised the largest bond of its kind, secured by the royalties Subway earns from its US franchisees as well as its intellectual property.

Feverish demand — with investor orders eclipsing $20bn — allowed bankers at Barclays and 10 other lenders that were structuring the transaction to increase the size of the debt package and lower the interest payments Subway ultimately agreed to pay for the debt, according to three people with knowledge of the matter.

Subway will use the $3.4bn it raised as part of this deal to pay down some of the $5.4bn debt that a group of banks initially extended to finance the takeover by leveraged buyout shop Roark. The notes were tied to Subway’s US franchise business, and the company is expected to pay off the remainder of the $5.4bn with a future whole-business securitisation tied to its international operations, two people added.

Money managers hoped to put some of the vast sums of dry powder they have accumulated to work. Several said they also spied an opportunity to boost their returns in a year when much of the market has rallied. The yields on the debt, which included five-, seven- and 10-year notes, were higher than traditional corporate bonds that were similarly rated.

“You really can’t throw a stone this year without finding a rally,” one investor in the deal said. “Now you’re finding that there’s all of this money to deploy and this is a transaction that lets people deploy money in size.”

Roark and Subway did not respond to requests for comment.

Roark, which earlier this year completed its more than $9bn acquisition of Subway, has become a force in the US fast-food industry. The private equity firm owns Inspire Brands, the parent company of the Dunkin’, Buffalo Wild Wings and Arby’s chains, and is seen as one of the most sophisticated owners of restaurants that has championed the use of franchisees to fuel growth.

Subway was a pioneer of the franchise model, helping spur its growth from 16 shops in 1974 to more than 36,000 around the world in 2024. However, that can make it difficult for a company to raise debt in traditional markets, as the usual collateral its creditors would rely on — individual stores and equipment — is owned by franchisees.

Companies such as Subway have instead turned to a somewhat esoteric method, pledging the franchise fees they earn and even their brand. So-called whole-business securitisations give lenders more control if things go wrong, and limit a company’s ability to take on additional debt.

The $1.35bn of five-year notes were priced with a 1.5 percentage point premium over the benchmark five-year Treasury, for a yield of 6.07 per cent. That premium was reduced from roughly 2 percentage points when banks first started marketing the deal. The seven- and 10-year notes priced with yields of 6.32 per cent and 6.56 per cent, respectively.