It makes sense that more than one financing method is under discussion. A theoretical Subway LBO would be the one of the biggest buyouts since Elon Musk’s $44bn Twitter acquisition; that deal has been a nightmare for bankers, and Elliott and Vista’s $16.5bn take-private of Citrix wasn’t exactly a walk in the park either.

Bankers fought hard to underwrite those giant deals. But after the mess of 2022, they may be more cautious: some of them are still saddled with billions of risky Twitter loans, while others took hefty losses to offload Citrix’s buyout debt — some of which still remains on their books.

So far, 2023 has been more positive: the loan and bond markets reopened strongly, and investors are so hungry to put cash to work that they’ve even funded a slew of sponsor dividends. Some smaller LBOs, like Roper/Indicor and Intrado Safety, have found strong demand.

But to many underwriters, the idea of syndicating a footlong slice of Subway debt in today’s market is still a little daunting.

“It’s going to be tough unless it’s a whole business securitization,” said one banker, who isn’t involved in the transaction. “It would be a very large LBO, and in this environment that would be very difficult.”

The WBS angle

So: what about a whole business securitization?

This kind of deal, in which a company’s revenue-generating assets are pledged to a bankruptcy-remote vehicle which in turn issues bonds, could make sense to finance a Subway acquisition, given the structure of its business operates.

“It’s ripe for whole business securitization,” said an ABS investor. “Our market likes that kind of very well-known brand name with a wide footprint. They have a breadth of business, and it’s pretty resilient. Sandwiches, fast food, pizza, they tend to do well in whole business ABS.”

The financing product has been used by franchisors from Arby’s to hair removal chain European Wax Center and chicken wing restaurant Wingstop. Barclays and Guggenheim are well-known arrangers in the space (both declined to provide comment for this article).

One benefit of a whole business securitization is that those secured notes are typically more highly rated, and thus carry lower interest costs than high yield bonds or leveraged loans; whether the ABS market could support a deal the size of Subway is another question.

Whole business securitizations usually top out at $2bn-$3bn. For example, Dunkin’ Brands raised $2.35bn via a whole business securitization in 2021. Those funds were used, among other things, to pay a dividend to Inspire Brands, which is backed by Roark Capital and has high yield bonds.

It is also possible to use a securitization in conjunction with other financing methods. “There’s a trend toward using franchised securitization in concert with additional parallel financing, to achieve larger capital structures,” said an attorney familiar with securitization transactions.

Auto service chain Driven Brands, for example, has a revolver, a term loan and an outstanding securitization.

But those types of transactions are not necessarily as quick to complete as a traditional LBO, in part due to the time it takes to get a credit rating for a whole business securitization versus corporate debt in an LBO.

“Something that would have to be very carefully evaluated for a large and complicated system is that it takes longer to put a whole business securitization together,” the attorney noted.

“In terms of speed of execution, it may be easier to do a typical LBO financing and follow up with a whole business securitization.”

Fresh recipes

Another thing that complicates this story is that Subway is in search of a turnaround. The company’s earnings have been inconsistent over recent years, according to restaurant data provider Technomic.

Subway is the largest chain restaurant in the US by location count, and eighth-largest by systemwide sales, according to Technomic; all locations are franchised.

“Even if you do turn it around, where do you go to grow?” said a banker familiar with the sector. “They’re already everywhere.”

In the spirit of turning the page, Subway named former Burger King CEO John Chidsey as its chief executive in 2019.

Chidsey was the first CEO from outside the company’s founding families, and has pursued initiatives like a subscription service for sandwiches. Going forward, the company is looking to revitalize its brand through improved product quality, delivery offerings and store remodeling.

Part of the reason for a lack of big LBOs recently has been sellers unwilling to divest at a time of declining valuations. On that note, the timing of Subway’s sale left some sources scratching their heads. “It’s not the optimal time,” said an industry banker.

But the timing of Subway’s sale process seems to be driven by longer-term plans, sources noted.

“When they brought in the new CEO, it was kind of a signal that the business was going to be for sale at some point,” said another industry banker. “Then they ran into external issues, like the pandemic. They’ve been wanting to sell for a while.”

On a related note, the family of Subway’s late co-founder, Dr. Peter Buck, revealed yesterday that his stake in the company will be donated to charity, as stipulated in his will.

JPMorgan declined to provide comment for this article, and Subway did not respond to emails seeking comment.