Corporate Issuance Drives Treasuries Decline Amid Fed Rate Cut Expectations

Key Takeaway

• Subway plans a bond sale next week to support Roark Capital's $9 billion acquisition, using whole business securitization.
• Gray Television aims to sell $1 billion in senior secured notes and raise up to $750 million for refinancing efforts.
• Treasuries declined amid increased corporate issuance and Fed commentary suggesting higher interest rates going forward.

Subway's Bond Sale Plans

Banks are preparing to initiate a bond sale next week to support Roark Capital Group's acquisition of Subway, according to sources familiar with the matter. The sandwich chain will utilize a whole business securitization, a financing method where a company pledges most of its assets as collateral. The exact size of the deal, led by Morgan Stanley and Barclays Plc, remains undetermined. Representatives from Roark, Morgan Stanley, Barclays, and Subway have not commented on the matter.

Whole business securitizations are commonly used by businesses with extensive franchised networks, effectively mortgaging assets such as royalties, fees, and intellectual property. Roark Capital Group, a private equity firm, agreed to purchase Subway for over $9 billion last year, with $5 billion of financing from major banks. Subway has grown significantly, now boasting over 37,000 restaurants globally, up from just 16 in 1974.

The whole business securitization sector has seen substantial deals from companies like Dunkin’ Brands Group Inc., Domino’s Pizza Inc., and Taco Bell. This year alone, seven whole business deals, including those by Zaxby’s and Nothing Bundt Cake, have been priced, according to Bloomberg News data.

Gray Television's Refinancing Efforts

Gray Television Inc. has announced plans to sell $1 billion in senior secured notes as part of a broader refinancing strategy. The proceeds from this five-year bond will be used to refinance a $1.2 billion loan due in 2026 and repurchase its 5.9% senior notes also due in 2026. Additionally, Gray aims to raise up to $750 million from a new five-year term loan. The completion of both the bond and loan deals is contingent upon each other.

This move follows Gray's earlier loan sale being pulled from the market, raising concerns among investors about the financial stability of traditional broadcasters amid competition from streaming services. However, Gray's recent earnings report, which exceeded analyst estimates, has helped to alleviate some of these concerns. The company highlighted that its core advertising business has recovered from the Covid-19 pandemic, and its local news stations are well-positioned to benefit from upcoming political races across the United States.

Gray’s 7% bond due in 2027 is currently trading at about 90 cents on the dollar, according to pricing source Trace, indicating a level of investor confidence in the company's ability to manage its debt obligations effectively.

Treasuries Decline Amid Corporate Issuance

Treasuries experienced a decline for the third consecutive day on Monday, reversing last week’s rally driven by signs of easing inflationary pressures. The 30-year bond led the declines, slipping 2 basis points as of 9:44 a.m. in New York. A significant wave of selling in the futures market accelerated the slump, with 20,000 10-year note futures changing hands in a three-minute window around 8:20 a.m. This activity occurred despite the absence of new economic data, as investors focused on commentary from Federal Reserve speakers and a packed slate of investment-grade issuance.

Zachary Griffiths, head of US investment grade and macro strategy at CreditSights, commented, “It looks like corporate issuance is heating up a bit this morning, which could be weighing on the market more broadly from a technical perspective.” He added, “We’ve seen some selling activity in the futures market amid a light economic calendar, but heavy slate of Fed speakers.”

Fed Commentary and Rate Cut Expectations

Federal Reserve Vice Chair for Supervision Michael Barr and Atlanta Fed President Raphael Bostic provided key insights into the central bank's stance. Barr suggested that the Fed should hold interest rates steady, while Bostic indicated that the “steady state” for US interest rates will likely be higher going forward than in the recent past. Traders are currently pricing in about 40 basis points of cuts by the end of the year, with the first reduction fully priced in for November.

However, there are signs of new bets against Treasuries being established in the futures market. Activity in two- and five-year note futures has increased, consistent with new short positioning as traders push back on Fed rate-cut pricing.