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Laura Thompson

Iceland’s management confirmed on today’s (8 February) Q3 23 conference call that they are “supremely confident” of refinancing its 2025 notes within the next twelve months. They accept that interest costs may be “slightly higher” but are comfortable with where interest coverage will be as energy costs normalise.

CFO, Richard Ewen, said that bond buybacks may also be used to chip away at the £550m SSNs due March 2025 before their refinancing.

However, the market is not reflecting Iceland’s confidence with the existing £250m SSNs due 2028 and £550m SSNs due 2025 both unmoved since this morning’s release; one bondholder said the lender base was prepared for bad news. Prior to this they traded well, down from yields of 18.2% and 13.3% in September 2022 to 9.8% and 9.5%.

“My eyes are on their plans for the 2025 notes,” admitted the bondholder. “I’m sure conversations are happening, but this feels more like exchange offer territory for me than full refi at the moment.”

You can understand why the market is not sold with leverage now at 6.2x, versus 4.2x on management’s generously adjusted EBITDA, and with the 25s becoming current in March next year a smooth refinancing appears less certain. Iceland’s previous HY deals were done at around 4.0x leverage without a heavily adjusted EBITDA figure, further highlighting the refi risk.

Management guided that FY 24 EBITDA will bounce back to slightly above the £140m FY 22 amount due to normalising energy costs and good trading performance. On this figure Iceland will be 5.0x leveraged, still relatively high for the UK frozen food and grocery retailer.

Management were quick to point out the £100m energy impact on EBITDA in FY 23 versus FY 22. The £35m impact in Q3 23 alone sank EBITDA by 30% YoY to £35m but Iceland fails to mention or adjust for the positive inflationary impact on revenues. Albeit more likely to maintain current levels than inflated energy costs, Iceland has increased prices 10.1% in the last year, higher than any of its peers.

A £15m-£20m energy impact is expected in Q4 23, with hedging and long-term purchase price agreements now in place for around half of FY 24-FY 25’s anticipated energy use. Management expects this to have a positive £30m-£35m impact in FY 24 versus FY 23, based on current wholesale prices.

The presentation also includes confirmation that the super senior basket has been utilised with a £30m upsize to the HSBC RCF to £50m. The EBITDA covenant has been ‘temporarily reduced’ making the facility fully available. Despite this management has no plans to draw on the RCF going forward.

The upsize is on the same existing terms which comes as a positive for the company after 9fin reported that other super senior sources of funding, including from alternative credit funds, were actively being explored in November 2022. At the time, bondholders were reportedly concerned about the potential cost of the facility and its necessity.

“I’m pleased that they’re expanding the RCF rather than attempt to raise new debt at a big OID hit,” said the bondholder. “They’d previously said they’d only do so if the price worked, so that talk was disappointing to see.”

With the RCF alongside the current £155m in cash, management expects to have over £200m of available liquidity over the next 12-18 months and for cash to increase by March-end.

To further boost liquidity, management decided to scale back on the store expansion programme in FY 24. They plan to open five stores versus 24 in FY 23. Management also guided FY 23 Capex at ~£50m, leaving £22m to still be spent in Q4.

Management will be making a waiver application to extend the FY (March end) results deadline beyond the original 120 days as it transitions reporting from FRS 102 to IFRS. According to Richard Ewen, two large bondholders have already agreed to this waiver free of charge.

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