16th April 2020

BOUGHT: Iceland 6.75% July 2024: YTM 9.5%

The high yield market will likely see a re-opening in primary through Verisure, suggesting that investors are ready to re-enter the market, initially on a cautious and selective basis. That deal is for just €150m and a 5NC1 structure. Nevertheless, it’s the first throw of the dice for a sector otherwise bereft a new deal since 20 February.

The news flow around the sector has been difficult and the market has been in defensive fashion since the coronavirus pandemic hammered risk assets. The recent equity market revival and the Fed stimulus package which has boosted US high yield has had a positive impact on the market in Europe.

Spreads, as measured by the index have recovered almost 30% of their weakness, leaving the iBoxx index at B+646bp (-270bp). The market remains very illiquid, the ability to transact at a reasonable price on the way up or down is poor, but there are pockets of liquidity emerging and opportunities presented as a result.

We have taken a look at the UK retail/food sector and, while high yield rated entities in this sector have come under pressure as a result of the weaker sentiment towards high yield per se, the food sector has had a better time of it as the population has hoarded ahead of – and into – the lockdown.

As a retail investor looking for sub-par paper which should be ‘money good’ (in our view) offering a very good yield, at creditmarketdaily.com we have decided to take a position.  We have done this by adding the Iceland sterling issue into our new investment portfolio through the WiseAlpha platform.

Also see: Our bond portfolio

These are the reasons why we’ve chosen Iceland:

Business Description

A UK-based food retailer, with 1,013 stores (976 UK ‘Iceland’ Stores and 119 ‘Food Warehouse’ stores). The business positions itself at the value-end of the retail market and currently holds 2.2% of the UK grocery market. Competition comes from established grocery supermarkets such as Tesco, Asda and Morrisons and value-end discounter retailers such as Aldi and Lidl.

87% of Iceland’s customers are C1, C2 and DE demographic (clerical, junior administrative jobs, skilled manual workers, semi-skilled and unskilled manual occupations and unemployed) – the most of any other food retailer – therefore it occupies a unique space in the grocery market.

Business Segments

Generally, the business revenues are split into three (LTM-June-2017) equal segments:

In the frozen food segment – ICELTD holds a 15.4% market share. This is the second-largest in the UK and is a key in the company’s strategy to position itself as a differentiated value offering – in essence, in between established supermarkets and discount retailers.

Ownership

63.1% owned by Brait (first stake acquired in March 2012). 36.9% owned by management.

Capital Structure

  • £30 RCF
  • £760m existing notes
  • £62m finance leases
  • £85m cash on balance sheet

Net Leverage 5.5x (up from 4.9x y-on-y) as of January 2020.

Latest Financials – FY2020 (40 weeks ended 3 Jan 2020)

Revenue increased +2.5%, but it was a challenging quarter as a result of the UK general election. Gross profit was -14% lower at £99m (from £113m in Q3 FY19).

EBITDA declined by 8% for the same period, to £81m. Net leverage increased to 5.5x from 4.9x at Q3 FY19 (last year) to Jan 2020.

There was a large working capital outflow of £33m and this was attributed to trade payments going forward. The company said that will increase going forward as the Swindon Warehouse (which will cost an additional £6m in working capital next year) is opened, but this does add additional capacity for increased sales.

FY2020 will be less than that last year at around £50m (FY19 £63.5m). Please note these results were pre-COVID19 lockdown.

Credit Negatives

  • Extremely competitive market with new entrants Aldi and Lidl already having a larger UK Grocery market share (8.2% and 6.1% respectively).
  • Deleveraging tough as costs are driven by inflationary increases (National Living Wage).

Credit Positives

  • Uniquely positioned in the frozen food market (2nd in the UK).
  • Solid footfall as highlighted in the figures from Kantar data (ICELTD till roll was up +33.8% last month, where March was the biggest month on record for UK grocery sales) resulting from the COVID-19 lockdown.
  • Recent 4-week sales have stated ICELTD sales +11.7% year on year which is a significant increase.
  • The company appears to be well-positioned as a value brand in a recessionary/depression environment.

Iceland Corporate Structure


Links/References

  1. Our bond portfolio
  2. Iceland Prospectus
  3. Iceland website

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.