Iceland - timing a refinancing - Model Update - Positioning
All,
Please find our updated analysis on Iceland post its Q2 numbers here.
Iceland bonds are call-constrained, with the Company likely to pursue a refinancing in the coming quarters. The key consideration is whether to refinance the entire capital structure or only the two 2027 bonds. The 2028 bonds represent relatively inexpensive financing; however, as they mature only six months after the 2027 bonds, a full refinancing remains the most likely outcome.
Investment Rationale:
- It is time to exit our position. We have been invested in Iceland for an extended period, having rotated into the 2028s just prior to the refinancing in Summer 2024. The rotation was made on the expectation that the refinancing would extend beyond the 2028 maturity. Although this did not occur, we maintained our 5% position, taken at 81%. With the bonds now trading at 97%, inside a 6% yield, we believe it is an appropriate time to exit.
- Although we are projecting EBITDA to marginally decline in FY26 (March 2026) compared to FY25, we remain confident that Iceland will continue to deleverage over the coming quarters.
- We expect the Company to undertake a full refinancing in Summer 2026, following the publication of FY26 results, which are due in July. The call schedule on the 2027 fixed bonds steps down in August 2026.
- Upside for the bonds is constrained by the call structure, particularly with a likely refinancing in July/August 2026. The yield to that period is c.6.5%.
- There is some potential for downside following the UK budget, but this is limited given Company performance and the high probability of a refinancing.
Timing of a Refinancing:
- Iceland’s management faces two interrelated decisions: when to refinance and whether to pursue a full or partial refinancing. While management has hinted at the possibility of refinancing earlier, the call schedule on the 2027 bonds steps down to 102.7% in August 2026. We therefore expect the company to proceed with a full refinancing around that time.
- The likelihood of an earlier refinancing is limited, as the call schedule remains restrictive. That said, given management’s historically cautious approach to refinancing, we would not expect them to delay unnecessarily once market conditions are favourable.
- In addiiton, given the 2028 bonds mature 6 months passed the 2027 bonds, we expect a full refinancing. The 2028 bonds are relatively cheap, with a 4.375% coupon but omitting them from an intial refinancing would only complicate the transaction and leave a further £250m to be refinanced later. It is not impossible but we think highly unlikely.
Recent Results:
- On the Q2 2026 call, management commentary was relatively positive, notwithstanding ongoing uncertainty in the UK consumer environment ahead of the upcoming budget.
- Iceland recorded a 4% increase in sales, 1% from price, and the balance from volume. The Company appears to be prioritising volume at present, rising by 3%, a notable outperformance given that the overall market remains broadly flat. Gross profit margin declined by 20bps; however, the higher topline sales compensated, resulting in overall gross profit remaining flat year-on-year. Iceland continues to manage inflationary pressures effectively, including those arising from National Insurance, minimum wage increases and business rates, which together equate to approximately £55m on an annualised basis.
- EBITDA was marginally lower, but improved working capital management led to a 0.2x reduction in leverage to 4.1x (3.8x on a pre-IFRS 16 basis).
- The Company traded poorly over the Christmas period last year, which provides a lower comparative base for this year’s performance. In July, Iceland repurchased £10m of its 2027 bonds at 103%, and further buybacks are expected in the coming weeks.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk