Fitch Ratings has affirmed WD FF Limited's (Iceland) Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook.
Fitch also affirmed the senior secured notes issued by its subsidiary Iceland Bondco PLC at 'B+' with a Recovery Rating of 'RR3'.
Iceland's IDR reflects its high EBITDAR leverage balanced against a successful specialist retail business model focused on the frozen food and value-seeking consumer segments, whose profits, with the exception of an adverse impact of high electricity costs on its FY23 (year-end March), have been resilient through business cycles. Fitch believes these food and grocery retail segments will continue benefiting from current subdued household spending in the UK, supporting Iceland's profit growth.
Iceland's estimated EBITDAR leverage of 6.4x at FYE24 is now in line with the company's 'B' rating, albeit at the top end. We expect further deleveraging over FY25-FY26, helped by steady revenue growth and slight improvements in profitability. This should result in comfortable leverage headroom under the rating, as underscored in its Stable Outlook.
Key Rating Drivers
Improving Leverage Headroom: We project Iceland's EBITDAR gross leverage to gradually fall to 6.2x in FY25 and to below 6.0x in FY26 from an estimated 6.4x at FYE24 (FYE23: 8.2x). This will be driven by a GBP30 million debt repayment in FY25 and continued EBITDA growth. Fitch views this leverage profile as more comfortable, providing headroom within the 'B' rating. We expect average EBITDAR coverage at around 1.5x, which is adequate for the rating, aided by lower debt. Iceland has hedged its interest rate and currency exposure on the euro-denominated portion of the new notes, which are floating rate.
Expected Continued EBITDA Recovery: We estimate EBITDA recovered to GBP154 million in FY24, after a 24% contraction in FY23 due to high energy costs as a frozen food retailer. We forecast EBITDA to improve further to GBP162 million in FY25 or 3.8% of sales, from 3.7% in FY24 and 2.5% in FY23. This will be driven by continued sales growth, benefiting from Iceland's value positioning and a decline in energy costs. We expect these trends to continue, which together with cost savings, should help offset cost inflation. As food price inflation eases, we expect Iceland to maintain revenue growth with volume increases.
Profit Pressures Managed: We expect Iceland to continue to benefit from various cost-saving measures to help offset cost inflation. Generally, cost inflation is harder to absorb for smaller-scale grocers such as Iceland that operate with thinner EBITDA margins than large and more diversified mainstream grocers (5%-6%). Iceland's energy costs are over 95% locked in for FY25, and we factor in a further GBP20 million reduction in costs on the back of GBP50 million confirmed savings in FY24.
Cash-Generative Business: Similar to other food retailers, Iceland is a cash-generative business. We expect positive free cash flow (FCF) margins, at slightly above 1% from FY26, similar to our estimate for FY24, which is in line with peers' and reflected in the Stable Outlook. We expect however a neutral FCF in FY25 following increased investment in its new Warrington warehouse. We assume this will temporarily cause capex to peak at GBP70 million, before it returns to a more normalised GBP50 million from FY26.
Restaurants Now in Restricted Group: Iceland's restaurants business - under its subsidiary Individual Restaurants Limited - has now become a guarantor of the senior secured notes and is therefore included in the restricted group. We have therefore included its revenue, EBITDA contribution for FY24, although the latter is immaterial, as well as its debt, to our metrics calculations. Most of this business' debt has been repaid, leaving a GBP18 million shareholder loan. We account the loan as debt given its upcoming contractual maturity, although Iceland expects it to be rolled over.
Value Positioning Benefits: We expect the UK food industry to continue to see stiff competition but for Iceland to remain a competitive player with its value product offering for consumers with weaker spending power and amid cost-of-living pressures. Iceland is UK's second-largest frozen food retailer after Tesco. Its sales grew during the global financial crisis and its share in the UK grocery market rose slightly during 2008-2024, despite competitive pressures and the rapid growth of discount stores. This was achieved with greater product differentiation, lower pricing, investment in its stores and formats, and improved brand positioning on sustainability.
Derivation Summary
Iceland's business risk profile, as a mostly UK-based specialist food retailer, is constrained by its modest size and lower diversification than that of other Fitch-rated European food retailers, such as Tesco PLC (BBB-/Stable), Bellis Finco plc (ASDA; B+/Positive) and Market Holdco 3 Limited (Morrisons; B/Positive).
All three peers are larger, have greater diversification and a high share of freehold store ownership compared with Iceland. Iceland has a smaller market share than those peers in the UK grocery segment, but is second behind Tesco in the frozen food category. Also, its offer is not confined to frozen food, with 60% of its revenue generated from the sales of other food and non-food products.
We expect Iceland's EBITDAR gross leverage to reduce to around 6.2x in FY25, which is higher than other Fitch-rated UK peers' (Morrisons to deleverage to near 6.0x by 2025; ASDA to be below 5.0x in 2025 and Tesco's around 3.0x). Peers also benefit from stronger coverage ratios than Iceland.
Iceland is larger in sales than Picard Bondco S.A. (B/Stable), a French specialist food retailer also active in frozen foods, but its profitability is materially weaker (EBITDAR margin of 6% versus Picard's 17%) making them comparable at EBITDAR level, and supporting superior cash flow generation versus other food retailers. Picard operates mostly in the higher-margin premium segment and benefits from strong brand awareness. Picard's EBITDAR gross leverage is currently higher than Iceland's but we project this ratio will improve after debt reduction to around 6.5x in FY24-FY27. The weaker financial structure is partially offset by Picard's stronger business profile.
Key Assumptions
Fitch's Key Assumptions Within its Rating Case for the Issuer:
Retail revenue (excluding restaurants) growth of 2.1% in FY25, driven by volume and consumer focus on value, followed by growth around 3.0% in FY26 and thereafter as slower like-for-like growth is compensated by higher net store openings
Three net new store openings in FY25, increasing toward around 20 stores a year in FY28
EBITDA margin to slightly increase towards 4% (FY24: estimated 3.7%), as cost savings offset wage inflation and on further normalisation of energy cost
Working-capital outflow of GBP9 million in FY25, driven by the Warrington depot's planned opening. This is followed by neutral working capital in FY26-FY28
Capex peaking at GBP70 million in FY25 due to Warrington depot investment and normalising at GBP50 million from FY26
No dividends or other distributions to FY28
Full repayment of its GBP30 million 2025 senior secured notes in FY25
Recovery Analysis
Fitch's Key Recovery Rating Assumptions:
Fitch's recovery analysis assumes that Iceland would be reorganised as a going concern in bankruptcy rather than liquidated. We have assumed a 10% administrative claim.
Iceland's going-concern (GC) EBITDA assumption reflects the scale of the company's business with new store openings each year, an improved cost base with visibility on energy costs and its disposal of a loss-making business in Ireland. We have included the restaurant business in our going-concern EBITDA calculation as it has been recently added within the restricted group.
The GC EBITDA to GBP120 million reflects our view of a sustainable, post-reorganisation EBITDA on which we base the enterprise valuation (EV). The assumption also reflects corrective measures taken in the reorganisation to offset the adverse conditions that trigger its default, such as cost-cutting efforts or a material business repositioning.
We apply an EV multiple of 4.5x to the going-concern EBITDA to calculate a post-reorganisation EV.
Iceland's revolving credit facility (RCF) of GBP50 million is assumed to be fully drawn in default. The RCF is super senior to the company's senior notes in the debt waterfall.
Our waterfall analysis generates a ranked recovery for Iceland's senior secured notes in the 'RR3' category, resulting in a 'B+' rating with recoveries of 58%. This is up from 56% since our review of the rating in 2023, reflecting a total GBP25 million repayment under its 2025 senior secured notes (GBP20 million during 4QFY24, and an additional GBP5 million in 1QFY25). We expect further improvement in the recovery percentage within the 'RR3' range, once the remaining GBP25 million amount is repaid with cash before its maturity in March 2025, but this is unlikely to lead an upgrade of the 'RR3' of the notes.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Like-for-like sales growth and the maintenance of stable market shares, leading to increases in EBITDA margin towards 5%
EBITDAR gross leverage below 5.5x on a sustained basis
EBITDAR fixed-charge coverage above 2.0x on a sustained basis
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Decline in like-for-like sales, with loss of market shares due to competition or to permanently lower capex, or inability to pass on cost inflation to consumers, leading to accelerating EBITDA margin erosion or neutral FCF on a sustained basis
Tightening of liquidity due to unexpected cash outflows
EBITDAR gross leverage above 6.5x on a sustained basis
EBITDAR fixed-charge coverage below 1.5x on a sustained basis
Liquidity and Debt Structure
Comfortable Liquidity: Fitch views Iceland's liquidity as comfortable, with estimated cash of GBP129 million at FYE24, which excluded a restricted GBP20 million for working-capital purposes (Fitch's adjustment). In addition, Iceland has an undrawn RCF of around GBP50 million and we expect it to generate positive FCF from FY26 onwards. Iceland's debt maturity profile is adequate, with no significant debt amount maturing before December 2027.
Issuer Profile
Iceland is a British food retailer specialising in frozen and chilled food products at a low price point. It operates around 1,000 stores in the UK.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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