Iceland Foods generates ESG angst as rates relief seized despite restaurant excursion

Iceland Foods could be a credit to watch closely. The UK frozen food retailer has modest 4.0x net leverage, is cash generative off current earnings and has received greater demand for its goods in the pandemic. But is using bond proceeds to support expansion into the restaurant sector whilst holding on to GBP 40m of rates relief received from the UK government an Environmental, Social and Governance (ESG) red flag? Some investors think so, as reported by Debtwire last Wednesday (24 February). File attached.

Keeping GBP 52.8m of its GBP 250m February bond proceeds for cash on balance sheet earmarked to help bail out heavily indebted restaurants whilst not returning taxpayer money doesn’t sit right from an ESG perspective. Managing director Richard Walker recently noted the company cannot afford to pay back business rates relief, due to the costs of making shops COVID-safe and buying out its previous shareholder, Brait. Iceland received a GBP 40m benefit but has not returned the money unlike other grocery retailers such as Tesco, Sainsbury’s, Asda, Morrisons, Lidl and Aldi. Iceland could possibly have paid a tighter coupon if it upsized its February notes offering and used extra proceeds to repay rates relief given the ESG benefits.

Group earnings have surged since the start of the pandemic with LTM 1 January 2021 adjusted EBITDA of GBP 174.3m up versus GBP 133.7m at LTM 30 March 2020 while the company is reasonably cashflow generative and leverage manageable. Iceland has the second-largest UK retailer frozen food market share with its 17.2% share only being behind that of Tesco. Iceland B2/B/B+ rated GBP 250m 4.375% senior secured 2028 bonds are today (2 March) indicated down at 97.875-mid with a 4.7% yield according to Markit, after pricing at par reoffer on 11 February.

We are curious on how investors view the name – are the bonds a buy now the lowly levered, cash generative credit is trading below reoffer or could Iceland bonds be an ice cube that melts further from here given intense grocery competition and ESG headwinds?