The Treasury will offer banks that own a stake in Kenya Airways (KQ) a compensation of up to $50 million (Sh6.425 billion) should the lenders sell their shares below the principal loan they extended to the troubled airline.
Treasury Cabinet Secretary John Mbadi disclosed the payout in a notice to a parliamentary committee giving the breakdown of $225 million that the government guaranteed the consortium of local banks.
The banks were acquired at a price of Sh7.78 each but KQ’s stock price would drop to below Sh4 before their trading on the Nairobi Securities Exchange (NSE) was frozen in July 2020 as the government mulled a takeover of the airline.
The airline’s stock, which resumed trading on the NSE on January 25, was up five percent to trade Sh5.46 on Friday.
This means the consortium of local banks, including Equity, NCBA, Co-operative and KCB, would be entitled to the government guarantee if they made a sale at the current share price that would fetch the lenders Sh12 billion, which is short of the principal debt by Sh9.46 billion.
“The Government of Kenya (GoK) guaranteed the local banks to the tune of USD 225 million. The GoK guarantee was split into three i.e. $75 million for Standby Letters of Credit (SBLC), $100 million multipurpose credit facility and $50 million guarantee to KQ Lenders should they sell their shares in KQ at the end of the facility period and are unable to cover the principal loan balance,” said Mr Mbadi.
Lenders that converted part of their outstanding loan to equity in the government-driven Project Safari Restructuring include Diamond Trust Bank, National Bank of Kenya, I&M Bank, and Ecobank.
In total, the local banks had extended $217 million (Sh27.88 billion) to KQ, with more than three quarters of the debt converted to equity under a special purpose vehicle, KQ Lenders Company 2017 Ltd, which was incorporated to represent the interests of the lenders.
The balance of $50 million (Sh6.425 billion) was issued as a mandatory convertible note, or a short-term loan that can be converted into equity in a company at a later date.
The swap deal, which cut debt and eased the pressure on cash flow, increased the government’s shares to 48.9 percent from 29.8 percent.
Air France KLM’s 26.7 percent stake was diluted to 7.8 percent.
Revelation of the share compensation came as it emerged that the banks had forced the Treasury to pay them Sh19.3 billion ($149.9 million) in full for unpaid loans to KQ and rejected an offer to recover the defaulted debt through a 6.5-year bond.
The banks had slapped the Treasury with a default notice after the national carrier indicated it had no cash to settle the debt.
The Treasury, which had guaranteed the loan, had to settle the debt in cash by August or issue the lenders an acceptable government security instrument or a bond, prompting the lenders to issue a loan call-up.
Technically a call-up is a demand from lenders for full payment of the debt on fears of the borrower’s future ability to make payments.
Being a sovereign loan, non-payments would have been deemed a default by Kenya in a development that would hurt the country’s credit rating.
This forced the government to withdraw Sh19.3 billion on January 3 to settle the debt without Parliament’s approval as an emergency item.
The settlement has since been included in the supplementary budget that is before Parliament for review and approval.
The Treasury, which is also facing a cash crunch, had offered a 6.5-year bond for an undisclosed interest rate to the banks, which rejected the offer.
The airline is banking on its top shareholders to back the conversion of the loans to shares or other instruments like bonds in fresh efforts to ease its debt burden and smooth the path for entry of a strategic investor.
Despite posting its first half-year profit in a decade, KQ still suffers a negative equity position standing at Sh123.6 billion in the wake of mounting debts and a prolonged stay in the loss-making territory.
Negative equity is where a company’s debt exceeds its assets, translating into financial distress since in the event of liquidation shareholders would receive nothing.
A cleaner balance sheet will put KQ in a position to attract a strategic investor, who is needed to inject further capital and boost strategic input.
In August, KQ reported its first half-year profit in more than a decade, helped by rising passenger numbers, and lower debt cost after restructuring a dollar-based loan owed to a US financier.
The airline made a profit after tax of Sh513 million for January to June, overturning a Sh21.7 billion loss in the first half of 2023. It was hopeful it could break even for the full year.
The airline has been in the red since 2013. Its revenue rose by 22 percent in the first half, helped by a 10 percent rise in passenger numbers.
KQ slid into insolvency in 2018 after an expansion drive left it with billions of shillings in debt.
