KQ prices rights issue at Sh14, eyes multi-billion-shilling loan

Kenya Airways (KQ) has priced its Sh20.6 billion rights issue at Sh14 per share and is aiming to borrow an additional Sh182.5 billion from banks over the next five years to buy new planes and support its expansion plan.

The airline has offered the rights at a 22.4 per cent discount on its current share price of Sh18.05 and 32.2 per cent to the shares’ average price over the last three months – betting on the concession to help the offer attain full subscription.

Also read Kenya Airways in Sh20.7 bn cash call for expansion
The national carrier plans to double its fleet in the next five years to 68 jets and is looking to add 60 new routes over 10 years, hence the need for new financing.

This is why KQ will be tapping Sh182.5 billion from banks that will raise its total capital requirements to Sh300 billion, with the carrier raising nearly Sh100 million internally in the five year period.

“Aircraft delivery loans will be $2.3 billion (Sh182.5 billon), but we need to put down a deposit two years before delivery and we intend to fund this through the rights issue,” said Mr Alex Mbugua, the group finance director at Kenya Airways.

The carrier wants to use the new aircrafts to expand its Africa and Asia routes, using its Nairobi hub to connect African travellers with the outside world via Jomo Kenyatta International Airport.

But the huge financing requirements and shortage of pilots are emerging as threats to KQ’s profitability it has issued a profit warning for the year ended March on rising operation costs led by volatile fuel prices. It also blamed the euro zone debt crisis and political unrest in Egypt for cutting travel.

The rights issue will lead to the creation of 1.48 billion shares to be offered at a rate of 16 for every five held.

The national carrier has already been 50 per cent subscribed after both AirFrance KLM and the Kenyan government, which has a 23 per cent stake, committed to take up their rights. KLM has a 26 per cent stake. The minimum subscription required for the issue to go ahead is 70 per cent or Sh14.42 billion.

Analysts reckon that the airline would struggle to persuade retail shareholders to take up their rights on the bearish run at the Nairobi Securities Exchange (NSE) – which has reduced the participation of short-term investors at the Nairobi bourse. Its share has fallen 47 per cent in the past year and yesterday shed 2.9 per cent.

Local shareholders are expected to buy at least 51 per cent of 1.48 billion shares, but KQ has tapped Citi Bank to underwrite the offer – meaning that it will buy the shares that will be left on the table the airline subscriber should it fail to attain minimum subscription. 

“With the promise from KLM and the government, it means they are looking for Sh10 billion and given that the KQ has a good reputation, I see it being successful,” said Eric Musau, analyst at Standard Investment Bank
“The timing has turned in their favour as interest rates are declining and institutional investors are turning to equities from the debt market,” added Mr Musau.

CFC Stanbic is transaction adviser for the issue, as Standard Investment Bank acts as lead sponsoring broker.
[email protected]