Kenya Airways expansion push cuts capital base

Kenya Airways could be forced to return to its shareholders for more cash to re-balance its debt to equity ratio as it embarks on a multi-billion shilling borrowing plan.

The national carrier has announced an intention to borrow up to Sh160 billion ($1.9 billion) in the next seven years through a financing deal arranged by Cairo-based Afreximbank in addition to borrowing Sh6.7 billion ($80 million) from the World Bank’s private sector lending arm, IFC.

The projected long-term borrowing is expected to raise Kenya Airways’ (KQ) debt to equity ratio from the current level of about 92.3 per cent to 257.3 per cent in the next three years according to projections by the airline.

READ: KQ picks Afreximbank to arrange $1.9b planes purchase

KQ has just concluded a rights issue through which it raised Sh14.5 billion but the projected borrowing plan could see the airline return to the stock market for more shareholder funds.

“While the rights issue was considered a success, there still remains a large funding gap which the company intends to fill with debt. In order to do this successfully without putting undue pressure on its cost of capital, Kenya Airways will have to increase its equity balance,” said Old Mutual in a research note sent on Thursday.

KQ total shareholder funds currently stand at Sh23 billion, against a net debt of Sh21.3 billion.

It is projected that the net debt will rise to Sh115.5 billion by 2015, against total equity of Sh44.9 billion.

“It is very unlikely that investors and even debt holders would be comfortable with that level of debt,” said Kuria Kamau, a research analyst at Old Mutual. “They would either have to earn a lot of profits or float another rights issue,” he added.

The cash raised from KQ’s recent rights issue is intended to partly finance pre-delivery payments on its nine Boeing 787-8 orders and to raise the equity proportion of the company’s balance sheet.

The carrier, however, raised only 70 per cent of the Sh20.6 billion target, leaving a Sh6.2 billion funding gap.

“We would expect Kenya Airways to make up for the shortfall by taking on more aircraft with operating leases. We, therefore, do not expect it to curtail its expansion plans to 2015 even though aircraft financing markets are tightening,” said Citigroup’s global markets in yet another report released on Thursday.

“There is a risk of future equity issuance due to its aggressive expansion and capital spending plans,” said Citi, which was involved in the KQ rights issue as a book runner and underwriter.

Standard Investment Bank analyst Eric Musau, however, said the need for another KQ rights issue will not be urgent if the airline matches its revenue and profit growth with the increase in its debts.

KQ projects that its net earnings will increase from Sh1.7 billion reported this year to Sh5 billion by 2015, driven by a 50 per cent revenue growth to Sh161.8 billion in the three years.