KQ gets Sh20 billion bailout cash from Rotich’s mini budget

National carrier Kenya Airways has emerged as one of the biggest beneficiaries of the Treasury’s mini-budget that came with a Sh20.2 billion bailout package to help it weather the financial storm it has been flying through in the past three years. 

The money, which is being disbursed in the form of a bridging loan, is provided for in the supplementary budget that was tabled in Parliament last week.

It comes nearly six months after the airline received a Sh4.2 billion bailout package to help it navigate strong operational and debt headwinds that have left it with record losses.

READ: Troubled Kenya Airways gets Sh4.2bn from Treasury

Treasury secretary Henry Rotich said the financing aims to stabilise the carrier and leave space for the owners to think about its strategic direction.

“The bridge financing together with the asset disposal and restructuring should stabilise KQ financially. We are having a transactional adviser dealing with the bigger issue of how to finance its strategic direction after stabilisation,” the minister said.

The Treasury, which has had to slash the national budget due to a slowdown in revenue collection, plans to finance the bailout package using a loan from African Export-Import Bank (Afrexim) for onward lending to KQ.

Taking the loan through the Treasury allows KQ enough room to craft a payment plan that does not pile pressure on its balance sheet, which is already heavy with debt and has forced the airline to sell some of its assets.

“Ideally it should be that KQ pays before instalments are due and then we pay but if KQ can’t pay then we pay and KQ pays us later,” said Treasury principal secretary Kamau Thugge in a separate interview.

Largest financial intervention

The Treasury said it had opted to bear the debt burden on behalf of the airline in order to monitor the ongoing restructuring.

This is the largest financial intervention the Kenyan government, which has a 29 per cent stake in the national carrier, has ever made in a company, underlining its attachment to the airline and the political mileage it hopes to gain by keeping it in the skies.

The debt plan spares the airline the pain of taking in more expensive commercial loans that would put a strain on its cash flows but exposes the taxpayers to taking in the entire debt in the event of a default.

KQ’s borrowings stood at Sh52 billion at the end of September, translating to a Sh3.4 billion financing cost burden.

The company’s management has admitted it is significantly supported by creditors and is looking at avenues of replacing short-term debt with long-term maturities.

The national carrier has hired PJT Partners — an American advisory and capital raising firm — to restructure its balance sheet and help in the search for long-term capital refinancing.

“In our estimation we are looking at between Sh60 billion and Sh70 billion in terms of total; not all of that will be new money because some of that is going to refinance the existing debt,” said KQ’s chief executive officer, Mbuvi Ngunze, in a recent interview with local broadcaster Citizen TV, adding that the new money should be Sh40 billion.

Mr Ngunze expects to raise the amount through a mix of debt, shareholder financing and the coming on board of a strategic investor.

KQ hopes to draw an additional loan of Sh10 billion from Afrexim having received Sh10 billion from the Cairo-based lender last year.

The Treasury could also be poised to hold a larger stake in the company by converting the debt to equity. “This is likely to be initial lending but after sometime when KQ will have known how much it needs to raise from shareholders the government could convert it to equity,” said Eric Musau, an analyst with Standard Investment Bank.

Review partnership

The government has questioned the business plan of Dutch airline KLM, which has a 27 per cent stake in KQ and partners with it on some routes, arguing the relationship is heavily tilted in favour of KLM.

Mr Rotich has previously stated the government would review the partnership with KLM without offering any details.

Mr Musau, however, reckons that the partnership has been positive to the extent of international routes management, skills transfer and access to spare parts but needs to be renegotiated on African routes.

KQ has rolled out a turnaround strategy focusing on return to profitability, revising its business model to regain a competitive edge, and finding a sustainable financial structure.

The airline sold two Boeing 777-200 ER aircraft to US-based airline Omni Air and has earmarked two more for sale. It has also leased its Boeing 777-300s, leaving it with the smaller B787s, which have similar abilities for long-haul missions, in a move the management estimates will save the airline Sh700 million monthly.

Sold landing slot

Last month, KQ sold its prime landing slot at London’s Heathrow Airport in a deal estimated to be worth Sh3.7 billion. The airline has also sold a 30-acre piece of land in Embakasi, Nairobi valued at over Sh2 billion as part of the recovery plan.

The KQ management expects the restructuring to also affect its employees who enjoy heavy protection from aggressive unions.

KQ’s board last month appointed consulting firm Deloitte to undertake a forensic audit of its financial decisions dating back six years.

The airline’s troubles have been attributed to a combination of factors, including fuel price volatility, intense competition and more recently the threat of terrorism and epidemics that have adversely impacted global travel.

Analysts have also pointed to the hurried implementation of an ambitious expansion plan, dubbed Project Mawingu, which informed the airline’s decision to take big debt.

The national carrier shocked the market with a record Sh25.7 billion after-tax loss in the year ended last March, prompting parliamentarians to call for an investigation into its operations.