Companies

KQ seeks court order to whip lenders into line

kq

A Kenya Airways plane at JKIA, Nairobi. PHOTO | FILE

National carrier Kenya Airways #ticker:KQ has moved to court seeking orders compelling a group of banks to accept the planned conversion of the billions of shillings the airline owes them into substantial stakes in the ailing business.

KQ, as the airline is popularly known, is seeking to activate a clause in the Companies Act that allows distressed companies to make “compromise” financial arrangements with the same class of creditors if 75 per cent of them approve of the proposal.

KQ has proposed that the 11 banks and the Treasury convert outstanding and unsecured loans amounting to Sh23 billion and Sh27.2 billion respectively into equity, a plan that is expected to precipitate massive dilution of existing shareholders.

The airline reckons that a balance sheet restructuring is the only way to stay afloat as it will offer a “cash-flow relief” of Sh37 billion over five years and reduce gross debt exposure by Sh51 billion to Sh191 billion.

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Through its lawyers Coulson Harney, the airline has sought the court’s consent to convene a creditor’s meeting to pass the proposed restructuring plan ahead of its presentation to shareholders for approval at an extraordinary general meeting on August 7.

“The petitioner (KQ) desires to convene a statutory meeting with the scheme creditors for purposes of having them consider and vote on the scheme,” the petition papers say.

The lenders, through a special purpose vehicle called KQ Lenders Company Limited, will own a 35.7 per cent of the airline which they will be allowed to divest over 10 years by selling in the open market or to a strategic investor.

Those who are unwilling to be a part of the holding company can also take up KQ shares individually or opt for a combination of shares and mandatory convertible bond.

If KQ gets a court approval, three banks opposed to the debt-to-equity proposals will be forced to follow their consenting peers and the Treasury down the rabbit hole as they will be deemed to have opted for the shares plus bond option “by default”.

KQ owes Equity Bank #ticker:EQTY Sh5.2 billion, National Bank #ticker:NBK (Sh3.5 billion), Co-operative Bank #ticker:COOP (Sh3.3 billion), CBA Group (Sh3.1 billion), NIC Bank #ticker:NIC (Sh2.1 billion), DTB #ticker:DTK (Sh2.1 billion) and KCB Group #ticker:KCB (Sh2.1 billion).

I&M Bank and Ecobank are claiming Sh824 million each from the cash-strapped airline, while troubled Chase Bank and Jamii Bora are owed Sh721 million and Sh412 million respectively.

The earliest maturing of these short-term facilities, which KQ borrowed to meet its short-term obligations including paying salaries, became payable on October 26, 2016 while the oldest has a maturity date of January 31, 2017.

KQ says in its petition that eight of the 11 banks and the Treasury — which hold 87 per cent (or Sh43.7 billion) of the Sh50.2 billion unsecured debt — have “agreed to the scheme.”

This is above the 75 per cent threshold set in the Companies Act. People familiar with the transaction say Equity, Jamii Bora  and Ecobank are holding out against the debt conversion plan, arguing that they “were not consulted.”

The three are collectively owed Sh6.4 billion (or just 13 per cent of the outstanding debt).

Several executives of the affected banks grumbled that, over and above further extending the life of the loans tied to customer deposits, they are being “forced to partner” and become owners of a company which may not have been in their radar in the first place.

“Post the proposed restructure, KQ will remain at risk while further amplifying the risks on the banking sector,” said one banker who spoke on condition of anonymity.

Some have threatened to block the Kenya Airways petition in court. KQ insists that the proposed restructuring is the only way it can “keep trading as a going concern” since it is “in danger of not meeting its obligations” and could be wound up by creditors.

The latest push to save the national carrier became public a couple of weeks ago when the Treasury said it would be guaranteeing Sh77.3 billion in local and international debt in exchange for a number of concessions.

The facilities from international lenders, including JP Morgan and Citibank, were secured by several aircraft.

KQ and the Treasury (whose shareholding is set jump to 46.5 per cent from 29.8 per cent) have teamed up to push through the restructuring plan despite opposition from some banks.

Dutch carrier KLM has committed to inject a total of Sh7.9 billion but will still see its stake in the business drop to 13.7 per cent from 26.7 per cent, being replaced as the second-largest KQ shareholder by the 11 banks.

Retail investors, who number about 78,000, will be required to sign off on the plan on August 7 (a day before the General Election).

Their stake will be diluted by 95 per cent but they will before the year ends get invited to participate in a Sh1.5 billion open offer.