Banks in the Kenya Airways debt restructuring deal may have lost an equivalent of eight per cent of their annualised net profit.
The most negatively affected will be National Bank of Kenya.
Ecobank will also be vulnerable, but has stronger capital buffer to absorb losses.
The other financial institutions will however manage to absorb the losses, Moody’s said.
Commercial banks in the Kenya Airways #ticker:KQ debt restructuring deal may have lost an equivalent of eight per cent of their annualised net profit as estimated from the half-year results, analysts at credit rating firm Moody’s have said.
Citing loan loss provisions, longer maturities and reduced interest rates as the key factors in the reduction in profitability, the analysts said the most negatively affected will be National Bank of Kenya #ticker:NBK.
Ecobank will also be vulnerable, but has stronger capital buffer to absorb losses, the report added. The other financial institutions will however manage to absorb the losses, Moody’s said.
The debt-for-equity swap deal, announced on Monday last week, saw 10 banks agree to convert Sh17.32 billion ($167.2 million) of Sh22.51 billion ( $217.24 million) loans to the loss-making airline into 38.1 per cent shareholding.
They are expected to dispose of that stake through a special purpose vehicle KQ Lenders Company to a strategic investor or in an open market in 10 years. “Although that effect [of debt restructuring] is manageable for most banks, which can absorb the losses using recurring earnings, the loss will be challenging for NBK, threatening to further erode its already-depleted capital as a result of weak financial performance.
NBK’s capital adequacy ratio was 11.8 per cent as of June 2017, below the 14.5 per cent regulatory minimum,” the Moody’s report says.
“Ecobank Kenya Limited also appears vulnerable owing to weak profitability, but the bank’s total capital ratio was 19.7 per cent as of June 2017 and provides a strong buffer to absorb losses,” the report adds.
The lenders will, as part of the deal, restructure their largely short-term unsecured facilities into 10-year loans with reduced interest at the rate of one per cent for the first five years, three per cent for the following two years and five per cent for the last three years.
The interest rates on the converted loans could have averaged nine per cent, Moody’s noted.
“We estimate that longer maturities and reduced interest rates for loans will result in present value losses of 25 per cent at the banks, although required accounting provisions will depend on auditors’ assumptions and valuations,” Moody’s analysts said in this week’s credit outlook report.
The overall losses from the deal “relative to each bank’s annualised net income for the first half of 2017” cut net income by estimated eight per cent.
