Top commercial banks will convert Sh19.3 billion ($149.9 million) worth of loans advanced to Kenya Airways (KQ) into Treasury bonds after the deadline for clearing the debt lapsed, as part of a restructuring to nurse the ailing airline back to financial health.
The 10 banks, including Equity Bank, KCB Group and Cooperative Bank, that own 38.1 percent of the airline have been offered a 6.5-year bond for an undisclosed interest rate, according to a Treasury document seen by the Business Daily.
The Treasury, which has guaranteed the loan, had to settle the debt in cash by end of August or issue the lenders an acceptable government security instrument or a bond.
The airline is banking on its top shareholders to back the conversion of the loans to shares or other instruments like bonds in fresh efforts to ease its debt burden and smooth the path for entry of a strategic investor early next year.
“The government has to settle the guarantee claim in full (without set-off or other deduction for any purpose whatsoever) by cash or delivering an acceptable government security instrument,” the Treasury document shows.
“Regarding the local banks’ position, letters of credit amounting to an aggregate outstanding amount due and payable under the new Finance Documents is $149,989,169, which was due by August 2024. This shall be settled by the end of December 31, 2024.”
Currently, Treasury bonds with a 6.5-year tenure can attract interest of up to 17 percent, an attractive return for banks that have in the past decade failed to make a profit for their multibillion-shilling financing of Kenya Airways.
Despite posting its first half-year profit in decade, KQ still suffers a negative equity position standing at Sh123.6 billion in the wake of mounting debts and prolonged stay in the loss-making territory.
Negative equity is where a company’s debt exceeds its assets, translating into financial distress since in the event of liquidation shareholders would receive nothing.
It is the Sh123.6 billion hole that KQ seeks to cure through both the debt conversions and the capital injection by a strategic investor.
“The ten local banks advanced two facilities totalling $175.0 million – $100.0 million being a multi-purpose loan facility and $75.0 million being letters of credit. The government issued guarantees worth $225.0 million to the banks for the two facilities,” the Treasury document shows.
The Treasury is walking a financing tightrope after deadly protests forced President William Ruto’s administration to abandon tax measures that would have collected Sh346 billion this year.
The cash crunch in the aftermath of the Finance Bill withdrawal has made it difficult for the Treasury to make a cash payment of Sh19.4 billion to banks.
This triggered the second option in the settlement of the guarantee pact: issuance of a 6.5-year Treasury bond.
In 2017, the government and 10 top banks, including Diamond Trust Bank, NCBA Bank, I&M Bank and Ecobank, converted part of the billions owed to them into equity to return the carrier to profitability.
The swap deal, which cut debt and eased the pressure on cash flow, increased the government’s shares to 48.9 percent from 29.8 percent while banks got a 38.1 percent stake, through a special vehicle.
Air France KLM’s 26.7 percent stake was diluted to 7.8 percent.
KQ’s leadership had initially indicated its bias for the State and the banks to accept more shares in favour of lowering debt, testing the lenders’ resolve in the turnaround of the airline.
The banks converted $167.2 million (now Sh21.6 billion) worth of debt into the 38.1 percent stake.
A cleaner balance sheet will put KQ in a position to attract a strategic investor, who is needed to inject further capital and boost strategic input.
In August, KQ reported its first half-year profit in more than a decade, helped by rising passenger numbers, and lower debt cost after restructuring a dollar-based loan owed to a US financier.
The airline made a profit after tax of Sh513 million for January to June, overturning a Sh21.7 billion loss in the first half of 2023. It was hopeful it could break even for the full year.
The airline has been in the red since 2013. The airline’s revenue rose by 22 percent in the first half, helped by a 10 percent rise in passenger numbers.
KQ chief executive Allan Kilavuka earlier said the company was seeking to finalise negotiations with a strategic equity investor, without giving details.
“We want to remove any potential risk of not paying loans as and when they fall due. We want to deplete our debt stock quite significantly and, of course, when the new investor comes, they will increase equity since part of their money will be used to pay down debt,” Mr Kilavuka said.
KQ slid into insolvency in 2018 after an expansion drive left it with billions of shillings in debt.
