Inside Sh11bn KQ loan deal with government

Kenya Airways #ticker:KQ has revealed the terms of an Sh11 billion loan it took from the government in the year ended December to fund its operations at a time the Covid-19 pandemic had hurt its cash flows.

The airline took the debt in two tranches of Sh5 billion followed by Sh6 billion.

The Sh5 billion loan has a concessional interest rate of three percent per annum – less than a quarter of the rate charged by commercial banks — and matures in five years.

The carrier will pay an interest of Sh150 million per year on the loan or a total of Sh750 million over the five years. The repayment of the principal is expected at the end of the five years.

A loan of a similar size would cost Sh650 million per annum or a total of Sh3.2 billion in five years based on the 13 percent interest rate currently charged by most commercial banks.

“The first loan of Sh5 billion was to facilitate E-190 aircraft fleet engine overhauls that were due in 2020,” the national carrier says in its latest annual report.

“As part of government commitments to support the airline’s resumption of operations following the impact of Covid-19 pandemic, a second loan of Sh6 billion was advanced in the year and its terms are yet to be finalised.”

The government was the only entity that provided new loans to the company in the review period, indicating the critical role the State has played in keeping the airline alive.

KQ, as the airline is known by its international code, previously borrowed liberally from international financiers and nearly all of the country’s leading banks, including KCB Group and Equity Group.

The airline, however, defaulted on the local lenders who now only maintain a revolving credit facility agreed with the company earlier as part of the restructure of their combined Sh17 billion worth of unsecured loans in 2017.

International lenders like JP Morgan and Citibank have secured their loans using the aircraft purchased by the company.

The heavy losses and revenue dip caused the company to breach the terms set by the global financiers, underlining the airline’s debt distress.

“As at December 31, 2020, the group did not comply with one of the financial covenants being the unrestricted cash to revenue ratio,” KQ says in the report.

“The group and company however obtained waivers from the financiers prior to year-end and as such the group and company had a contractual right to defer payment for at least 12 months at the end of the reporting period.”

The ratio measures a company’s ability to generate cash from its operations and is ideal for assessing the financial health of firms like airlines that do not offer credit sales.

Without the exemption, some Sh73.6 billion worth of long-term loans would have been reclassified as payable within a year, throwing the airline into an existential crisis.

The government’s financial support for KQ is likely to continue in the coming years when the State will be the firm’s sole shareholder. The National Treasury, which holds a 48.9 percent stake in the carrier, has rolled off plans to buy out the minority shareholders at a price that is yet to be disclosed.

KQ whose shares have been suspended from trading on the Nairobi Securities Exchange until December, last traded at a price of Sh3.83 apiece.

The government plans to merge the airline and Kenya Airports Authority (KAA)—the airports manager — under a holding company called Kenya Aviation Corporation.

Under common ownership and control, it is believed that the subsidiaries will be on a stronger financial footing by sharing resources and jointly developing the country’s aviation sector.

KQ has been making losses over the years, wiping out shareholder funds and leaving it to rely on government bailouts to survive.

The airline’s chief executive Allan Kilavuka recently said the company will need at least $500 million (Sh54.87 billion) in bailouts in the next nine months as it navigates the turbulent aviation sector following collapse in air travel demand amid Covid-19 economic fallout.

Without the State aid, Mr Kilavuka warned the airline risks running out of money in the near future as banks are increasingly reluctant to lend to African carriers grappling with depressed earnings due to the coronavirus disruptions.

KQ reported a record Sh36.2 billion net loss in the year ended December, widening it from Sh12.9 billion the year before as costs surpassed revenues by a large margin.

The performance, which the national carrier says was exacerbated by the grounding of its aircraft between April and July last year, also expanded its negative equity to Sh64.1 billion from Sh17.8 billion.

This has further exposed lenders to major losses as shareholder funds have been wiped out, leaving the airline to rely on government guarantees and bailouts to protect the interests of some of its major creditors, including international financial institutions.

Total income fell 58.8 percent to Sh52.8 billion in demonstration of the disruption suffered by the aviation sector in the Covid-19 pandemic which hit the country in mid-March 2020.