Kenya Airways (KQ) is eyeing its second debt-to-equity swap in under seven years as part of a broader restructuring to nurse the ailing airline back to financial health.
The airline is banking on its top shareholders to back the conversion of the loans to shares in fresh efforts to smooth the path for entry of a strategic investor in December or early next year.
Despite posting its first half-year profit in a 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-to-equity swap and the capital injection by a strategic investor.
“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 when the new investor comes, they will, of course, increase equity since part of their money will be used to pay down debt,” KQ CEO Allan Kilavuka told the Business Daily.
“We have some large shareholders and they might want to convert some of their debt to equity.”
In 2017, the government and 11 top banks, including KCB, Equity, Cooperative Bank and NCBA, converted part of the billions of shillings owed to them into equity in an effort 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. Now, KQ’s leadership wants the government 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.
KQ did not reveal the cash currently owed to the 11 banks, but analysts believe it hasn’t changed much from the debt that remained after the 2017 swap deal.
The airline owed the banks $217.2 million (Sh28 billion) after the swap deal. It owes the government tens of billions of shillings.
The conversion of this debt into shares will further dilute the minority shareholders. About 75,000 individuals own a 2.8 percent stake and 2.4 percent held under the employee share ownership plan.
The national carrier says it targets re-balancing its debt-to-equity ratio from the current 13:1 to 2:1 and a swap by the top shareholders is needed.
“We believe that the debt-to-equity ratio shouldn’t exceed 2:1 and that progressively we should be in line with best business practices and moving to 2:1 would be fine. Part of that could be our large shareholders converting their debt-to-equity to help in this rebalancing,” Mr Kilavuka said.
The ratio, which is calculated by dividing the company’s total liabilities by its shareholder equity, is used to evaluate a firm’s capacity to hold debt and meet its financial obligations.
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.
Two weeks ago, 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.
Mr Kilavuka said the company was seeking to finalise negotiations with a strategic equity investor, without giving details.
KQ slid into insolvency in 2018 after an expansion drive left it with billions of shillings in debt.
