Potential investors for the proposed Kenya Airways (KQ) equity stake sale have expressed uneasiness over the national carrier’s heavy debt load, making it the biggest headache for the airline in its search for buyers.
KQ managers who have undertaken several scouting missions to weigh the attraction of the company’s equity offer in the US, China and the Middle East told Parliament that they had a few leads but with no commitments this far.
“All the potential investors we spoke to agreed that the fundamentals of the company are very strong. Their concern was on the debt level and that’s why a good strategy would be reducing the company’s debt to get extra funding into the company,” KQ CEO Allan Kilavuka told the National Assembly Public Debt and Privatization Committee on Monday.
The management of the airline also disclosed it was in the process of identifying a financial adviser to help develop an investor memo to guide the selection of the preferred investor(s).
The entry of a strategic investor is expected to reduce the risk and cost exposure to the government.
The selection of a financial adviser, which will be undertaken through KQ's internal procurement structures, is set to close in December.
Last December, President William Ruto led a Kenyan delegation to Washington with a pitch to sell a controlling stake in the KQ, as part of a move to steer the beleaguered airline back to profitability.
The push by the government to pursue a strategic investor in KQ comes against the backdrop of a pause on bailouts to the carrier by the Exchequer in the fiscal year starting July 1.
At the end of May, KQ owed Sh187.74 billion ($1.347 billion) to creditors, including the Sh61.4 billion ($439.8 million) Tsavo facility related to the carrier’s acquisition of six Boeing 787-8 aircraft, one Boeing 777-300 ER aircraft and one Genx engine in 2012.
KQ missed payments on the facility, resulting in the government taking over the guaranteed debt after which the Exchequer cleared Sh10.1 billion as at the end of March 2023.
The Exchequer has further guaranteed Sh31.4 billion ($225 million) in KQ borrowing from nine local banks for the financing of working capital and which was secured in November 2017 at the end of the company’s last restructuring.
Aside from the guaranteed facilities, KQ owes Sh22.9 billion to critical suppliers, including aircraft fuelers, handling companies and airport authorities, and whose default would result in the crippling of the airline’s operations.
KQ also owes Sh13.7 billion ($98 million) to syndicates, including the Afrexim Bank and Standard Chartered Bank, for the purchase of 10 Embraer e-jets, a facility dubbed as Samburu and whose default would lead to the grounding of the carrier’s fleet.
KQ disclosed it has received numerous moratoriums from the syndicate which has served to prevent the realisation of the contingency risk.
The airline further owes the government Sh58.7 billion ($420.5 million) in additional support since the airline was restructured in 2017.
KQ’s heavy leverage has seen the company continue to operate as a going concern, with the group’s and company’s total liabilities exceeding total assets by Sh108.1 billion and Sh105.2 billion respectively in the year ended December 2022.
During the same period, KQ incurred a wider loss of Sh38.3 billion from Sh15.9 billion in 2021 after higher forex losses and steeper fuel costs.
The treatment of the company’s debt going forward is likely to be a top concern for any new strategic investor(s) in the company, with any further debt restructuring being likely to influence the control of the carrier.
In 2017, for instance, 10 local banks — Equity, KCB, Co-operative, CBA, NIC, SBM, DTB, NBK, I&M and Ecobank — gained a new shareholding of 38.1 percent from the conversion of Sh23.3 billion ($167 million) debt to equity.
The government’s own shareholding in KQ also increased from 26.7 percent to 48.9 percent via a similar conversion.
Despite jitters about the company’s debt treatment, the KQ management insists priority remains in the recapitalisation of the carrier after which the government and other creditors may opt to undertake new debt-to-equity switches.
“The airline is significantly undercapitalised and that’s why the quest for capitalisation by either government or strategic equity is important. If that money comes and the airline is healthy, the government can convert that debt or request the strategic investor to pay off the debt,” said Mr Kilavuka.
KQ’s new capitalisation underpins its latest operational review which is dubbed Project Kifaru.
Beyond the equity stake sale, the plan involves optimising the fleet and network, cost reduction programmes, collective bargaining agreement negotiations and the growth of partnerships through collaborations with peer carriers on the continent.
