Eight commercial banks forced the Treasury to pay them Sh19.3 billion ($149.9 million) in full for unpaid loans to Kenya Airways and rejected an offer to recover the defaulted debt through a 6.5-year bond.
The lenders, including Equity Bank, NCBA Bank and Cooperative Bank, slapped the Treasury with a default notice after the national carrier indicated it had no cash to settle the debt.
The Treasury, which had guaranteed the loan, had to settle the debt in cash by August or issue the lenders an acceptable government security instrument or a bond, prompting them to issue a loan call-up.
“This amount of $149,989,169 shall be payable to Government of Kenya (GoK) by Kenya Airways (KQ) through a Shareholder Loan Agreement whose terms are to be negotiated and finalised in the first half of 2025,” the Treasury Cabinet Secretary John Mbadi, disclosed in a notice to Parliament.
The Treasury, which has a 48.9 stake in the airline, guaranteed KQ, as the airline is popularly known by its codeshare, a new loan of $42 million and letters of credit taken from the eight local banks, including Ecobank, NBK, DTB and I&M, amounting to $132 million.
Letters of credit were issued by the banks to Kenya Airways suppliers and firms that offered it aircraft on a lease with the promise to settle the dues if the national carrier defaulted.
KQ defaulted on the payments, prompting the lenders to put pressure on the State to settle the amount.
“To address the breach, the lenders called on the government guarantee and issued a demand to GoK for immediate settlement of $149.9 million,” said Mr Mbadi in the notice.
“The settlement to the local banks was done on 3rd January 2025.”
The banks own 38.1 percent of the airline after an earlier swap of loans to equity, and the Treasury and KQ were seeking a similar switch with the new loans.
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.
Currently, Treasury bonds with a 6.5-year tenure can attract interest of up to 13 percent, a return that the State thought was attractive for banks that have in the past decade failed to make a profit for their multi-billion shilling financing of KQ.
The banks insisted on full payment of the Sh19.3 billion debt.
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 a 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 plug through both debt conversions and the capital injection by a strategic investor.
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 had 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 bonds.
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.
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. Its revenue rose by 22 percent in the first half, helped by a 10 percent rise in passenger numbers.
KQ slid into insolvency in 2018 after an expansion drive left it with billions of shillings in debt.
