Ten Kenyan banks that bailed out Kenya Airways (KQ) #ticker:KQ by converting their loans into shares Wednesday got an early boost after the national carrier’s capitalisation surged by Sh52.3 billion in the day’s trading on the stock market.
The national carrier’s shares resumed trading on the Nairobi Securities Exchange (NSE) yesterday after two weeks’ suspension during which the total issued stock was increased by 4.3 billion shares.
The airline’s market valuation rose 7.6 times, defying what would ordinarily have been a dilutive effect of the increase in issued shares.
If it holds, the rise in market value should in theory make it possible for the 10 Kenyan banks to sell their shares and recover their Sh22 billion debt that the airline defaulted on before they were forced into a debt-to-equity conversion.
KQ previously traded on November 14 when its share price closed at Sh5.3 apiece, giving it a market capitalisation of Sh7.9 billion.
The stock was suspended the next day to allow for a series of capital restructuring moves which had the net effect of increasing the total issued shares from 1.49 billion to 5.82 billion.
On the enlarged share base, investors yesterday traded 2.1 million units on a wide pendulum that swung from lows of Sh2.1 to highs of Sh15, settling at an average of Sh10.35, which assigned the airline a market value of Sh60.2 billion.
Retail investors, however, saw their paper wealth cut in half despite the higher valuation. This is because they were diluted 95 per cent in a process that, for example saw, an investor’s original holding of 1,000 shares drop by a factor of four to 250 units.
The small investors will be required to pay up an aggregate of Sh1.5 billion in an upcoming cash call to minimise their dilution.
The entry of banks on KQ’s shareholders register, including KCB #ticker:KCB, Equity #ticker:EQTY and NIC #ticker:NIC, which now own 38.1 per cent of the national carrier, was one of the major reasons for the increase in the number of shares.
The lenders, which swapped their loans for shares at a price of Sh2.13 each, yesterday broke even on paper as their stake was marked at Sh22.9 billion. The banks opted to take up KQ shares after weighing worse options, including booking bad debts.
Should the airline’s stock retain its sharp premium on the company’s fundamentals, the banks could start recouping their cash from selling their shares.
The shares held by the lenders — 2.2 billion units — are however unlikely to be offloaded in the open market in a short period without sinking the stock.
Airlines, pension funds and private equity firms are the ones likely to buy out the banks but these institutional investors are expected to wait for KQ’s recovery before jumping in.
The national carrier says the restructuring plan has pulled it from a negative net worth of Sh45 billion to a positive book value of Sh12 billion.
This translates into a net asset value per share of about Sh2 or a fifth of what KQ was trading at yesterday.
Dutch carrier KLM is set to be allotted additional shares running into hundreds of millions, which will further change KQ’s capital structure.
The airline’s debt binge roped in 11 local banks —including Jamii Bora which successfully pushed to be paid in cash rather than shares— that bet on an implicit government guarantee to protect their loans.
When KQ faced bankruptcy, however, the government forced the lenders to share in the losses, including lost interest income.
The government offered to guarantee only new loans to the tune of Sh18 billion, which the lenders are to provide as part of the capital restructuring plan.
Interest rates on the converted loans from local banks diverged by up to 5.5 percentage points, indicating varying risk perceptions among the lenders.
KCB’s Sh2 billion had the highest interest rate of 12.5 per cent, followed by National Bank of Kenya’s Sh3.5 billion at 11.22 per cent.
Equity Bank, Commercial Bank of Africa and Ecobank all priced their respective loans of Sh5.1 billion, Sh3 billion and Sh824 million respectively at 10 per cent.
The Sh412 million that KQ owed Jamii Bora had an interest rate of nine per cent, the same level as NIC Bank’s Sh2 billion.
Co-op Bank #ticker:COOP priced its Sh3.3 billion loan at 8.83 per cent, followed by Diamond Trust Bank’s Sh2 billion (at 8.5 per cent) and Chase Bank’s Sh721 million (8.25 per cent).
I&M #ticker:I&M, which lent KQ Sh824 million, offered the national carrier the lowest interest rate of seven per cent.