Equity’s and Ecobank’s acceptance of the debt conversion proposal is what KQ needs to move forward a stalled restructuring initiative.
Equity, Ecobank and Jamii Bora, who are together owed Sh6.4 billion, have since September stalled the debt conversion plan, insisting it leaves them in worse positions than their peers whose debts are better covered by government guarantees.
National carrier Kenya Airways’ #ticker:KQ climb out of the debt hole is expected to get a big boost this week when Equity Bank signs the deal to convert its Sh5 billion loan into shares.
Documents seen by the Business Daily show that Equity #ticker:EQTY and Ecobank – which have been opposed to the shares deal – are finalising an agreement which, if signed, will see their exposure in the airline spread more equitably alongside the eight other lenders.
Equity’s and Ecobank’s acceptance of the debt conversion proposal is what KQ needs to move forward a stalled restructuring initiative that is critical to its recovery plan.
National Bank of Kenya #ticker:NBK, Co-operative Bank #ticker:COOP, CBA, NIC Bank #ticker:NIC, DTB #ticker:DTK, KCB #ticker:KCB, I&M #ticker:I&M, and Chase Bank, who are collectively owed Sh16.3 billion by KQ, approved the initial proposal fronted by the troubled lender and government.
Equity, Ecobank and Jamii Bora, who are together owed Sh6.4 billion, have since September stalled the debt conversion plan, insisting it leaves them in worse positions than their peers whose debts are better covered by government guarantees.
Not playing ball
While KQ and the government moved to enforce a section of the Companies Act allowing them to forcefully drag along the three dissenters, the banks rushed to the Supreme Court to block the move, leading to the search for an out-of-court settlement.
The fresh deal follows many meetings between investment secretary Esther Koimett – the Treasury’s representative – and top managers of the three banks not playing ball.
“We have been holding discussions with all the players involved in the restructuring with the aim of bridging the differences of opinion,” Ms Koimett told the Business Daily in an interview.
“We hope to have an agreement on paper soon.”
Equity, Ecobank and Jamii argued that KCB, NBK, Co-op had fairly balanced debt portfolios in the form of letters of credit (Sh7.7 billion) and cash (Sh8.9 billion). All other banks had not issued letters of credit (LCs).
The Treasury had initially committed to fully guarantee the LCs, arguing that they were part of the Sh18 billion the creditor banks are collectively expected to lend KQ in the future. Old loans would, however, only be guaranteed to the tune of Sh5.2 billon.
The three dissenting banks had argued that this arrangement would see them exit the transaction in a worse off position than KCB, NBK and Co-op, hence their spirited objection.
Under the new deal, the lenders that do not have the fully guaranteed LCs will be allowed to issue them on a prorated basis, but within the Sh7.7 billion limit. Similar considerations will be made for fresh lending.
Jamii, a tier-three bank, will now be exempted from swapping its Sh381 million loan into debt. The lender will instead be paid its dues over five years (an increase of one year) and at an interest rate significantly lower than the current nine per cent.
“The updated allocation and guarantee proposal is designed to find a consensual and equitable resolution which will allow KQ to receive the full backing of all 11 of its Kenyan banks,” the carrier says in its fresh proposal to lenders.
“It seeks to provide maximum equality between institutions covering both funded and unfunded credit lines.”
Banks will then commit to issue fresh cash as follows; CBA (Sh515 million), Co-op (Sh535.6 million), DTB (Sh340 million), Ecobank (Sh134 million), Equity (Sh855 million) and I&M (Sh134 million). KCB and NIC will each pump in Sh339 million while NBK will wire Sh402 million.
Chase Bank, which is under receivership, has not been assigned a funding quota.
Consensus
These amounts are listed as estimates and could vary slightly when the deal closes.
In effect, banks without LCs will now end up issuing significantly less fresh funds than they would have otherwise done.
The lenders, upon reaching consensus, will hold a 28 per cent stake in the airline through a holding firm called KQ Lenders Company.
The company will have a lifespan of 10 years and will pay the lenders an interest of one per cent (year one to five), three per cent (year six and seven) and five per cent for the last three years.
The banks will be expected to recoup their debts by selling the airline’s shares to a strategic investor or in the open market in the medium term.
The new plan envisions that fresh funds shall be deposited in an escrow account a week before the deal is done, the documents in the Business Daily’s possession show.
Accrued bank payments will be wired to the respective lenders on the day the deal closes. The LCs will be posted on the same day.
Operating lessor agreements will be effected a week after the signing of the deal, precipitating the release of “trapped cash back to KQ from lessors.”
