Eleven Kenyan banks are set to convert Sh23 billion in risky Kenya Airways #ticker:KQ loans into shares in a rare restructuring deal fronted by the Treasury that has seen the lenders also commit to advance the struggling airline working capital.
The banks, which include big lenders Equity #ticker:EQTY , KCB Group #ticker:KCB , Commercial Bank of Africa and Co-operative Bank #ticker:COOP , will form a new company (special purpose vehicle) through which they will own shares in the struggling national carrier. Jamii Bora, I&M Bank #ticker:I&M , NIC Bank #ticker:NIC and Ecobank, Chase Bank, National Bank #ticker:NBK and Diamond Trust Bank #ticker:DTK complete the list of lenders that have outstanding loans with the airline.
“The 11 banks’ debt will move to equity. They can recover their debt in form of shares, by selling them on the stock exchange,” said Transport Secretary James Macharia.
News of the conversion of bank loans into shares came a day after the Treasury announced that it would also convert its Sh25 billion KQ loans into shares.
The Treasury owns 29.8 per cent of KQ while KLM has a 26.7 per cent stake.
KQ has reported net losses for five consecutive years.
It narrowed its net loss for the 12 months to March by 60.9 per cent to Sh10.2 billion.
Details of the deal with the banks are contained in a sessional paper tabled by National Assembly Majority Leader Aden Duale in the House yesterday, with a request to MPs to “fast-track” it before they break for recess next Thursday.
The document, drafted by Treasury Secretary Henry Rotich, shows that the banks are free to offload their shares on the open market anytime over the next decade to recover their outstanding funds.
However, if KQ’s share price will not have risen sufficiently to cover their exposure by 2027, the government has guaranteed to step in and pay these local banks a lump sum of $75 million (Sh7.7 billion).
In the case of liquidation, which is what the intricate restructuring plan is trying to prevent, the Treasury will wire Sh28.8 billion to the 11 banks — placing a heavy burden on the economy and taxpayers.
Several executives of the affected banks, who spoke to the Business Daily on condition of anonymity, said they are getting into the deal because it is the “only option of getting our money back”.
Their grumble is that, over and above further extending the life of the facilities, they are being “forced to partner” and become owners of a company which may not have been in their radar in the first place.
“The financial restructuring option... creates the incentives to ensure that all the relevant stakeholders of the company contribute to achieve a mutually beneficial outcome,” Mr Rotich notes in the sessional paper.
“It is inter-conditional on every one of them agreeing to the restructure. The guarantees avoid any cash bailout and consequential request from all stakeholders to receive cash.”
KQ borrowed the short-term loans to meet its daily obligations — which at some point included paying salaries — as well as purchasing parts like engines.
As at March 2016, the carrier also had long-term (12-year) asset-backed loans totalling Sh105.5 billion from Barclays Bank Plc #ticker:BBK , Citibank and JP Morgan used to fund acquisition of aircraft.
The long-term credit is guaranteed by the Export-Import Bank of the United States of America (Eximbank) and was initially slated to mature between 2017 and 2026, with annualised interest rates of up to 5.36 per cent.
KQ’s management recently negotiated with both sets of lenders to sign off on concessions, including extending loan tenures to bring down interest payable per cycles.
KLM, the other major shareholder, is expected to inject at least $100 million (Sh10.3 billion) in KQ.
The loans totalling $750 million (Sh77.3 billion) have piled immense pressure on the loss-making national carrier to the extent that, as one of the affected bankers put it, repayments have become “erratic”.
The restructuring guarantees payment for both sets of creditors in the event of KQ defaulting. The Treasury’s guarantee of Eximbank’s portion (Sh54.07 billion) is for a period of five years, offering KQ some breathing room.
Local banks, who will now be shareholders, will only secure the guarantee by committing to offering financial support to the airline if and when required as committed shareholders.
The government is, however, more concerned with the loans owed to local banks since Barclays Bank Plc, Citibank and JP Morgan have the option of selling KQ’s planes to recover their funds with “minimal residual risk to government.”
Additional reporting by Edwin Mutai