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DEBT SWAP DEAL WANTS BANKS TO LEND KQ SH18BN - FINANCIAL-24

Commercial banks that agree to swap their multi-billion shilling debt for a stake in Kenya Airways will be required to lend the airline an extra Sh18.1 billion at an interest rate of about 6.65 per cent, principally to refurbish aircraft engines.

The Treasury, which is KQ’s top shareholder, has asked the 11 banks that the airline owes billions of shillings to set up the dollar-denominated fund that will earn them an annual interest based on three-month USD London Interbank Offer Rate (Libor) plus 5.35 percentage points.

The three-month USD Libor rate currently stands at 1.316 per cent.

Details of this facility are contained in a presentation KQ made to the banks earlier this month, explaining why they should join forces and own a 35.7 per cent slice of the business.

“The new facility is fully guaranteed by government and shall be initially available for five years and renewable every year thereafter for five years based on the annual utilisation requirements of the borrower,” the airline says.

The 10-year revolving fund is one of the conditions the Treasury set for the lenders, including Equity , KCB and Co-op Bank , in exchange for the guarantee it is providing for their doubtful loans that are being swapped for the 35.7 per cent stake in the airline.

KQ owes the local lenders Sh23 billion in short-term loans they individually advanced the national carrier to enable it meet its obligations, including payment of salaries.

KQ owes Equity Bank Sh5.2 billion, National Bank (Sh3.5 billion), Co-operative Bank (Sh3.3 billion), CBA (Sh3.1 billion), and Sh2.1 billion each to NIC Bank, DTB and KCB.

I&M Bank and Ecobank are claiming Sh824 million each from the cash-strapped airline, while troubled Chase Bank and Jamii Bora banks are owed Sh721 million and Sh412 million respectively.

Under the Treasury proposal, the banks will be allowed to divest their 35.7 per cent stake over 10 years by selling in the open market or to a strategic investor.

KQ bank debts (Sh, billions)

Equity Bank, Ecobank and Jamii Bora are reportedly opposed to the debt-to-equity swap

Total

24.00

Equity 

5.15

NBK

3.50

Co-op

3.30

CBA

3.09

NIC

2.06

KCB

2.06

DTB 

2.06

I&M 

0.82

Ecobank

0.82

Chase

0.72

Jamii Bora

0.41

More support

Over and above the mountain of outstanding loans, and the proposal that they jointly own shares in the ailing airline, the banks are being asked to commit even more money to supporting KQ.

The new working capital fund will also see local banks earn an extra annual interest of 1.5 per cent — payable per quarter — for the portion of the facility they issue as letters of credit.

They will also reap from processing and annual facility fees that will “all be borne by Kenya Airways”, according to the KQ presentation.

Given that the new facility is dollar-denominated, KQ risks seeing its future earnings negatively impacted by foreign exchange losses that have in the past years been troublesome, alongside fuel hedging.

In June last year, the airline’s acting finance director, Dick Murianki, disclosed that a majority of the loans, including local ones, are dollar-denominated and were taken up when the shilling was trading at 75 or 78 units to the dollar.

KQ is now repaying them at over 100 units to the dollar.

At the rate of 6.65 per cent interest rate, the new KQ facility compares favourably with the government’s prevailing borrowing rate of about five to six percentage points above Libor.

Business Daily

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