Kenya Airways is banking on the conversion of its debt, owed to the Kenyan government, into equity as part of efforts to fly out of a financial crisis that has dodged it for the last three years.
The airline said Tuesday that Kenya's Cabinet has approved the debt/equity swap, which now awaits Parliament's nod.
"The support confirmed by the Cabinet included conversion of the Government of Kenya loans into equity, and provision of contingent guarantees subject to parliamentary approval in exchange for material concessions to be provided as part of the financial restructuring," the airline said in a statement.
KQ added that this would help secure future funding and would now not require government to provide cash as part of the recapitalisation.
The heavily-indebted carrier owes $1.45 billion. The debt combined with low business has rendered the airline technically insolvent.
The government will offer $750 million in guarantees to KQ's creditors. Of the amount, $525 million will cover debt owed to the US Exim Bank and the rest to local lenders, reported Reuters.
"We continue to support Kenya Airways as it is a valuable national strategic asset. As a major shareholder, we are keen to secure the airline's future and ensure it has a healthy liquidity profile and remains operational," said National Treasury Cabinet Secretary Henry Rotich.
"The aviation sector continues to play a major role in the country's development and position as a major hub in the region. Kenya Airways, as the national carrier, plays a major role in driving the country's competitiveness, and diplomacy and what we have settled for is the best interest not only of the airline but the country at large," Transport Cabinet Secretary James Macharia said.
Michael Joseph, KQ chairman, said once the transaction is completed it will position Kenya Airways for a new era of sustainable growth by cutting debt and maintaining a healthy liquidity profile.
"We are grateful for the support obtained from the Government and urge the National Assembly to give its approval.
"Already we have seen our operating profit improving and reduced our costs and losses. With a healthier liquidity, and at no cash cost to the Government, the airline will be in a better place to continue with its operations serving Kenya and the region at large" Mr Joseph said.
The airline has been making losses since 2013.
Its principal shareholders are Kenya's National Treasury with a 29.8 per cent stake and Dutch airline KLM, which owns 26.73 per cent shareholding.