20 November 2017

Kenya: KLM Loses Out in Kenya Airways Debt-Equity Swap

Dutch carrier KLM is the biggest loser in the just concluded Kenya Airways debt-equity swap that will see the struggling airline majority owned by the government and banks, who could, however, sell off their stakes at the earliest opportunity.

Treasury Cabinet Secretary Henry Rotich said that in the new shareholding structure, after converting KQ's loans of Ksh44.2 billion ($442 million) into equity, KLM will have a 7.8 per cent stake, down from 26.7 per cent, whereas the government's will rise to 48.9 per cent from 29.8 per cent.

The banks' stake will stand at 38.1 per cent, acquired through KQ Lenders Co.

"Government loans to KQ were huge and when they were converted into equity, they diluted KLM's equity. The government will have three members on the board while the banks will bring in two, and KLM one," Mr Rotich said.

Previously, KLM had two board seats, the same as the government while the 10 banks are the new entrant taking up two seats, in proportion to their combined ownership of 87 per cent shares.

Fresh capital

KLM, which has been a KQ shareholder and partner since December 1995, will also inject KSh7.9 billion ($76 million) in fresh capital into the business, although this is not enough to prevent a dilution in light of the large amounts being converted by the state and the banks.

The banks are Equity, KCB Group, Commercial Bank of Africa, Ecobank, I&M, Co-operative, NIC Bank, Chase Bank, National Bank and Diamond Trust Bank who can recover their debt in form of shares, by selling them on the stock exchange.

"Banks should sell their stake immediately an opportunity to exit presents itself. They have no business being equity investors in the first place, it was forced on them by circumstances," AIB Capital analyst Dominic Ruriga told The EastAfrican.

A document drafted by Mr Rotich shows that the banks are free to offload their shares on the open market any time over the next decade to recover their investment.

However, if KQ's share price will not have risen sufficiently to cover their exposure by 2027, the government has guaranteed it will step in and pay these banks a lump sum of $75 million (Ksh7.7 billion).

In the event of liquidation, which is what the intricate restructuring plan is trying to prevent, the Treasury will wire Ksh28.8 billion ($278 million) to the 11 banks -- placing a heavy burden on the economy.

According to SIB analyst Francis Mwangi, it would be prudent for banks to sell their stake once they recover their money.

Strategic direction

"For capital adequacy reasons, holding the funds in the form of shares for too long would deny the banks' capital adequacy flexibilities," said Mr Mwangi.

The government also explained that when all the debt owed by KQ and the interest accrued were calculated, its shareholding would have been higher than 50 per cent, making the airline a state corporation which was not what the government wanted.

In notices posted in local dailies, it had applied to the Capital Markets Authority for exemption from a requirement to make a takeover bid for KQ, on the grounds that the restructuring was meant to rescue a firm in financial distress in the interest of the public.

"We had to assure Kenyans that there was a business case for support of the airline and apart from our own determination, an independent third party review from the US, which has rebuilt many airlines that have had challenges, gave us confidence that there was a strong case for us to intervene," said Mr Rotich.

"The airline expects that with the operational restructuring, they will continue to refine their strategic direction to ensure that the problems that brought it down will never recur."

The restructuring plan that was first mooted in June has been agreed following long negotiations which saw one bank, Jamii Bora, opt out of converting their loan, and instead choosing to receive their dues over a five-year period.

The Treasury came up with the plan to save KQ from collapse due to the huge negative impact this would have on the economy, affecting the transport, logistics and tourism sectors, which all depend on the airline.

KQ has reported net losses for five consecutive years. It narrowed its net loss to March by 60.9 per cent to Ksh10.2 billion ($102 million).

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