National carrier Kenya Airways has prepared a delicate recovery plan that will see 11 commercial banks it owes Sh22.8 billion jointly replace Dutch airline KLM as the second largest shareholder after the National Treasury.
Kenya Airways, which is popularly known as KQ, says in a circular sent to shareholders ahead of a special general meeting that the lenders, including Equity, KCB Group and Co-operative Bank have formed a special purpose vehicle — the KQ Lenders Company Limited — through which they will own 35.7 per cent of the national carrier.
KQ borrowed unsecured short-term loans from the banks to meet its daily obligations, including payment of salaries during its most turbulent times.
The national government, the single largest shareholder that the carrier owes Sh27.2 billion (inclusive of accrued interest), is also converting the debt into shares, a move that is set to increase its stake in the airline to 46.5 per cent from the current 29.8 per cent.
The two share swaps — by the banks and the Treasury — have a 95 per cent dilutive effect on all existing shareholders.
KLM, a KQ joint venture partner and shareholder, is taking the biggest cut in terms of actual valuation of its stake which is nearly halving to 13.7 per cent from the current 26.7 per cent despite the Dutch carrier injecting Sh7.9 billion in cash and in-kind to the airline’s recovery effort.
KQ employees with outstanding performance records are also being offered 1.9 per cent shares, making them the company’s fourth largest shareholders.
Mbuvi Ngunze, KQ’s former managing director and restructuring adviser, said the banks will have the option of divesting from the airline over a 10-year period by selling their stake on the stock market or to a strategic investor.
“The Treasury will have two seats in the KQ board, KLM will appoint another while the banks shall also have one director, as long as they own at least five per cent of the shares,” he said.
This new shareholding structure is contained in a comprehensive shareholder circular prepared by a team of consultants, including PTJ Partners (restructuring adviser), White & Case (international counsel), Coulson Harney (local legal advisers) and Deloitte (independent financial adviser). Shareholders have been invited to an extraordinary general meeting (EGM) on August 7 to approve the proposed changes.
The recovery plan seeks to offer the airline “cash-flow relief” of Sh37 billion over a period of five years and reduce gross debt exposure — aircraft, bank and government debt as well as future lease payments — by between Sh51 billion to Sh191 billion.
Its ultimate goal is to leave KQ in a positive equity position of Sh8.9 billion from the current negative Sh44.9 billion.
If the plan is approved, the 70,000 Kenya Airways’ retail shareholders will be left with a tiny 1.24 per cent of the national carrier, down from 24 per cent — making them the biggest losers in the transaction.
The investors will, however, be invited to participate in a Sh1.5 billion “open offer” to reduce the dilutive effect before the year ends.
KLM has shielded itself from the possible deeper erosion of its stake in the troubled airline by making a multi-billion shilling cash injection and transfer of one London Heathrow airport landing slot to Kenya Airways (which currently leases them) in exchange for shares.
The Dutch carrier will also get more equity in lieu of payments due from KQ for an IT system installation and support services it has rendered the Kenyan carrier.
These two “in-kind” transactions are valued at Sh2.7 billion. “The debts being turned into equity were so significant such that KLM would have had to inject over Sh15 billion to retain its original stake,” said Mr Mbuvi.
The Treasury, which is not injecting fresh funds into KQ, has guaranteed KQ $750 million in local and international loans in exchange of several concessions from the lenders.
Under the shareholder structure, the 11 Kenyan banks will offer Sh18.1 billion in new credit to KQ to “principally secure aircraft engines refurbishment. A few banks are yet to sign the plan, according to the circular.
The recovery plan says the local lenders, as well as the Treasury have three options to safeguard their interests.
They can either individually convert their debt into ordinary shares, convert a portion of it for a convertible bond or join forces under the special purpose vehicle.
“If any Kenyan bank or the government fails to exercise its option in relation to the above by the date of launch of the restructuring, it shall be deemed to have opted for option the first option above,” the circular says.
KQ chairman Michael Joseph has informed shareholders that there is no funding alternative to rescue the airline and that failure to implement the plan will see the business “enter into formal insolvency” and delist from the NSE.
Mr Joseph has, through the circular, requested shareholders to approve the plan, adding that it is in the best long-term interests of the company.
However, the EGM is a mere formality. “Shareholders representing over 56 per cent of the issued and outstanding ordinary shares have indicated their intention to vote in favour of the resolutions at the EGM,” said Mr Joseph.