A fleet of Kenya Airways planes at the Jomo Kenyatta International Airport in Nairobi. FILE PHOTO | NMG Banks are now betting on a Treasury guarantee to recover their loans from Kenya Airways (KQ) as opposed to the airline’s cash flows, citing the weakened business model in the Covid-19 environment.
Eleven local banks including Equity , KCB Group and Co-operative Bank , in 2017 converted $223 million (Sh24 billion) loans into shares after the Treasury offered a $750 million (Sh80.9 billion) guarantee that also covered the US Exim Bank.
The banks have been valuing the loans based on the interest receivable and what they stand to get from selling KQ shares in the open market to recover their outstanding funds.
However, banks such as Equity have now shifted the model saying the widening loss and insolvency position of KQ makes it difficult to measure future recovery of the loan through interest and sale of shares.
“In 2020, the use of the discounted cash flow approach was no longer considered appropriate as it is unclear what the long-term effects of the Covid-19 pandemic and government actions will be on the cash flows of the original borrower company,” said Equity in its 2020 annual report.
“Management has therefore only taken into account the government guarantee as there is significant uncertainty in relation to the future recovery of interest and recovery of amounts from sale of shares.”
KQ net loss in the year to December nearly tripled to Sh36.2 billion—the worst ever in the history of the airline—on account of Covid-19 disruptions that led to a sharp decline in passenger numbers.
The airline has gone for the eighth straight year without profits, extending its accumulated losses to Sh128.76 billion and negative equity of Sh64.2 billion.
Under the Treasury deal, the banks are free to offload their shares on the open market anytime to recover their outstanding loans.
However, if KQ’s share price will not have risen sufficiently to cover their exposure by 2027, the government guaranteed to step in and pay them a lump sum of $75 million (Sh8.1 billion).
In the case of liquidation, Treasury will wire Sh29.9 billion ($278 million) to the 11 banks — placing a heavy burden on the economy and taxpayers.