Kenya Airways offers 11 banks multi-million debt-for-equity swap deal to replace KLM

Under the shareholder structure, the 11 Kenyan banks will offer $174 million in new credit to KQ.

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In a circular sent to shareholders ahead of its special general meeting on August 7, 11 commercial banks that KQ owes $219 million have been offered a debt-for-equity swap deal that will see them jointly replace Dutch airline KLM as the second largest shareholder after the National Treasury.

Under the shareholder structure, the 11 Kenyan banks will offer $174 million in new credit to KQ to “principally secure aircraft engines refurbishment.

Some of the commercial banks set to benefit from the new shares structure include Equity, KCB Group and Co-operative Bank who jointly own 35.7 per cent of the national carrier through a special purpose vehicle called the KQ Lenders Company Limited.

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 Nairobi securities exchange.

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 banks 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 as reported by a local media house.

KQ borrowed unsecured short-term loans from the banks to meet its daily obligations, including payment of salaries during its most turbulent times.

KLM, a KQ joint venture partner and shareholder, despite 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, has shielded itself from further future possible deeper erosion of its stake.

The Dutch carrier has injected $76 million in cash and in-kind to the airline’s recovery effort and transferred one of its London Heathrow airport landing slot to Kenya Airways (which currently leases them) in exchange for shares.

As part of the broader restructuring plan, the Kenyan government, the single largest shareholder that the carrier owes $261 million last month agreed to convert the debt into shares and increase its stake in the airline to 46.5 per cent from the current 29.8 per cent.

KQ employees with outstanding performance records are also being offered 1.9 per cent shares, making them the company’s fourth largest shareholders.

The recovery plan seeks to offer the airline “cash-flow relief” of $356 million over a period of five years and reduce gross debt exposure by between $490 million to $1.8 billion.

Once fully implemented, it is hoped the plan will leave KQ in a positive equity position of $85 million from the current negative $432 million.

This new shareholding structure was 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.

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