Sh11bn KQ domestic loan agreement with government

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Sh11bn KQ domestic loan agreement with government


A Kenya Airways plane grounded at Nairobi’s Jomo Kenyatta International Airport on April 3, 2020.

summary

  • The airline took the debt in two installments of 5 billion shillings followed by 6 billion shillings.
  • The 5 billion shillings loan has a concessional interest rate of three percent per annum – less than a quarter of the rate charged by commercial banks – and matures in five years.
  • The carrier will pay interest of 150 million shillings per year on the loan or a total of 750 million shillings over five years.

Kenya Airways #ticker: KQ revealed the terms of an 11 billion shillings loan it took from the government in the year ended in December to fund its operations at a time of the Covid-19 pandemic had hurt its cash flow.

The airline took the debt in two installments of 5 billion shillings followed by 6 billion shillings.

The 5 billion shillings loan has a concessional interest rate of three percent per annum – less than a quarter of the rate charged by commercial banks – and matures in five years.

The carrier will pay interest of 150 million shillings per year on the loan or a total of 750 million shillings over five years. Principal repayment is expected at the end of the five years.

A loan of a similar size would cost 650 million shillings per year, or a total of 3.2 billion shillings in five years, based on the 13% interest rate currently charged by most commercial banks.

“The first loan of 5 billion shillings was aimed at facilitating engine overhauls in the E-190 aircraft fleet due in 2020,” the national carrier said in its latest annual report.

“As part of the government’s commitments to support the resumption of airline operations following the impact of the Covid-19 pandemic, a second loan of 6 billion shillings was advanced in the year and its terms should still to be finalized. “

The government was the only entity to provide new loans to the company during the review period, testifying to the critical role the state played in keeping the airline alive.

KQ, as the airline is known by its international code, previously borrowed heavily from international financiers and almost all of the country’s major banks, including KCB Group and Equity Group.

The airline, however, has defaulted on local lenders who now only maintain a revolving credit facility they agreed to with the company earlier as part of their restructuring of their combined $ 17 billion unsecured loans. shillings in 2017.

International lenders like JP Morgan and Citibank guaranteed their loans using the plane the company bought.

The heavy losses and declining revenues caused the company to violate conditions set by global financiers, highlighting the airline’s over-indebtedness.

“As of December 31, 2020, the group was not in compliance with one of the financial covenants being the unrestricted cash-to-revenue ratio,” KQ said in the report.

“The group and the company, however, obtained waivers from the financiers before the end of the year and, as such, the group and the company had a contractual right to defer payment by at least 12 months at the end of the reporting period. “

The ratio measures a company’s ability to generate cash from its operations and is ideal for assessing the financial health of businesses such as airlines that do not offer sales on credit.

Without the exemption, some 73.6 billion shillings in long-term loans would have been reclassified as payable within a year, plunging the airline into an existential crisis.

Government financial support for KQ is expected to continue in the years to come, when the state becomes the sole shareholder in the company. The National Treasury, which has a 48.9% stake in the carrier, has abandoned plans to buy out minority shareholders at a price that has not yet been disclosed.

KQ, whose shares were suspended from trading on the Nairobi Stock Exchange until December, last traded at a price of Sh3.83 each.

The government plans to merge the airline and the Kenya Airports Authority (KAA) – the manager of the airports – under a holding company called the Kenya Aviation Corporation.

Under common ownership and control, it is believed that subsidiaries will be on a more solid financial footing by sharing resources and jointly developing the country’s aviation sector.

KQ has suffered losses over the years, wiping out shareholder funds and leaving it to depend on government bailouts for its survival.

The airline’s chief executive, Allan Kilavuka, recently said the company would need at least $ 500 million (54.87 billion shillings) in bailouts over the next nine months to navigate the turbulent business of aviation after collapse in demand for air travel amid economic fallout from Covid-19.

Without state aid, Mr Kilavuka warned that the airline could run out of money in the near future, with banks increasingly reluctant to lend to African carriers struggling with depressed incomes due to coronavirus-related disturbances.

KQ reported a record net loss of 36.2 billion shillings in the year ended December, topping it by 12.9 billion shillings the year before, with costs far exceeding revenues.

The performance, which the national carrier said was exacerbated by the grounding of its planes between April and July last year, also extended its negative equity to 64.1 billion shillings from 17.8 billion shillings. shillings.

It further exposed lenders to significant losses as shareholder funds were wiped out, leaving the airline to rely on government guarantees and bailouts to protect the interests of some of its major creditors, including international financial institutions. .

Total income fell 58.8% to 52.8 billion shillings, evidence of the disruption suffered by the aviation industry during the Covid-19 pandemic that hit the country in mid-March 2020.



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