No special treatment for Banks acquiring shares in Kenya Airways

 

Kenya Airways aircraft at the Jomo Kenyatta International Airport.

The lenders tied to troubled institutions such as Kenya Airways and Nakumatt will not get special treatment, according to the central bank.

Central Bank of Kenya (CBK) Governor Patrick Njoroge has said that while the regulator supports negotiations, the banks will have to classify their loans accordingly and ensure that their equity position in these institutions is not valued more than a quarter of their core capital.

“The plan to convert debt into equity is okay. However, the equity interest should not breach the maximum threshold... it cannot exceed 25 per cent of their core capital,” explained Dr Njoroge.

The two institutions owe banks Sh31 billion, which is at potential risk of default if they do not agree on a deal that can ease the strain on the banks’ books. “Lending has to be correctly classified. We are not offering any forbearance in this regard,” he said.

The CBK caution comes as reports indicate that some banks are reluctant to take up an equity position in Kenya Airways under a proposed elaborate financial restructuring plan to return the carrier to profitability.

The 11 lenders are reported to have formed a special purpose vehicle — the KQ Lenders Company Limited — through which they will own 35.7 per cent of the national carrier

The banks, which include Kenya Commercial Bank (KCB Group), Commercial Bank of Africa, Cooperative Bank, Jamii Bora, I&M Bank, NIC Bank and Ecobank, Chase Bank, National Bank, and Diamond Trust Bank will own shares in the troubled carrier.

A clause in the terms of restructuring the airline’s debt states that if the debtors do not take up equity, then Kenya Airways will seek protection from the companies law, making it difficult for the banks to recover the Sh23 billion they loaned to the airline. KQ is also seeking the approval of most of its creditors (75 per cent), which would be used to compel the rest of the creditors to consider the recovery plan that had been agreed upon.

“To the extent unanimous consent is not obtained from certain unsecured bank lenders, the company will implement that aspect of the transaction via a scheme of arrangement on the Companies Act,” Kenya Airways chairman Michael Joseph said in a notice.

Under the Companies Act, the insolvency law of 2015 has the net effect of giving struggling companies another chance so that they can be settle their debts as they continue to operate.

The lenders will not even have time to consult with their shareholders as they take up the non-banking business.

“Bankers are like any of us... what do they know about aviation? However, what is important is that a solution is negotiated because if talks come down everybody loses. It is in their interest,” Dr Njoroge said. Kenya Airways borrowed unsecured short-term loans from the banks to meet its daily obligations, including payment of salaries, during its most turbulent times.