Lenders at loss on how to fly stricken KQ to profitability

Kenya Airways 787 Dreamliner taking off photo:courtesy

The most dazzling and frightening view above the clouds is probably the tiny beeping console screens and the dozens of buttons in an airplane’s cockpit, if you have no idea how the whole contraption is flown.

Now, 11 banks are finding themselves in the cockpit of Kenya Airway’s fleet of Dreamliners clutching at the joysticks with completely no idea of how to steer it to profitability - or the consolation of flight hours of experience required for the decade-long turnaround plan.

Major lenders KCB, Equity, Commercial Bank of Africa, Co-operative, Diamond Trust, I&M and NIC are about to become the second-largest shareholders in the national airline.

Smaller rivals Ecobank, Chase Bank, National Bank and Jamii Bora are also in the mix.

A confidential situation analysis on just how the banks will take up the 35.7 per cent stake in the carrier shows that some of them are already feeling jittery about the deal.

“It is very easy to write something that looks very good on paper but when it comes down to actual business model for that borrower or that entity is another thing which we do not know, banks know even less. Banks are like us, how much do they know about aviation?” Central Bank Governor Patrick Njoroge said recently at a press briefing.

Some of the banks have insisted that the agreement they had with KQ was a lender-borrower arrangement and forcibly changing this into shareholding will seriously harm their liquidity, haemorrhage customer deposits and destabilise them financially.

“This is setting a bad precedent. In fact, it will make it difficult to lend to companies that are struggling financially. What will prevent companies that are struggling financially from borrowing and then turning the funds into shareholding if KQ is allowed to do what they are up to?” a bank executive told Weekend Business on conditions of anonymity.

MATTER OF CONCERN

Dr Njoroge said that while it would not weigh into the deal, a matter of concern should be whether Kenya Airways, fondly known as KQ, will not come hurtling down with the lenders after the restructuring.

“Our concern, of course, is the underlying sustainability of the borrower; that is what underpins the deal. You can imagine if they had a brilliant model on paper and that was not viable and would not take off in reality even though on paper it looked very good,” he said.

“I think those are concerns that need to be dealt with, the borrower should actually be doing the right thing, that is strengthening itself,” he said.

Banks have gone to school of aviation to understand the technical lingo of nautical miles, which has taken them through the airlines, history, media coverage and peer reviews over the last eight years.

Some of the banks that have opposed the move insist their peers such as National Bank and Chase Bank have been forced into the deal despite their known struggles to stay liquid in order to be operational in the cut-throat industry.

“The banking industry is staring at a catastrophe. We are being pushed to give money to an entity that has been bailed out 13 times before without any signs of resurrecting. If it happens, this will be the 14th time, but what guarantees do we have that our money will be put to good use?” said the executive.

“Already, there are red flags. KQ is paying consultants more than Sh2 billion drawn from borrowed money. It is intriguing that one of the consultants being paid heftily is a former executive.”

“These are things we need to ponder before we pump more money into a hemorrhaging business,” said the bank executive.

According to the review by one of the local banks, Kenya Airways may as well need a miracle even after the restructuring.

The bank believes that the bailout will be a drop in the ocean given that the local banks are only owed Sh23 billion while the Government is owed Sh25 billion.

The restructuring will only reduce the Company’s current Sh242 billion gross debt exposure by approximately Sh50 billion.

To fly at par with competitors such as Ethiopian and Turkish airlines, the document claims that KQ will need Sh100 billion in equity capital - not loans.

“Solvency is resolved but not leverage, which remains well above industry average,” the report reads.

The lender, in trying to compare KQ and Ethiopian, shows that between 2009 and 2017, passengers flying the latter grew from 2.8 million annually to 8.6 million while those flying KQ only increased from 2.8 million to 4.2 million a year.

As a result, the revenue for Ethiopian was almost two-and-a-half times that of Kenya Airways.

In fact, the lender seems to believe that the motivation for the proposed restructuring was rather hastily done due to pressure of maturing payments within the year.

CASH GENERATION

“The restructuring does not improve the cash generation through enhanced operations to introduce new cash into the company,” the report reads.

“Instead, the restructure from a cash liquidity perspective only alleviates prospective interest and principle cash payments that would have become due from the Government and the local banks, which were all due in less than a year,” it says.

This is despite the lender putting out proposal to get a further Sh18.1 billion ($175 million) Government-secured debt and dipping into the pockets of its small shareholders for Sh1.5 billion through a cash call after restructuring.

The lender seemed not to be convinced by the 10-year term plan that would see KQ pay for its aircraft leases by 2027.

According to the data collected by the bank, KQ only made profit four times in the past decade and has been making losses in the past five consecutively. It has been insolvent for the past three years, a position it sank to just two years after making a rights issue.

The analysis shows that while debt, costs and the number of aircraft grew by leaps and bounds, revenue stagnated at just around Sh100 billion in the last five years.

The lender is of the opinion that the whole plan will only benefit the owners of the leased Dreamliners, saying that “post-restructuring any new cash will be directed towards repaying the secured lenders (foreign) as opposed to the day-to-day operations of building KQ into the pride of Africa”.

Some of the beneficiaries of the deal, according to the report, would be advisors including US-based PJT Partners, audit firm Deloitte, lawyers from New-York based White & Case and Coulson Harney.

The other beneficiaries cited would be secured lenders including Barclays Bank Plc, Citibank and JP Morgan that have the option of selling KQ’s planes to recover their money.

“The beneficiaries...therefore, is not Kenya as represented by KQ, the local banks, government or shareholders, but the advisors paid in aggregate Sh2.5 billion ($24.85 million) which equates to 11 per cent of local banks’ outstanding unsecured debt. And secured lenders whose original economic position of Sh54.1 billion ($521 million) we expect to have enhanced through the Government guarantees,” claims the document.

Although the lenders know fully well that the restructuring may be inevitable, they are warning that the banking industry will be plunged into a crisis even as it struggles to recover from two years of turmoil that has seen three lenders go into receivership.

In fact, KQ has gone to court to compel the lenders who are unwilling to join the bandwagon to participate in the deal. The airline is seeking approval of a majority of its creditors (75 per cent), which would be used to compel the rest of them to take up whatever plan is agreed upon.

“The company will no longer be able to service its debt obligations as they fall due and it is unlikely to continue to be in a position to operate as a going concern,” KQ chairman Michael Joseph said in a circular to shareholders.