Intrigues behind Kenya Airways debt restructuring
By Macharia Kamau
| December 3rd 2017
The restructuring of Kenya Airways, concluded mid-November, has been billed as one of the most complex transactions in the region.
Complex due to the number of companies and institutions involved. The deal saw transaction advisers shuttle from Africa to Europe and America over a two-year period, in a bid to get the stakeholders to buy into the plan.
The transaction involved two syndicates of international financiers, 11 Kenyan commercial banks, numerous operating lessors, the Kenyan Government and KLM Royal Dutch Airlines.
The complexity was exacerbated by the fact that not all these parties shared in the need to save the airline. While the Government felt strongly about the need to save KQ as the airline is a strategic asset for Kenya, others did not share this feeling.
The latter were of the opinion that it should be wound up so they can recover their money. These included local banks, which had to convert their loans into ownership and had resisted the move up until October this year.
Weekend Business interviewed Richard Harney who was the lead adviser in the transaction. His firm, Coulson Harney, the Kenyan arm of the South African law firm Bowmans, was contracted in early 2016 as the legal adviser for the deal that was to save KQ from going into bankruptcy.
The firm worked alongside PJT Partners and White and Case in structuring the mega deal, which he notes is the largest and most complex in Kenya’s and regional deal-making history.
“We were brought in as legal advisers in the first part of 2016 and were working with international transaction advisers PJT and international legal counsel White and Case to develop a transaction structure that was suitable and workable under Kenyan law,” said Mr Harney.
“We developed a structure together with the advisers that indicated a significant level of complication because there were a lot of different stakeholders involved. Talking to PJT Partners, which is a specialist company doing restructuring internationally, they commented time and again that this project was one of the most complex, difficult, long running and high value restructuring that they worked on for a few years.
“Regionally, there is no transaction that compares in size and complexity. By global standards, this is a noticeable transaction. It will probably be the largest on the continent this year.”
For the advisers, it has been close to two years of late nights, early mornings and at times no sleep, according to Harney.
“I have certainly never worked on a project that required as much intensity, time and resources as this. At any one time, I could have anything between four and 10 lawyers working on the project over the past year. PJT was flying two of their team members between Nairobi and London every week for over two years back and forth London,” he said.
From the onset, the advisers were working on a deal that would reduce KQ’s unsustainable debt levels, leave it listed at the securities exchange and at the same time prevent it from going back into being a State corporation. This was a tough brief, considering the money it owed the Government as well as 11 local banks.
“Other than saving the company from bankruptcy, one of the key considerations from the beginning was, if at all possible, to preserve the company as listed company at the securities exchange and to avoid the company from becoming a State corporation which would have happened if the Government took a majority stake,” Harney said.
“The airline is critical to the economy and Government was behind the process and supportive of the proposals of retaining KQ as listed and making sure the company remained widely held and not owned by the Government.”
A major challenge was the local banks, which did not want a stake in the airline and instead asked for their loans to be repaid.
“The negotiations with banks were difficult because they were being asked to accept a new and novel structure to convert commercial loans into equity, which was unusual and not done to the scale and the number of banks. It was ground-breaking and they found it difficult to accept the conversion.”
In July this year, three banks, Equity, EcoBank and Jamii Bora, moved to court seeking to stop the restructuring that would force them to take up ownership in the airline.
The court threw out their application on account of clauses in the Companies’ Act whereby the restructuring proposal was made binding on the minority creditors.
The banks now own 38.1 per cent of the airline through a special purpose vehicle – the KQ Lenders Company – which took ownership of the Sh26 billion owed by the airline and now has debt obligations to the banks.
“It is unfortunate that we had to litigate with some of the banks over the scheme. We think it was unfortunate and an outcome that could have been avoided but some of the banks had a different interpretation of the Companies’ Act.
"The courts upheld our position and at the end, the banks that had disagreed with the procedures did agree to the restructuring process,” said Harney.
“Getting the banks to agree was probably why the process took a long time. We agreed in October and concluded the process in November.”
Other than the Kenyan banks, other problems that the transaction advisers had to deal with included getting international financiers to agree to the proposal.
Among these was the US EXIM Bank, which financed the purchase of the KQ’s 787 Boeing planes as well as a number of firms that have leased their aircrafts to KQ. The Government agreed to guarantee KQ’s creditors (including local banks) to the tune of $750 million (Sh77.17 billion), of which $25 million (Sh2.57 billion) was to the US EXIM Bank, in exchange for material concessions.
“There were challenges with the transaction all the way through. You are dealing with operating lessors and financiers from the USA and other parts of the world who do not share the same vision about saving KQ and they have a more commercial perspective. There were a lot of negotiations with these parties, which was very difficult at times,” said Harney.
The restructuring proposal also included re-looking at the partnership agreement between Kenya Airways and KLM. This was partly due to the fact that the banks would now hold a significant shareholding in the airline as well as the powers bestowed on the Dutch carrier in the original agreement signed in 1996, during KQ’s privatisation.
According to Harney, KLM has also been re-looking at its partnership with KQ. While it is not pulling out, it wants to deepen its commercial relationship with KQ as opposed to having large stake.
Following the restructuring, KLM has a 7.8 per cent stake in KQ, from the previous 26 per cent. It, however, has opportunity to invest further and increase it to 13 per cent. The airline has also reduced its presence in the KQ board to just one director. A new partnership agreement under negotiation is set to see its powers reduced.
“KLM has re-evaluated their relationship as an investor in KQ and made it clear they wish to continue with the joint venture. They see that as a better form of contribution to the future of KQ than investing through having huge shareholding in the airline,” said Harney.
“It is not right to give the impression that KLM is pulling out of the partnership with KQ. In fact, quite the opposite, the intention is to build the joint venture between the two airlines.”
KQ and KLM are still negotiating a new agreement, which will among other things bring on board Air France as well as water down powers that KLM has over KQ.
“In the course of negotiations, we agreed it was useful to re-evaluate the old agreement between KLM and Government to restructure the relationship… and that some of the historical rights given to KLM in 1996 should be removed from being in favour of KLM on the grounds that KQ has grown and the relationship has changed from being a shareholder relationship to being a commercial relationship,” said Harney.
“In any case, KLM has never used the rights but has created a negative perception about KLM’s influence on the company. It is more of rebalancing the relationship as opposed KLM pulling out.”
Voiced out concerns
The transaction advisers were paid Sh1.4 billion for restructuring the deal, according to a June circular by the airline to its shareholders. This kicked up a storm and during the August 7 extra-ordinary meeting, the small shareholders voiced out concerns as to why the airline needed to spend so much money at a time when it was struggling and faced a real threat of being liquidated.
Harney, whose firm will pocket a portion of the fees, however, said the magnitude and complexity of the deal and going by international standards, the payment is justifiable. He adds that there was a rider requiring the advisers to deliver a successful outcome before being paid.
“By international standards, a restructuring as complicated and drawn-out as this one, the price that a company has to pay to advisers is probably fairly standard,” Harney told Weekend Business.
“The advisers were being paid on the basis of a successful outcome. Therefore the responsibility for delivering a successful outcome rested with advisers and they would be paid if they delivered. If they did not, they would not be paid, which was a big incentive to see the transaction through.”
He added: "Ordinarily, the firm in distress or problems pays advisers in advance. In this case, most of the advisers were not paid until the very end. It took two years of work on an intensive basis.”
He added that there were numerous companies and not just the three lead companies that were involved.
“There were about 16 different advising entities, law firms, banks and consultants. The payment is fully justifiable, particularly going by the results that were achieved,” he said.
“Overall, when you look at the total size of the transaction where $2.2 billion (Sh226 billion) of liabilities have been restructured successfully, the fees that are being paid, while looks a lot, they are not unreasonable, certainly by international standards.
"We have to recognise that for large scale complex projects like this, there was a need for international advisors and their fees and charges are higher than they would be in Kenya.”
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