The government plans to allocate debt ridden Kenya Airways Sh75 billion in support of the company’s restructuring programme. Treasury is seeking Parliament’s approval to release the money which will include loans from both local and international financial institutions.
In the Sessional Paper number 3, Treasury Cabinet Secretary Henry Rotich, is requesting the National Assembly to approve Kenya Government Guarantee amounting to $750 million (Sh75.2 billion), for the restructuring.
Current total contingent liabilities of the government, Rotich explains, is in respect to the Public Financial Management Act, 2012, amounting to Sh 57.6 billion. With the proposed guarantee of a sum equivalent to Sh75.2 billion, the aggregate amount will be Sh132.9 billion.
“This, together with the stock of outstanding debt, is within the debt limit set by Parliament,” Rotich says in his report to the National Assembly. The funding, he says, will include a guarantee of $525 million (Sh52.5 billion) to United States Exim Bank in order to deliver liquidity savings to KQ over a period of five years.
A further guarantee of $225million (Sh22.5 billion) to local Kenyan banks, primarily to support working capital requirements. Financial restructuring of the company is supported by the turnaround plan initiated in 2015 which is already bearing fruit, as demonstrated by the 2016/17 full year results.
Rotich says that the operating margin improved by Sh5 billion to Sh900 million from an operating loss of Sh4.1 billon. The preferred financial restructuring option entails a Solvent Consensual Inter- Conditional Restructuring, which creates the incentives to ensure that all relevant stakeholders of the company contribute to achieve a mutually beneficial outcome.
Convert debt It is expected to yield permanent and temporary liquidity of approximately Sh100 billion and reduce from over Sh200 billion to almost Sh120 billion.
Rotich explains that to facilitate the transaction, the government will convert its debt of $243 million (Sh25 billion) plus accrued interest to equity. Government will also provide a guarantee amounting to Sh750 billion to cover both US Exim and the participating local banks to the tune of Sh525 billion and Sh 225 billion respectively.
“These guarantees are a contingent liability required to secure future funding of KQ. They avoid any cash bailout and consequential request from stakeholders to receive cash,” says Rotich.
The government, he added, will receive additional shares in KQ for providing the guarantees. Leader of majority Aden Duale asked the Finance and Trade Committee to move with speed and approve the report so that parliament can pass it before it adjourns next week.
Rotich said it is important to note that once KQ is restructured and is back to financial stability, it will be able to meet its financial obligations, mitigating government risk.