Kenya Airways investors are set to suffer a major dilution in the proposed capital optimisation programme which was on Wednesday presented to the National Assembly for approval.
The national carrier has reached a deal with key creditors and major shareholders to convert the Sh25 billion debt it owes the government and about Sh23.25 billion commercial loans from 11 domestic banks to equity, a deal endorsed by the Cabinet.
KLM Dutch Royal Airlines, which holds a 26.73 per cent stake in KQ, has also agreed to inject $100 million (Sh10.33 billion) fresh capital into the airline, in the complex capital optimisation arrangement.
The Treasury has also agreed to guarantee $750 million (Sh77.51 billion) that KQ owes local and international lenders, including $525 million (Sh54.26 billion) facility with Export-Import Bank of the US.
The 11 local creditors have also agreed to form a Special Purpose Vehicle to convert their cumulative Sh23.25 billion loan to equity. They are KCB, Equity, Co-operative Bank, Diamond Trust Bank, Commercial Bank of Africa, I&M Bank, NIC Bank, National Bank, Ecobank, Chase Bank (under receivership) and Jamii Bora.
The KQ top leadership, led by chair Michael Joseph, is confident the plan will free more cash to help turn around the loss-making airline in three years.
Kenya Airways, in a note to investors yesterday, confirmed the discussions are at an advanced stage.
“As part of this process, it is expected that the company’s shareholders will be invited to participate in a new issue of equity on a pro rata basis, although at a significant dilution to the current positions,” the national carrier said. “Accordingly… the company’s shareholders will be invited and prospective investors are advised to exercise caution when dealing in securities of the company until further announcements are made on the status of the balance sheet recapitalisation.”
Analysts at Genghis Capital yesterday estimated that considering a price of Sh6.80 per share on Wednesday, the Treasury is likely to increase its holding in KQ to 41.1 from 29.8 per cent, while banks through the SPV will control a 33.7 per cent stake. KLM stake may fall to 18.7 from 26.73 per cent, with minority shareholders controlling 6.49 per cent stake from about 43.47 per cent.
“In addition,we are looking at a possible dilution to current shareholders of approximately 5.7 times, which translates to a diluted market price of approximately Sh1.20,” Genghis said in the note. “With the airline announcing that other shareholders will participate in the capital programme (a probable rights issue), we expect the dilutive effect to be worse than our estimates.”
The airline cut full-year net loss for period ended March 31 by 61.10 per cent to Sh10.20 billion while total operating costs dropped 12.37 per cent to Sh105.38 billion.
Revenue, however, dropped 8.51 per cent to Sh106.28 billion due to reduced capacity, although passenger numbers grew 5.4 per cent to a record 4.46 million. KQ rebounded to an operating profit of Sh897 million in the period from Sh4.09 billion loss a year earlier.
“However, not all is lost with the carrier as the positive side of this transaction is that the new Sh48 billion (approximately) will turn the Sh44 billion negative equity to positive placing KQ in a better credit position for the future,” Genghis said.
“Kenya Airways plays a huge role in the economy of Kenya and we have to remember that people come and put their headquarters in Nairobi because of Kenya Airways.They come here because they can get around, they can fly to many, many destinations in Africa,” Joseph said on May 25.
“We have to be very sure that we support our airline and we continue to push our regulators and government to support Kenya Airways as a viable operation.”