Kenya Airways (KQ) loans totaling $485 million (KES 59.7 billion) will be taken over by the Kenyan government as part of its rescue plan for the troubled airline.
Officials from the National Treasury told the International Monetary Fund (IMF) that the country will undertake many such takeovers of distressed loans, known technically as novation, increasing the country’s annual debt service by KES 10 billion.
This exacerbates the country’s debt repayment woes, which have already been exacerbated by a weaker shilling amid tightening liquidity in the global financial market, making it difficult for high-risk frontier economies like Kenya to obtain cheap financing.
The airline has been a consistent recipient of state bailouts, and it is expected to receive another KES 35 billion in the current fiscal year, with some of it going toward debt repayment.
KQ, as Kenya Airways is known by its international code, defaulted on a portion of a $525 million (KES 64.6 billion) loan from the Private Export Funding Corporation (PEFCO) of the United States, which was guaranteed by Exim Bank of the United States, which was guaranteed by the Government of Kenya.
The KQ loan was called due to loan payment defaults and was for the purchase of seven aircrafts and one engine.
According to Treasury, following the default, KQ sought government intervention, and the Cabinet approved the Government paying the loan arrears on behalf of the airline, with the balance of the guaranteed loan being taken over by the State to prevent further call up.
“The guarantees are already part of the GoK debt stock and, not likely to cause significant impact, other than an increase in the annual payment obligations from the Consolidated Funds Services (estimated at KES 10 billion per year),” said the Cabinet Secretary for National Treasury Professor Njuguna Ndungu.
Kenya Airways, which has not made a profit since 2012, saw its financial position deteriorate in 2020 as governments attempted to contain the spread of Covid-19 by limiting people’s movement.
The loan repayment made by the state on behalf of KQ will be recovered through a subsidiary loan agreement between the government and the airline, as required by the PFM Act of 2012.
President William Ruto’s administration has been looking for a strategic investor, and during a recent trip to the United States, the head of state met with top executives of Delta Air Lines, where he launched the government’s bid to sell its entire 48.9% stake in Kenya Airways.
“I’m willing to sell the whole of Kenya Airways Plc,” Dr Ruto told Bloomberg News on the sidelines of the US-Africa Leaders Summit in Washington DC on Friday. “I’m not in the business of running an airline that just has a Kenyan flag, that’s not my business.”
The IMF, which had entered into a 38-month program with Kenya to assist it in dealing with its debt vulnerabilities, pushed for KQ restructuring as one of the program’s conditions.
According to the IMF, the airline’s restructuring plan prioritizes network optimization, lease negotiation, staff rationalization, and other cost-cutting measures.
“The airline has retired 16 loss-making networks and renegotiated some aircraft leases but faces challenges in rationalizing staff costs,” said Treasury.
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