Local banks take Sh8 billion hit in KQ shares
What you need to know:
- In 2017, KQ issued the lenders with 2.2 billion shares to settle their loans amounting to Sh17 billion.
- The shares were acquired at a price of Sh7.78 each but the airline’s stock price has since dropped 51.7 percent to close at Sh3.75 on Friday.
- This means that banks will find it difficult to sell their holdings at a profit.
Ten local banks including Equity, KCB and CBA have suffered a combined paper loss of Sh8.6 billion on their Kenya Airways’ shares as the airline’s stock plummeted in the wake of continued losses.
KQ, as the national carrier is known by its international code, in 2017 issued the lenders with 2.2 billion shares to settle their loans amounting to Sh17 billion.
The shares were acquired at a price of Sh7.78 each but the airline’s stock price has since dropped 51.7 percent to close at Sh3.75 on Friday, resulting in the lenders’ paper loss of Sh8.6 billion.
This means that banks will find it difficult to sell their holdings at a profit, with KQ’s continued losses and wipeout of shareholder funds making a recovery less likely in the medium term.
The share price drop also hurts the lenders’ plans to sell an additional 663.5 million shares through the NSE over the next nine years. KQ is to issue the second batch of shares at a similar price of Sh7.78 each upon request and the lenders are to sell them immediately in the open market.
Losses on the second group of shares are, however, expected to be partly mitigated by government guarantees.
KQ reported a net loss of Sh7.5 billion in the year ended December when its costs surpassed its revenue significantly.
The new loss sent the airline back to a negative equity of Sh2.4 billion, meaning that the recent capital restructuring moves are inadequate and the company urgently needs more funds to stay aloft.
Individual investors in the national carrier have fared even worse since most of them will only break even when the stock trades at Sh21.2. This means that they are sitting on a paper loss of 82 per cent.
In search of a long-term solution to KQ’s problems, the government has considered various proposals including shielding the company from paying taxes.
A more detailed strategy was the proposed a merger between the airline and the Kenya Airports Authority (KAA) in a transaction aimed at having KQ run Jomo Kenyatta International Airport for 30 years.
One of the objectives is to help the two firms share costs. The proposed venture has, however, become controversial, with critics fearing that the deal will simply transfer KQ’s financial burden to the KAA.