Government begins repaying KQ debt from US Exim Bank
The government has paid Sh2.8billion as part of a defaulted loan it had guaranteed national carrier, Kenya Airways from the US Exim Bank.
Treasury documents showed that the amount was paid in the first quarter of the current 2022/23 financial year covering the three months to September.
“During the first quarter the National Treasury guarantee to KQ was called as a result of loan repayment defaults. Following the default, KQ sought the government’s intervention and the Cabinet gave approvals for the government to pay the loan arrears on behalf of KQ and novate the loan balance to the government,” said the Treasury.
“The arrears of Sh2.8 billion was therefore paid in the first quarter of the financial year 2022/23,” it added.
The government took over a Sh64.05 billion loan from the US Exim Bank after KQ defaulted on repayment, underlining the cash woes facing the airline which was recently hit by a pilots’ strike.
The Treasury last month revealed that the Cabinet approved the government take over the $525 million (Sh64.05billion) debt it had guaranteed KQ, following defaults. The State in 2017 guaranteed the KQ loan that has a 10-year tenure running until June 2028.
The carrier had borrowed a total of $841.6 million (Sh102.67billion) from the US Exim Bank to buy seven aircraft and an engine but failed to fully service the debt due to cash flow challenges linked to disruptions linked to the Covid-19 pandemic. This forced the State to take over 62.4percent of the debt it had guaranteed the airline.
“A Cabinet decision was made to novate Kenya Airways guaranteed debt to the government which was in arrears. Kenya Airways borrowed a total of USD 841.6 million from Exim Bank of USA to purchase seven aircraft and one engine. Out of this amount, the National Government guaranteed USD 525 million” the Treasury said.
“Kenya Airways defaulted on both the guaranteed portion of the loan amount as well as the non-guaranteed portion,” it added.
The Treasury said the State is currently working to replace the bungled contract with a new one by June 2023 that will see it start servicing the debt on behalf of KQ.
“KQ has experienced cash flow challenges in the past which were exacerbated following strict Covid -19 containment measures that cut down business operations and global travels,” it said.
Treasury says the loan repayments done by the government on behalf of KQ will be recovered through a subsidiary loan agreement between the Government and the airline as per the requirements of the Public Finance Management Act, 2012.
The Sh64.05billion loan repayment default adds to the list of recent breaches by KQ. In a separate matter, Kenya Airways delayed interest payment for a Sh 25 billion loan the government had extended to it as of December 2021.
The airline, which received a Sh 11 billion State loan in 2020, and another Sh 14 billion in 2021, delayed making any payments for the two loans.
The airline is currently in a restructuring programme as part of conditions set by the International Monetary Fund (IMF) to rescue state-owned-enterprises from inefficiencies, with among measures in line being the laying down of staff, reviewing flight frequencies and routes to do away with those not guaranteeing proper returns.
The airline, which is expected to undergo a restructure costing more than Sh118billion(1 billion), has in past few years been hit by severe cash flow problems which rendered it unable to pay lessors and creditors' due invoices, resulting in significant outstanding obligations.
The airline earlier this year appointed a US-based advisory firm, Seabury Consulting to guide it on a financial restructuring and revival plan. The State earlier this year abandoned plans for nationalistion of KQ as a long-term solution to it financial woes. The government owns 48.9 percent of KQ shares.
The nationalisation plan, which had been approved by lawmakers in July 2019, would have seen the airline delisted from the Nairobi Securities where trading in its shares remains suspended since July 2020.
The State wanted to emulate countries such as Ethiopia which run air transport assets — from airports to fuelling operations —under a single company, using funds from the more profitable parts to support others.
Under the model approved by MPs, KQ would have become one of four subsidiaries in an aviation holding company. The others would be Jomo Kenyatta International Airport, an aviation college, and the Kenya Airports Authority operating all other airports.
While appearing before the National Assembly's Committee on Appointments for vetting on Wednesday, October 19, new Transport Cabinet Secretary Kipchumba Murkomen revealed plans to reform KQ splitting it into cargo, passenger, charter services, and drone subsidiaries.