State to repay KQ’s Sh63bn defaulted loan
The government will take over a Sh63.7 billion loan from the United States Exim Bank after national carrier Kenya Airways defaulted on repayment, underlining the cash woes facing the airline.
The National Treasury revealed that the Cabinet approved a decision to have the government take over the $525 million debt it had guaranteed KQ, following defaults. The state in 2017 guaranteed the loan that has a 10-year tenure running until June 2028.
The carrier had borrowed a total of $841.6 million (Sh102.17 billion) 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 Covid-19 disruptions. This forced the State to take over 62.4 per cent of the debt it had guaranteed the airline.
“Kenya Airways defaulted on both the guaranteed portion of the loan amount as well as the non-guaranteed portion,” Treasury said.
It added that the government is currently working to replace the bungled contract with a new one by June 2023, which 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 according to the requirements of the Public Finance Management Act.
The Sh67.2billion loan repayment default adds to the list of recent breaches by KQ.
Kenya Airways delayed interest payment for a Sh25 billion loan the government had extended to it as of December 2021. The airline, which received a Sh11 billion state loan in 2020, and another Sh14 billion in 2021, delayed making any payments for the two loans.
The airline is currently under a restructuring programme as part of conditions set by the International Monetary Fund to rescue state-owned enterprises from inefficiencies, with some of the measures including laying off staff and reviewing flight frequencies and routes.
The airline has in the past few years been hit by severe cash flow problems that rendered it unable to pay lessors and creditors, resulting in significant outstanding obligations.
Earlier this year, it appointed a US-based advisory firm, Seabury Consulting, to guide it on a financial restructuring and revival plan. This is after the state abandoned plans to nationalise it. The government owns 48.9 per cent 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 Exchange where trading in its shares remains suspended since July 2020.
The government 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.
While appearing before the National Assembly's Committee on Appointments for vetting, new Transport Cabinet Secretary Kipchumba Murkomen revealed plans to reform KQ, splitting it into cargo, passenger, charter services, and drone subsidiaries.
Expensive fuel propelled Kenya Airways’ losses in the first half of this year by nearly three times, exposing the risk side of its decision not to hedge on jet fuel.