Kenya Government Takes Control of Kenya Airways in Debt Swap

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  • Government, banks agree to convert $405.3m of debt to equity
  • Agreement dilutes shareholders including Air France-KLM

Kenya’s government and domestic lenders agreed to convert $405.3 million of Kenya Airways Plc debt into equity, giving the state a controlling stake and diluting other shareholders including Air France-KLM.

The government, which has given Kenya Airways shilling and U.S.-dollar loans totaling $238.1 million, will increase its stake to 48.9 percent from 29.8 percent, according to statements published in the Nairobi-based Standard newspaper on Monday. Lenders owed $217.2 million will convert part of that debt into a 38.1 percent holding.

“The government of Kenya shall acquire effective control in Kenya Airways and it shall make an application to the Capital Markets Authority for exemption from the take-over requirements in compliance with the Take-overs regulations,” Treasury Secretary Henry Rotich said. He’s scheduled to address the media later on Monday morning.

Kenya Airways, in which Air France-KLM has a 26.7 percent stake, announced a $690-million reorganization last year aimed at returning the company to profit. The carrier posted a 26.2 billion-shilling ($253 million) loss in 2016 -- the biggest in Kenyan corporate history. Since the plan was announced, the airline cut jobs, reduced the size of its fleet to 39 aircraft from 47, canceled unprofitable routes and increased the focus on its African network.

The carrier is vying with with South African Airways and Ethiopian Airlines Enterprise, the continent’s biggest airlines, to expand its pan-African network, which currently includes 47 destinations outside Kenya.

Convertible Loan

In addition to the debt-for-equity swap, the government and Kenya Airways entered a convertible-loan agreement for a remaining portion of state loans that will result in the issue of more shares at a future date, according to the statement. A similar agreement was reached with banks, whose stake will be housed in a company known as KQ Lenders Co., for $50 million of outstanding debt.

“They’re keeping the door open for a future debt-equity swap in case the current plan proves insufficient,” said Abizer Sharafali, a senior research analyst at Nairobi-based Apex Africa Capital Ltd. “With the agreement, they don’t need to start the whole process again.”

KQ Lenders also has no plans to make a take-over offer for the airline, according to the statement.

Kenya Airways gained as much as 0.9 percent and traded unchanged at 5.65 shillings by 12:49 p.m. in Nairobi. The stock has declined 3.4 percent so far this year.

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