Fleet financing pushes up KQ debt to Sh89bn

Money Markets

Kenya Airways Boeing 777-300ER launched last year. The airline increased its debt by Sh28bn last year as it sought financing for new planes. PHOTO | FILE 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• KQ borrowings rose to Sh89 billion, raising its gearing ratio (debt/equity ratio) to 279 per cent from 156 per cent a year earlier.
• The money was largely sourced from foreign lenders to buy more efficient planes.
• KQ launched an ambitious expansion plan in 2012 to double its fleet in the next five years to 68 planes at an estimated cost of Sh300 billion.

Kenya Airways piled up its debt stock by Sh28 billion last year as it sought financing for new and more efficient planes.

KQ borrowings rose to Sh89 billion, raising its gearing ratio (debt/equity ratio) to 279 per cent from 156 per cent a year earlier.

The growth in debt resulted from a Sh10 billion financing from international lenders Citi Bank and JP Morgan that is repayable in 12 years and an additional Sh13.5 billion financing from Afrexim Bank.

“The loans were obtained for funding aircraft acquisition, aircraft spare engines and for pre-delivery payments for ordered aircraft,” said Kenya Airways in its annual report.

KQ launched an ambitious expansion plan in 2012 to double its fleet in the next five years to 68 planes at an estimated cost of Sh300 billion.

The airline planned to raise Sh100 billion internally in the five-year period and borrow Sh182 billion. However two years of loss-making have seen the company’s reserves drop by more than half to Sh10 billion and significantly hurt its gearing ratio.

“Structurally the airline industry all over the world is weak because it is a high-capital expenditure industry with low margins and volatile revenues so if you are lending to it you have to structure the loan well in fairly soft terms,” said Standard Investment Bank head of research Francis Mwangi.

The debts have largely been sourced from international lenders who are able to offer soft terms.

The Co-operative Bank is the only local lender listed as a financier of the airline, having financed the acquisition of an Embraer spare engine through a five-year loan whose current balance is Sh393 million.

Other local lenders are only engaged on short-term borrowings of less than a year.

READ: Spare Dreamliner engine costs airline Sh400m in tax

Last year KQ made a Sh12.1 billion deposit towards acquisition of eight Boeing 787-8 aircraft and Boeing 777-300ER, scheduled for delivery between 2014 and 2015. The total deposits made so far are Sh27.5 billion.

The deposits do not earn any interest indicating that the airline lenders have to offer some relief on the principal and interest repayment before the asset is delivered, argued Mr Mwangi.

“For the purpose of holding collateral for the financiers the aircraft are registered in the name of special entities whose equity is held by the security trustees on behalf of the respective financiers. The legal title is to be transferred to Kenya Airways once the loans are fully repaid,” said KQ in the report.

The airline has already received two Boeings whose deposit KQ paid using cash raised from shareholders in a rights issue. KQ had also signed an agreement to acquire 26 jets from Brazilian firm Embraer. It already has 20 Embraer in its fleet.