KQ could swap debt to equity to fly back to profitability

Kenya Airways chief exeutive Mbuvi Ngunze. He said that they have registered an improvement in the mark to the market valuation of fuel hedges of $26 million. PHOTO | JEFF ANGOTE 

By ALLAN OLINGO

In Summary

Turnaround plan

• The airline is currently working on its Pride turnaround strategy, which includes staff layoffs, and rationalisation of its fleet through sale and leasing of some of its surplus aircraft.
• In January, it sold two aircraft to Oklahoma-based Omni Air International at $146 million and has leased five aircraft to Turkey and other airlines. “The sale and lease of aircraft is saving us $8 million per month in costs beginning this month,” Mr Ngunze said. Citibank analysts said that the sale and lease of aircraft will earn the carrier about $110 million.
  KQ has received $40 million from the sale of its Heathrow slot to Oman Air and a further $104 million in pre-delivery deposit refunds from Boeing, with the Citi analysts concluding that its liquidity is now “under control”.
• The airline has already started laying off staff, sending home 80 employees out of the expected 600, an exercise expected to cost it $12 million.

The restructuring of Kenya Airways has been thrown into further uncertainty after the airline reported a record $262 million loss for the year to March 31, 2016.

That staggering loss, for the fourth year in a row, has worsened the carrier’s negative equity position to $357 million, meaning no valuation can be done to determine how much money existing shareholders and potential investors can inject into the carrier.

READ: Kenya Airways widens record net loss to $258.3 million

Some estimates suggest the airline needs $600 million to stay afloat.

Although the management made a publicity meal out of the reduction in operating losses from $160 million to $40 million, some analysts expect the airline to start addressing the negative equity position from 2018, when a profit of $20 million is projected.

Kenya Airways chairman Dennis Aggrey Awori told investors on Thursday that the negative equity position could be reversed in the next 18 months. Once this is achieved, the carrier can invite investors to put in more money in the company.

Strategic investor

“As it is, we cannot be valued due to our equity positions. It is our belief that once we turn positive, probably in the next 18 months, then we will sit down, do a valuation and decide on what stake to give out to the strategic investor,” Mr Awori said.

The airline’s negative equity position has worsened to $357 million from the previous year’s $59 million due to the accumulated losses.

Midweek, Treasury Cabinet Secretary Henry Rotich said that private equity investors could be interested in the airline, which is majority owned by the Kenyan government at 30 per cent, with 27 per cent owned by KLM.

The airline is now banking on PJT Partners, an investment bank that offers strategy, restructuring and fundraising services, to reorganise its balance sheet and advise on its long-term capital-raising.

The EastAfrican has learnt that a debt-to-equity swap is being considered as one of the ways for the airline to turn to positive reporting.

The $200 million loan facility from Cairo-based Afrexim Bank, secured through an on-lending agreement, and the Kenya Finance Ministry’s $40 million credit facility to the airline will be turned into equity to hasten a turnaround.

Transport and Infrastructure Cabinet Secretary James Macharia told The EastAfrican that it was too early to comment on the debt to equity swap, but mentioned that a Cabinet subcommittee was looking at recommendations from PJT Partners, the airlines investment advisers.

“We are studying the proposal from the advisers, which is not limited to the capital restructuring. In a few weeks, we will share the outcome of the Cabinet committee deliberations and the way forward for the airline,” Mr Macharia said

In April, Mr Rotich told parliament that talks were ongoing to consider converting the $200 million loan from Afrexim to equity to ease the carrier’s debt burden.

“Since the airline needs an equity injection, there were considerations to change the borrowing into government equity in the company since the government is a shareholder,” Mr Rotich said.

Shiv Arora, an investment analyst at Cytonn Investments, said that a debt swap would only address the carrier’s problems in the short term.

“We feel the government will be prolonging the inevitable by bailing them out, because the hedging and borrowing costs are not going away,” Mr Arora said.

Last month, analysts at Citi Bank projected that KQ could return to profitability in the year to March 2018 with a $20 million profit, preceded by a loss position of $15 million in 2017.

The airline’s finance costs rose by $70 million, from $45 million, largely due to the high cost of lending and currency fluctuations.

Dick Murianki, acting finance director, said that close to 98 per cent of KQ’s loans are in dollars, meaning it has recorded substantial foreign exchange losses.

“Some of these loans were taken when the shilling was trading at 75 units to the dollar and we are now repaying them at 101 units to the dollar,” Mr Murianki said, adding that they have managed to convert some of the short-term loan facilities into long-term debt, but at an added cost in terms of interest.

The airline saw its other costs associated with maintenance of aircraft and revaluation of assets held in certain markets such as South Sudan, Nigeria and Angola rise to $108 million last year, from $13 million the previous year.

“We have so far managed to repatriate $1 million of our funds out of Nigeria from the $4 million stranded there. We have a total of $25 million stuck in these three countries due to hard currency challenges,” Mr Murianki said.

The airline also recorded a $97 million increase in foreign exchange losses, blamed on the 12.9 per cent depreciation of the shilling against the dollar.

In addition, the drop in oil prices during the year also unfavourably impacted the Kenya Airways fuel hedges, resulting in an additional $50 million in realised fuel hedge losses.

KQ chief executive officer Mbuvi Ngunze said that the carrier has however registered an improvement in the mark-to-the-market valuation of fuel hedges of $26 million.

“This has been largely due to the flexibility of the new hedging plans we have entered into that have also seen their timelines reduced to between 12 and 24 months,” Mr Ngunze said, adding that the airline is expecting its expensive hedging contracts to end by March next year, allowing it to fully utilise the benefits of the low oil prices.

Mr Ngunze attributed the 75 per cent reduction in operating losses, from $163 million the previous year to $41 million, to a growth in “cabin factor” to 68.3 per cent — with an increase in passenger numbers from 4.18 million to 4.23 million — a reduction in direct operating costs, overheads and fuel.

“We have achieved these results in a tough aviation context, in which airlines continue to be impacted by wild currency fluctuations, volatility in fuel prices, and a changing commodity price environment,” he said.