Treasury’s Sh20bn KQ loan terms alarm MPs

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By DAVID HERBLING

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Summary

• Members of Parliament have flagged the loan as a big risk to the stability of public finances as it has to be fully repaid in one lump sum.
• The Treasury guaranteed the bailout funds, meaning taxpayers must foot the bill in the... event that KQ defaults on the dollar-denominated loan.
• Cairo-based African Export-Import Bank provided the syndicated loan at an interest rate of 6.80 per cent per annum.

Kenyan taxpayers are facing the prospect of paying a Sh20 billion ($200 million) debt next year when a government-backed short-term loan advanced to national carrier Kenya Airways matures.

Members of Parliament have flagged the loan as a big risk to the stability of public finances as it has to be fully repaid in one lump sum.

The Treasury guaranteed the bailout funds, meaning taxpayers must foot the bill in the event that cash-starved KQ, as the airline is popularly known, defaults on the dollar-denominated loan.

Cairo-based African Export-Import Bank provided the syndicated loan at an interest rate of 6.80 per cent per annum.

It was hoped that KQ would be in a better position to pay the loan after the two-year term but that is unlikely to happen given the slow pace at which the airline is recovering.

“This loan has a grace period of two years and will be due for payment in 2018 in one instalment,” Budget committee chairman Mutava Musyimi says in a report submitted to the National Assembly.

“This payment of a huge amount of money at a go is likely to shock the financial pillars of the national budget.”

The Treasury owns 29.80 per cent of KQ and is the single-largest shareholder followed by KLM Royal Dutch Airlines with a 26.73 per cent stake.

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MPs said their bleak assessment of the debt is based on previous experience where agencies with State-backed loans such as the East African Portland Cement Company, the Kenya Broadcasting Corporation, and the Nairobi City Council have defaulted on their obligations — forcing taxpayers to dig deeper into their pockets to service the outstanding facilities.

Technically insolvent

KQ was technically insolvent late last year when its total assets were valued at Sh158.6 billion against liabilities of Sh197.4 billion, leaving it in a negative equity position of Sh38.9 billion.

The airline sank Sh17 billion in loan repayments in the half year to September 2016, representing a 54 per cent growth from the Sh11.3 billion it spent on debt servicing in a similar period a year earlier.

Total borrowings at KQ stood at Sh116.7 billion in the six months to September 2016 — meaning the bridge loan that is due for payment in 2018 accounts for nearly a fifth of the airline’s total loans portfolio.

MPs argued that the Treasury should have set tough conditions for financing KQ’s turnaround plan before guaranteeing such a huge short-term loan.

“Noting that a company is receiving $200 million worth of foreign finance payable by public money, there should have been an indication of terms and conditions set to restructuring the company, including targets, goals and other cost-cutting and austerity measures,” the committee says.

KQ drew the cash in two tranches of $100 million each, and used it in the fiscal year ended March 2016.

Ballooning public debt

Its publicly guaranteed loan forms part of Kenya’s bulging public debt, which stood at Sh3.827 trillion or equivalent to 51.50 per cent of GDP by December 2016, according to latest data from the Treasury.

The debt has now hit the Sh4 trillion mark after Kenya chalked up an additional $1.55 billion this week in syndicated foreign debt  arranged by a consortium of banks.

To further complement the Afrexim facility, the Treasury also advanced the airline a Sh4.2 billion one-year shareholder loan at an interest rate of 10.2 per cent per annum. The loan fell due last year.

The continued freefall of the Kenyan shilling against the US dollar also risks leaving KQ with a heavier bill when repaying Afrexim’s foreign currency-denominated loan.

KQ was in the red to the tune of Sh4.8 billion in the half year to September 2016, compared to the after-tax loss of Sh11.95 billion it made in a similar period a year earlier.

The reduction of losses was mainly attributed to a string of asset disposals and deep cost-cutting measures. The airline’s revenues, however, dropped 3.5 per cent to Sh54.7 billion during the period as passenger numbers dropped.

Former Safaricom chief executive Michael Joseph was in October last year appointed to chair the airline’s board in a shake-up that will see the chief executive, Mbuvi Ngunze, exit by end of next month.