Banks’ holdout risks scuttling Kenya Airways recovery plans

Monday July 17 2017

Mbuvi Ngunze, KQ board adviser. file photo | nmg

Mbuvi Ngunze, KQ board adviser. file photo | nmg 

By VICTOR JUMA
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Some commercial banks that national carrier Kenya Airways #ticker:KQ owes billions of shillings are holding out against the just-released rescue plan, putting the deal that offers the lenders a substantial stake in the airline at the risk of collapse.

The Nairobi Securities Exchange-listed firm has proposed far-reaching turnaround measures that, among other things, imposes major losses on shareholders and creditors, including local banks it owes a total of Sh23 billion.

KQ, as the airline is popularly known, said in a circular to shareholders most of the banks have backed the plan although some are yet to sign up.

The airline said the resistance may force it to rely on provisions of the Companies Act to force the holdout banks into accepting the deal, including conversion of the loans into ordinary shares.

“The key risk in relation to the scheme is that creditors and other stakeholders dispute the process, which may result in delays or in it being unsuccessful,” KQ said.

“If such actions mean that the scheme is not sanctioned in time, or at all, the restructuring cannot be implemented. In this instance the company will not be able to continue to operate as a going concern and so shareholders would be unlikely to see any return on their current investment. Closure of the company and liquidation would follow.”

The resistance by the banks — which were not identified — suggests their belief that the terms offered to them in KQ’s rescue plan is not attractive enough to warrant their participation.

The banks that made short-term unsecured loans to KQ include KCB #ticker:KCB , Equity #ticker:EQTY and Co-op Bank #ticker:COOP .

The government has offered to guarantee the bank loans but only to lenders who agree to issue new Sh18.1 billion credit facilities to the national carrier.

The rescue plan envisages that the lenders will recoup the Sh23 billion by selling the airline’s shares to a strategic investor or in the open market in the medium term.

KQ says there is no viable alternative to the restructuring, which could result in a major battle with the holdout banks. The company plans to subdue the dissenters by first gaining support from a majority of the lenders.

“It is likely, given that a minority of the Kenyan banks have not signed the restructuring agreement … that the debt restructuring will be implemented by way of the scheme (forced participation), along with the government debt restructuring,” the company said in the circular.

The scheme, which KQ plans to structure, is an application of the Companies Act which allows firms to push through compromise agreements with banks so long as it has received the backing of the same class of creditors amounting to 75 per cent of the owed sums. In this case, the unsecured lenders — government and banks — are owed Sh50.2 billion. To have its way, KQ just needs the backing of creditors who are owed Sh37.7 billion to have its way.

A company can apply to the courts seeking an order binding all its creditors once the condition is met.

“A compromise or agreement sanctioned by the court is binding — on all creditors or the class of creditors, or on the members or class of members, concerned,” says the law.

It remains to be seen whether KQ will hit the 75 per cent threshold and force the participation of the dissenters.