Mbadi: KQ on track but not out of the woods yet
By Victor Mukabi, March 6, 2025Kenya Airways needs restructuring as it is currently struggling to cater for its liabilities, despite having posted a profit, National Treasury Cabinet Secretary John Mbadi has said.
KQ, as the national carrier is known by its international code, reported a profit for the first half of the 2024 financial year, ending June 30, from the Sh21.7 billion loss reported in the similar previous period. This was the first time the airline had made a profit after tax since 2013.
However, the airline is currently seeking Sh26 billion from the government to repair and bring back eight engines to the country to help with its operations, a new revelation that comes immediately after it announced an additional plane to its fleet.
Addressing National Assembly departmental committees at a Nairobi hotel, Mbadi dismissed the glamorous reports that the airline is doing well, adding that it also needs some serious restructuring.
“The real story is that KQ is struggling, even as we speak, KQ is still seeking funding from the government to the tune of Sh26 billion to repair and bring back engines for the aircraft to service the condition, I think about eight of them,” he said.
“In fact, when you sit with them, you paint a very good picture of what is likely to happen, so when, they could be making some more profits, but KQ needs serious restructuring,” the CS disclosed.
According to Mbadi, the government has had to bail out the airline a couple of times, guaranteeing its debts due to the financial challenges it has been going through over time.
Ideally, if the airline defaults its debt obligations to creditors, the government steps in to guarantee them since it becomes a national interest. At the moment, the total amount expected to cleared for 10 local banks is Sh9.6 billion.
In the financial year 2021/22, the government guarantee to the national career was called as a result of loan payment defaults of $525 million (Sh67.72 billion) owed to Private Export Funding Corporation (PEFCO) of US and guaranteed by Exim Bank of US who in turn were guaranteed by the Government of Kenya.
The loan had been used for the purchase of seven aircrafts and one engine and was set for a tenure of 10 years expected to mature in FY 2027/28.
“Following the default KQ sought GoK intervention and the Cabinet gave approvals for the Government to pay the loan arrears on behalf of KQ and the loan balance was novated to Government.
The novation process was finalized in the FY 2022/23 and the loan repayments are being done on behalf of KQ which shall be recovered through a subsidiary loan agreement between the Government and the airline as per the requirements of the PFM Act, 2012,” Mbadi said.
Prior to this, locally, the airline sought $226 million ( Sh29.15 billion) from 10 commercial banks to cater for its working capital, but due to its deep-rooted financial woes, it had an outstanding debt of $217 million (Sh27.99 billion) by 2017.
The situation necessitated the Project Safari Restructuring during the year and then negotiated a restructuring of the outstanding debt which included the incorporation of a Special Purpose Vehicle (SPV), KQ Lenders Company 2017 Ltd (KQ Lenders), to represent the interests of the local banks.
A total of $167 million ( Sh21.54 billion) of the total debt was converted to equity through KQ Lenders with the balance of $ 50 million (Sh6.45 billion) being issued as a mandatory convertible note, a short-term debt instrument that is converted to equity upon a predetermined conversion event.
According to Mbadi, the government managed to guarantee the debts through three strategies including standby letters of credit (SBLC), $75 million ( Sh9.67 billion), multipurpose credit facility, $ 100 million ( Sh12.9 billion) and a guarantee to KQ Lenders $ 50 million (Sh6.45 billion) should they sell their shares in KQ at the end of the facility period and are unable to cover the principal loan balance.
Between May 2022 to September 2024, the lessors called on SBLCs amounting to $107.7 million (Sh13.89 billion), and the local banks had to respond to the call.
“KQ has been unable to fund the call-ups due to financial constraints and has requested the local banks to honour the call-ups and convert them into short-term loans under the terms of the GoK guaranteed multipurpose facility,”
This has resulted in the multipurpose facility rising above the guaranteed limit of $100 million (Sh12.9 billion) causing a breach in the facility.
Due to this breach, the local banks through their facility agent issued several notices to KQ, demanding immediate payment of the breached amount.
“So after the deliberations between GOK and the local banks and KQ, it was agreed that GOK set its amount called out to the local banks and treated the entire amount as an additional shareholder loan to Kenya Airways.
And I want to report that I chaired this meeting. It was a very, very stressful meeting to have, so to speak,” he stated.
“The banks were up in arms, very ready to call out this and the disaster this would have caused in our financial market was enormous. So, the settlement with the local bank was done on 3rd January 2025.”
He noted that the total amount of $ 149.9 million (Sh19.33 billion) shall be payable to the government by KQ through a Shareholder Loan Agreement whose terms are to be negotiated and finalized in the first half of 2025.