Banks bet on state guarantee to recover loans from Sh24bn KQ
Banks are now betting on a Treasury guarantee to collect their loans from Kenya Airways (KQ) as opposed to the airline’s cash flow, citing the weakened business model in the Covid-19 environment.
Eleven local banks, including Equity #ticker: EQTY, KCB Group #ticker: KCB and Co-operative Bank #ticker: COOP, in 2017 converted loans of $ 223 million (24 billion shillings) into shares after the Treasury offered $ 750 million (80.9 billion shillings) which also covered the US Exim Bank.
Banks have valued the loans based on interest receivable and what they can get by selling KQ shares on the open market to collect their unpaid funds.
However, banks such as Equity have now changed their model, claiming that the widening of KQ’s loss and insolvency position makes it difficult to measure future loan recovery through interest and the sale of the loan. actions.
“In 2020, the use of the discounted cash flow approach was no longer considered appropriate because it is not known what the long-term effects of the Covid-19 pandemic and government actions will be on the flows. cash flow from the original borrower company, ”Equity said in its 2020 annual report.
“Management therefore only took into account the state guarantee as there is significant uncertainty regarding the future collection of interest and the recovery of amounts from the sale of shares.”
KQ’s net loss in the year through December nearly tripled to 36.2 billion shillings, the worst on record in the airline’s history, due to the Covid-19 disruptions that have led to a sharp drop in the number of passengers.
The airline left for the eighth consecutive year without profit, extending its cumulative losses to 128.76 billion shillings and negative equity of 64.2 billion shillings.
Under the Treasury deal, banks are free to offload their shares on the open market at any time to collect their outstanding loans.
However, if KQ’s share price hasn’t risen enough to cover their exposure by 2027, the government has guaranteed to step in and pay them a lump sum of $ 75 million ($ 8.1 billion). of shillings).
In the event of liquidation, the Treasury will pay 29.9 billion shillings ($ 278 million) to the 11 banks, placing a heavy burden on the economy and taxpayers.