US issues Kenya a default notice for Sh57bn KQ debt
Wednesday February 15 2023
A US-backed financier has slapped the Treasury with a default notice for delayed payment of a Sh57.8 billion loan that the government guaranteed Kenya Airways.
Chris Kiptoo, the Treasury Principal Secretary, told Parliament that the Exim Bank of the USA has handed in a default notice after Kenya failed to remain up to date with payments of the loan.
This highlights the country’s struggles with the mounting public debt, whose cost servicing is expected to be more than half of projected State revenues in the fiscal year ending June.
KQ defaulted on part of its $525 million (Sh64.6 billion) loan from the Private Export Funding Corporation (PEFCO) of the USA and guaranteed by Exim Bank of USA which, in turn, was guaranteed by the Government of Kenya.
The 89-year-old Exim Bank, which is fully owned by the US government, provides direct loans, commercial loan guarantees, export credit insurance and working capital guarantees for American exporters.
Dr Kiptoo said the Treasury guaranteed the loan to the struggling airline at an exchange rate of Sh84 to a dollar. The exchange rate currently stands at Sh125.2 to the dollar.
“We have an outstanding balance of $462 million (Sh57.77 billion). A default notice has been issued by the guaranteed lender which is US Exim Bank which has called on the government of Kenya to pay. Now we don’t have, to say the truth, enough headroom to pay, but what is important is to pay,” Dr Kiptoo told the committee on Public Debt and Privatisation.
Technically a call-up of the loan means that the lender can demand full repayment of the debt on fears of a borrower’s future ability to make payments.
The KQ loan was a 12-year facility initially provided by Citi Bank and JP Morgan before PEFCO took it over as Exim and Kenya government joined in as guarantors.
The airline halted payments as it ran into financial difficulty exacerbated by the Covid-19 pandemic, which led to the grounding of a large part of global air travel.
The airline stopped remittances on the guaranteed and the non-guaranteed portions of the loan, the Treasury said in an earlier report.
“Following the default,” according to the report, the cabinet gave approvals to pay the loan arrears “and the loan balance to be novated—replace an old obligation with a new one– to the government.”
The airline, which has been surviving on State bailouts since the Covid-19 pandemic, reported a Sh9.8 billion loss in August — a better performance than the Sh11.48 billion loss it recorded in the same period a year earlier.
Read: Taxpayers to take over Sh59.7 billion Kenya Airways loans
The government in December announced it will take over Kenya Airways loans amounting to $485 million (Sh59.7 billion) that it had guaranteed the carrier.
The Treasury officials told the International Monetary Fund (IMF) that government would undertake many such takeovers of distressed loans—technically known as novation—pushing up the country’s annual debt service by Sh10 billion.
The airline has been a perennial beneficiary of State bailouts, with the carrier expected to receive another Sh35 billion in the current financial year, with some of it being used to repay its debts.
Dr Kiptoo told MPs that the government has been undertaking KQ restructuring dubbed “Project Kifaru.”
“To date, Sh16.3 billion has been disbursed under Project Kifaru to turn around the company,” the PS told MPs before the journalists were locked out of the meeting on grounds that the KQ issue is sensitive.
Appearing before MPs alongside the Treasury Cabinet Secretary Njuguna Ndungu during the scrutiny of the Supplementary Budget No 1 of 2022/23, Dr Kiptoo said the Cabinet had initially approved Sh30 billion to restructure KQ but the amount was reduced by Sh10 billion.
“Every project will suffer, including the KQ. It is a debt they have to pay. We must look at how to restructure KQ and bite the bullet,” he told the committee chaired by Balambala MP Abdi Shurie.
The loan repayment done on behalf of KQ by the State shall be recovered through a subsidiary loan agreement between the government and the airline as per the requirements of the PFM Act, 2012.
“Do we have a choice when it is cold? Can we continue allowing KQ to perennially drain cash on us? We have to restructure it,” Dr Kiptoo said.
He added that the Cabinet will make a decision on Kenya Airways.
In December, President William Ruto met top executives of Delta Air Lines on his American trip where he launched the government bid to sell its entire 48.9 per cent stake in Kenya Airways.
The President held a meeting with executives from Delta Air Lines Inc., the largest US carrier by market value, last Thursday.
Read: Kenya Airways’ KAA debt increases to Sh4.6 billion
He, however, declined to provide details of the talks as Kenya seeks a cash-flush foreign airline as a strategic investor in the national carrier to offer expertise and cut its reliance on Treasury handouts for operational cash.
“I’m willing to sell the whole of Kenya Airways Plc,” Dr Ruto told Bloomberg News on the sidelines of the US-Africa Leaders’ Summit during his Washington trip. “I’m not in the business of running an airline that just has a Kenyan flag, that’s not my business.”
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