“Kenya Airways defaults on massive loan from American Exim Bank”. Unfortunately, this is not the first time Kenya’s national carrier has made news for failures to settle down its financial obligations.
The airline is currently struggling financially as it has been unable to pay both the secured and the unsecured portion of the loan. There were suggestion late last year that Kenya Airways will merge with another debt-ridden airline, South African Airways to form a new pan-African airline. The status of that project is still in the works although it is unknown whether the two airlines are making any progress.
The Massive Debt
In 2014, Kenya Airways (KQ) obtained $821.4 million from the Export-Import Bank of the United States of America (American EXIM Bank). Back then Kenya Airways said it intended to use the funds to purchase 7 aircraft needed as the airline was in the process of modernizing its fleet to enable the carrier conquer new markets.
Back then, the assumption was that if Kenya Airways defaults on the loan, the American Exim Bank would just repossess the airline’s fleet, auction them-off in order to recover any outstanding loans.
To ensure that Kenya’s national airline secured the loan, the Government of Kenya provided certain guarantees to the American EXIM Bank. Specifically, the Government of Kenya agreed the issuance of $525 sovereign guarantee to the EXIM Bank.
Also, the Kenyan Government agreed to issue $225 million sovereign guarantee to Kenyan Banks that agreed to convert their outstanding loans with the airline into pure equity. So as not to risk Kenya Airways’ failure to secure the loan, KLM Royal Dutch Airlines also agreed to support KQ with non-financial assets to help the African airline in exchange for shares. At the end, KQ secured the much needed loan.
Kenya Airways Defaults on the Loan
Despite all the due diligence, collaterals and guarantees the American Exim Bank got, Kenya’s national airline has just defaulted on the loan. Some of the factors that put the airline in financial difficulty is the massive grounding of airline operations world-wide for two years due to COVID-19. The Coronavirus disease brought air travel to a grinding halt for two years meaning that KQ did not make money to enable it to settle the loan.
A U.S. government official was quoted as saying; “
“Kenya Airways defaulted on both the guaranteed portion of the loan amount as well as the non-guaranteed portion,
“The National Government is in the process of novating the debt to be finalized during the 2022/2023 fiscal year.”
Said the U.S. National Treasury representative.
The Kenyan government-as the guarantor-will be required to pick up the tab and pay the $525 million it guaranteed EXIM Bank in 2014. It is worth noting that the government of Kenya owns the largest share of the KQ equity at 48.9%. A group of 10 local banks owns a combined 38.1% stake of the airline while KLM owns about 7.8% of Kenya Airways. Employees own 2.4% of KQ while other shareholders own the remaining 2.8%.
Below is a video from Kenya Airways in-flight service (Courtesy of Kenya Airways Ltd.):
