US Issues Kenya a Default Notice for Sh57bn KQ Debt

A US-backed financier has served the Treasury with a default notice for failing to repay a Sh57.8 billion loan guaranteed by the government to Kenya Airways.

The Treasury Principal Secretary, Chris Kiptoo, told Parliament that the Exim Bank of the United States had issued a default notice after Kenya failed to make loan payments on time.

This highlights the country’s struggles with mounting public debt, the cost of which is expected to exceed half of projected State revenues in the fiscal year ending in June.

The Private Export Funding Corporation (PEFCO) of the USA, Exim Bank of the USA, and the Government of Kenya all provided guarantees for KQ’s $525 million (Sh64.6 billion) loan, which it partially missed payments on.

The 89-year-old Exim Bank, which is entirely owned by the US government, offers working capital guarantees, direct loans, export credit insurance, and guarantees for commercial loans to American exporters.

According to Dr. Kiptoo, the Treasury guaranteed the loan to the financially troubled airline at a rate of Sh84 to the dollar. The dollar presently exchanges hands for Sh125.2.

“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.

A call-up of the loan technically entitles the lender to demand full repayment of the debt based on concerns about the borrower’s ability to make payments in the future.

The Kenyan government and Exim joined in as guarantors on the KQ loan, which was originally a 12-year credit given by Citi Bank and JP Morgan until PEFCO took over.

Due to financial difficulties brought on by the Covid-19 outbreak, which caused a significant portion of international air travel to be grounded, the airline stopped making payments.

According to a previous report from the Treasury, the airline stopped making payments on both the guaranteed and unguaranteed parts of the loan.

“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 dependent on government aid since the Covid-19 outbreak, reported a loss of Sh9.8 billion in August, which is an improvement above the Sh11.48 billion loss it suffered during the same time last year.

In December, the government made the announcement that it would assume responsibility for the $485 million (Sh59.7 billion) in loans that it had guaranteed for Kenya Airways.

The government will carry out numerous such distressed loan takeovers, or “novation’s,” according to Treasury officials who spoke to the International Monetary Fund (IMF). This would increase the country’s annual debt service by Sh10 billion.

The airline has consistently benefited from state bailouts, and it is anticipated that it will receive another Sh35 billion in the current fiscal year, some of which will go toward paying off its debts.

According to Dr. Kiptoo, the government has been restructuring KQ under the name “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.

Dr. Kiptoo said the Cabinet initially approved Sh30 billion to reorganize KQ, but the sum was decreased by Sh10 billion while testifying before MPs alongside the Treasury Cabinet Secretary Njuguna Ndungu during the inspection of the Supplementary Budget No. 1 of 2022/23.

“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.

According to the PFM Act of 2012’s requirements, the loan repayment that the State made on behalf of KQ would be repaid through a subsidiary loan agreement between the government and the airline.

“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.

The Cabinet will decide on Kenya Airways, he continued.

When visiting America in December, President William Ruto met with top Delta Air Lines officials and announced the government’s plan to sell its whole 48.9% interest in Kenya Airways.

Last Thursday, the President met with officials from Delta Air Lines Inc., the largest US airline by market value.

While Kenya seeks a cash-flush foreign airline as a strategic investor in the national carrier to contribute expertise and reduce its dependency on Treasury subsidies for operational funding, he declined to share details of the conversations.

“I’m willing to sell the whole of Kenya Airways Plc,” Dr Ruto told Bloomberg News on the side lines 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.”