Category Archives: IFC

KQ Capital Optimization: Government, banks, KLM, shareholders impact

Kenya Airways (KQ) shareholders have been asked to approve a balance sheet restructuring. They have known this day was coming for the last two years, but the KQ capital restructuring details will still be an initial shock to many of them.

The circular signed by Michael Joseph Chairman of the board cautions about the unsustainable debt levels at KQ and that the failure to restructure this, may lead to insolvency and closure. KQ’s Kshs 155 billion balance sheet has Kshs 113 billion of long-term debt and debt and 82 billion in current liabilities – resulting in negative 47 of KQ capital. The proposed deal will reduce the company debt by Kshs 51 billion and also unlock new funding. But this comes at a price and he cautions that minority shareholders will be significantly diluted, In this conversion of debt to equity, but they can still buy shares at a discount.

Excerpts from the 38-page shareholder circular (see investor documents

Individual shareholders:  Each ordinary share is being subdivided into 20 shares one of which is interim and 19 of which are deferred.

  • A KQ shareholder with 1,000 shares today will end up with 1,000 shares (initially they will be 250 shares) and 19,000 deferred shares. The ordinary shares will be listed on the NSE.
  • The deferred shares have no share certificate, carry no dividend or voting rights, and are not transferable (tradable). The creation of this class is to prevent an unlawful reduction of the company share capital.

Board restructuring: the Government shall have two seats on the board, while KLM will have one. The banks will have 1 director for every 5% they own (through KQ Lenders Co.). 2/3 of the board are to vote on new CEO & finance director appointments, and on partnership agreements, fleet plans, and strategy. The circular notes the changes will enable faster decision-making and less conflict at the board.

Shareholders Change:

  • Shareholding before: Kenya Government 29.8%, KLM 26.7%, IFC (9.56%), Mike Maina Kamau 4.3%, others 30%
  • Shareholding after: Kenya Government 46.5%, Kenya Banks 35.7%, KLM 13.7%, employees ESOP 1.9%, IFC 0.5%, Mike Maina Kamau 4.3% 0.2%, others 30%.
  • KLM and IFC significantly reduce their shareholding edit.
  • A new shareholders ESOP is proposed to be created and qualifying employees can buy up to 2% of the shares.

Shareholder Dilution: the existing Shareholders’ holdings of Ordinary Shares will be diluted by 95% as a result of the Restructuring and Employee Offer.

  • A shareholder with 1,000 shares will end up with 1,000 shares (initially they will be 250 shares) and 19,000 deferred shares.
  • The new shares will be consolidated after allotments are done i.e. mainly to the banks – so that meaningful trading can take place. (On completion, the company will have 7.4 billion ordinary shares and 28 billion deferred shares). KQ can’t also issue shares at discount to the nominal value, so a share split and an immediate consolidation will be done.
  • For an illustration of the dilution Mike Maina Kamau remains with 64.4 million shares but that shareholding, which was equivalent to owning over 4% of KQ, is now 0.22% assuming he does not buy new shares.
  • Shareholders can buy up to Kshs 1.5 billion of new ordinary shares, but new shares they buy are not tradable

The Government of Kenya: When he presented his budget speech earlier this year, Treasury CS Henry Rotich spoke of plans to restructure the KQ balance sheet in which the government could play a critical role and bring on board other stakeholders.

  • They had earlier provided Kshs 24 billion in loans that is being converted to equity
  • The government is will now providing in-kind contributions being the provision of government guarantees (not cash) of another 54 billion to US EXIM bank and Kshs 23 billion to Kenya banks.

KQ Capital and Kenya Banks: Kenyan banks are owed Kshs 23 billion plus interest, which they will convert to equity in a debt restructuring.,

  • Also, a group of Kenyan banks has agreed to provide Kshs 18.1 billion in new financing.
  • Eight Kenyan banks signed in on the deal on July 14.
  • Kenya banks have two options of how to participate – either to convert debt into equity or to subscribe to a new “Kenya Lenders Co” in a secured debt arrangement. If any Kenyan bank that has lent to the airlines does not indicate its preference, it is deemed to have accepted the equity route – but a majority has opted for the scheme. These novel agreements are part of the new companies act that allows companies to discuss distress debts with banks as long as 75% of creditors approve.
  • KQ Lenders Co. Ltd will be permitted to divest the Ordinary Shares it holds in KQ through the NSE and the sale proceeds will be used by MTC Trust Services to repay the Kenyan Banks loans;

KLM: will invest Kshs 7.5 billion through in-kind contributions of Kshs 2.7 billion, and will also subscribe for Kshs 5 billion (Kshs 2.5 billion of share in two phases) after settling some terms on employee number and aircraft leases.

  • Also, the recently criticized master cooperation agreement between KQ and KLM (signed in December 1995) shall be terminated.
  • KLM in-kind contributions include the slot (takeoff/landing rights) at London Heathrow currently used by KQ, and certain IT systems.

Don’t go to court: the circular warns that:

  • The key risk in relation to the Scheme is that creditors and other stakeholders dispute the process, which may result in delays or in it being unsuccessful
  • if the Restructuring is not implemented, there will be no amendments to any of the Existing Indebtedness and there will be no new money from KLM or the Government.

Way forward The circular from the Chairman notes that:

  • shareholders representing over 56% of the issued and outstanding Ordinary Shares have indicated their intention to vote in favour of the Resolution at the EGM. Such Shareholders include the Government and KLM.
  • .. Accordingly, the Board unanimously recommends all Shareholders to vote in favour of the Resolution to be proposed at the EGM as they intend to do in respect of the beneficial shareholdings of the entities they represent on the Board
  • Transactions are expected to be completed in August 2017, which includes the shareholders meeting (EGM) on August 7 in Nairobi and signatures from aircraft financiers and the banks.
  • 75% of shareholders have to vote at the EGM for the KQ capital restructuring to move forward.

KQ Capital Advisors: PJT Partners, Bowmans, White & Case (both legal), Kestrel stockbrokers, Redhouse, KPMG auditors, Deloitte (financial advisors), C&R Registrars. The exercise will cost about Kshs 25M with 9.8 million for lawyers and 14.4 million for transaction advisors

$1 = Kshs 103

IFC in Kenya

A snapshot of the pipeline of approved, pending, and other projects at the International Finance Corporation (IFC) that relate to Kenya. The IFC is the private sector lending arm of the World Bank and lends to private sector projects and entities in diverse sectors such as finance, logistics, energy, communications, and health, among others.

Financial Services

  • (Considering advancing $1.19 million to) Co-operative Bank to increase access to finance to the underserved SME market segment
  •  Britam Holdings (Kenya Shillings 3,553,375, 000 equity (approximately US$35 million for 10.37% of Britam to support the insurance company develop its local agency network, strengthen its capital base, and the integration of a new IT platform.
  • KCB Group ($75 million loan) facility to KCB to be on-lent as Tier II qualifying subordinated debt.
  • NIC Bank ($198,000) and is designed to increase access to finance to the underserved SME market segment.
  • Equity Group Holdings (US$100 million senior loan) to help the Bank grow its lending to Small and Medium Enterprises (“SME”), women entrepreneurs and to support the continued diversification of funding sources.

Communication & Infrastructure

  • C-Squared – IFC ($15 million) together with Google Inc., Convergence Partners, and Mitsui & C to start a partnership in CSquared building metro fibre optic networks in Sub-Saharan Africa starting in Uganda and Ghana
  • Western Indian Ocean Cable Company (US$20 million) to fund regional expansion through the acquisition of additional capacity in Africa, increase connectivity to other fibre optic systems, upgrade its capacity on the EASSy cable and purchase network equipment.

Investment Funds

  • Investisseurs and Partenaires Afrique Entrepreneurs II ($10 million into the $80 million IPAE Fund), that will invest in small and medium companies in West, Central, East Africa and the Indian Ocean Region.
  • LeapFrog Emerging Consumer Fund III ($25 million) to make mid-market growth capital investments into financial services and healthcare investments.
  • Catalyst Fund II, LLC (US$15 million) to the fund that is seeking to raise up to US$200 million in third party commitments to make 8-12 mid-market growth capital investments.
  • (IFC to invest $7.5 million in) Fanisi Capital Fund II, a 10 year closed-end SME Ventures fund targeting growth-oriented SMEs in Kenya, Rwanda, Tanzania and Uganda in four sectors: agribusiness, retail consumer (FMCG), healthcare and education.
  • African Local Currency Bond Fund (investment of $40 million) in a local currency bond fund sponsored by KfW and managed by LHGP Asset Management LLP.

    Food Business
  •  ($3 million loan to) Nespresso (guaranteed by Nestlé S.A.) and $3 million grant from the World Bank’s BioCarbon Fund (to be disbursed through the Nespresso Sustainability Innovation Fund) to support smallholder coffee farmers and producers in Ethiopia and Kenya involved in Nespresso’s AAA Program that is  being implemented by TechnoServe.
  • Kenya Tea Development Agency ($2.7 million)
  • (A proposed investment in Tropical Heat) to finance the expansion plans of the company which has purchased eight acres of land in Redhill to set up a new state-of-the-art factory, free of logistical constraints, and add production lines as needed for exports in the region.
  • (Approved loan of $3.5 million to) Insta Products (EPZ) a producer of ready to use therapeutic food, a high calorie fortified peanut paste based food product.

Energy & Logistics

  • Tobene Power SA – Melec PowerGen thermal plant in Senegal.
  • Africa Logistics Properties (US$10 million in ALP) which will develop and manage Grade A warehousing space in sub-Saharan Africa. For the first phase of this project, ALP is raising US$65-70 million to develop three key strategic sites (Tatu, Tilisi and Embakasi) around Nairobi. In May 2017, they broke ground on the Tatu one which, with 50,000 sqm in three units, will be the largest warehouse in Kenya to be built to international standards.
  • (IFC is looking to invest $5 million in equity with Investec Africa Private Equity Fund II) in Mobisol, a pay-as-you-go off-grid solar electricity provider operating in Tanzania, Kenya, and Rwanda.

Health

  • The Medical Credit Fund (MCF) is a financing and technical assistance vehicle with a mandate to improve access to quality healthcare for underserved populations in Sub-Saharan Africa.
  • IFC is considering a $10 million loan to Meghji Pethraj Shah Hospital (M.P. Shah) is one of Kenya’s oldest and most reputed hospitals for the construction and equipping of a new physiotherapy building and purchase of key medical equipment.

From Other Sources

  • IFC owns 10% of Kenya Airways that’s about to undergo a balance sheet restructuring.
  • As Kenya plans a green bond launch, in in South Africa, IFC successfully raised a 9-year, 1 billion Rand Green Bond via the Johannesburg Stock Exchange.
  • Gulf African Bank aims to support SME businesses in Uasin Gishu County through provision of affordable Shari’ah compliant financing facilities and free business advisory services to be offered in partnership with (IFC.
  • The KCB Foundation and IFC, have a partnership to improve the sustainability of SME’s within the informal sector through IFC training within 2jiajiri to improve the management capacity and business performance of SME’s.
  • IFC invested $15 million in the Stanlib Fahari I-Reit.

Kenya Green Bonds Launched

A few days ago saw the launch of green bonds in Kenya with the signing of a memorandum of understanding between the Kenya Bankers Association, Nairobi Securities Exchange (NSE) and Financial Sector Deepening Africa (not FSD Kenya). Through this, they hope to deliver lower cost funds through capital markets to finance green projects. China is actually the leader in this along with India, but Kenya, as part of a climate bonds initiative, will be the flagship for green bonds in Africa.

NSE CEO Geoffery Odundo NSE Odundo said green bond listings at the NSE would attract impact investors while Kenya Bankers Chairman, Lamin Manjang said they hoped the first green bond would list at the NSE this year. FSD Africa has committed $600,000 to this and the IFC will partner with KBA to determine green portfolio i.e. projects that quality for such finance, from sectors such as energy, agriculture, infrastructure, transport, manufacturing. Other actives to be undertaken include and enabling small banks to take part in financing the pipeline, extending green bonds across East Africa, creating a pool of Kenya green finance experts, and promoting green Islamic finance.

More on renewable energy project finance in Kenya.

Understanding the KQ & KLM Partnership

 The IFC-led privatization of Kenya Airways (KQ) in which KLM became a strategic partner, and shareholder, in the airline,  purchasing 26% of the Kenya government’s shares in the airline for US$26 million, and after which the shares of the company were listed in an IPO, was celebrated as one of the most significant privatization deals for a decade, until Kengen and Safaricom.

But that’s all in question with the recent loss announced by Kenya Airways with quite a bit of blame being directed at KLM for the position in which the KQ finds itself in. What does this entail?

A master cooperation agreement and shareholders agreement were signed between KLM and KQ in 1995, and a codeshare agreement and joint venture agreement followed in 1997.

KLM has seats on the board of Kenya Airways and some of the tenets of master cooperation agreement give any KLM director veto power over KQ decisions on:

IFC celebrates KLM's investment in KQ

IFC celebrates KLM’s investment in KQ

  • The appointment or dismissal of the Managing Director or Finance Director of KQ
  • The acquisition or disposal of any aircraft and any other variation in the size and composition of  KQ’s fleet. (KQ’s 2012 rights issue IM notes that following the approval of a 10 year business plan in July 2011,  KQ’s management embarked on implementing the strategic initiatives for the first five-year period. In particular, the Business Plan envisaged that KQ will acquire 46 aircraft over the period to March, 2016.) 
  • The allotment and issue of any shares
  • Entering into of any co-operation agreement with an airline that is a major competitor of KLM.
  • Material alteration KQ’s existing route network or material increase or reduction in the capacity on its routes
  • Material commitment or expenditure on sales and marketing or distribution of KQ’s products and services
  • Any sale of shares by the Government of Kenya to a major international airline.

Other notes from the IM and media

Global ticketing: In 2010, Kenya Airways became a full global airline partner of the SkyTeam global airline alliance, alongside KLM, having been an associate partner since 2007. KQ is currently the only SkyTeam member with significant operations in Africa.  With 14 SkyTeam member airlines, KQ’s passengers can take up to approximately 14,000 daily flights to 926 destinations in 173 countries. (So KLM helped KQ join? Will a break from KLM mean a break from Skyteam?).

Freight: In support of KQ’s expansion into freighter operations through the launch of a dedicated freighter business, the Board of Directors approved the acquisition of 12 freighter aircraft. In February, 2012, KQ introduced its first dedicated cargo aircraft, a Boeing 747-400F, to be operated in association with KLM and which was expected to fly twice weekly between Guangzhou, Nairobi and Lagos.

Passengers: This translated article hails Kenya Airways as being a jewel in the crown of KLM:  “The investment by KLM Kenya Airways is one that works out well for both parties.  Both companies fly each day between Amsterdam and Nairobi which there is a double daily connection..collectively the route has about one million passengers transported per year..

The cooperation agreement was expanded in November 2013: ..the collaboration was extended with the new routes London-Nairobi, Amsterdam-Entebbe / Kigali, Amsterdam-Lusaka-Harare and Amsterdam, and the Amsterdam-Kilimanjaro / Dar es Salaam. Kenya Airways and KLM jointly total around 44 weekly flights with a total turnover of over US$500 million.

However, this week, the KQ CEO said that the “In the context of the revenues and the costs on the routes in the joint agreement venture which we share 50-50, over the last three years, the route has been loss making,” ..and he said the Dutch Airline had since paid them a settlement transaction. 

Diamond Trust: Fourth Rights

Diamond Trust Bank is back for a fourth rights issues in recent years from its 11,136 shareholders at a rate of (Kshs 165) $1.95 per share, with each of shareholder entitled to buy 1 share for every 10 held. This follows others done in 2006, 2007 2012  and now this one.
Contrasting the four issues 
Year – Nov-06 ; Nov-07 ;  Jul-12 : Jul-14
Target (Kshs M) – 735 ; 1,600 ; 1,809 : 3,631
New shares (M) – 15.5 ; 23.3 ; 24.4 : 22.0
Price (Kshs)  – 50 ; 70 ; 74 ; 165
Ratio    1:8 ; 1;6 ; 1;8 : 1:10
Budget (Kshs M) 41.6 ;  54.7 ; 57.6: 100.1
  • The IFC remains as a principal funder and shareholder for the bank.
  • Diversification has paid off with the bank having 30% of assets and 19% of profits from outside Kenya. While 77% of Diamond Trust’s $61 million after-tax profit is from Kenya, the Tanzania and Uganda operations contributed about $7 million each of profit with Burundi trailing at ~$150,000 
  • They have extended traditional banking services in the mobile and card age by having M-Pesa at all their ATM machines. They also issues prepaid cards  for NationHela, NakumattGlobal and MiCard and handle remittances/money transfer for WesternUnion, MoneyGram and XpressMoney
  • Others institutions that may need to have rights issues or raise capital this year include ABC, Commercial Bank of Africa, Consolidated and Equatorial banks.