Category Archives: Kenya parliament

KQ EGM 2017

Kenya Airways (KQ) held an EGM – extraordinary general meeting of its shareholders today in Nairobi. KQ Chairman, Michael Joseph opened the KQ EGM with a statement that this was essential to the future of the airline, as it restructured their debt and reduced their cash payments. He cited the origin of the airlines’ problem as the fleet expansion, ordering new planes back in 2005, that arrived later than expected, and soon after there were issues like terrorist attacks, economic decline, Ebola and the airport fire. This was at a time that there were a lot of state-owned Middle East airlines allowed to Nairobi who did not have a profit motive and who undercut their KQ’s prices.

KQ’s first Dreamliner arrives in April 2014

He said the board had made responses such as offloading some aircraft to leases till the situation improved and they had also hired Sebastian Mikosz as CEO, who is a turnaround specialist.

Excerpts from the KQ EGM and the hour-long Q&A with shareholders

The Michael Joseph factor: Shareholders seem to have a lot of faith in Michael Joseph as a person to lead the turnaround. This is because of his legacy at Safaricom; he himself admitted as much in the challenge ahead of him, but he said that turning around KQ was much more complicated than Safaricom.

Hot button issues:

What Went Wrong? When it’s not clear what happened, Kenyans typically assign blame to corruption or mismanagement and several shareholders ask about a forensic audit query that had been done at KQ. Joseph said they had not forgotten the forensic audit, and he was going to clean the airline; he said that action had been taken with staff several dismissed or in court (He said justice was slow in the country cited a case where the former CFO had sued the airline and that case had not been heard a year later).

Payment to advisors; This came up several times and the figure cited was Kshs 1 5 billion. Joseph said the payment was a lump sum figure for the many advisors engaged in the complex restructuring deals. He cited Mckinsey as one case he was not happy and which had been terminated. Others were international competitively sourced and they had negotiated them down but had to pay.

Management ownership and staff pay: Shareholders asked the board and management to show commitment, by becoming shareholders. Joseph said he was a big investor at Safaricom and the KQ restructuring had an employee share ownership plan (ESOP) as part of the ownership plan, while disclosures about directors shareholdings would be forthcoming. Another shareholder asked the board and management to take a pay cut in line with what was expected of other employees.

Role of Government: Joseph said that the Government had allowed many new foreign airline flights to Kenya and that whenever the president visited abroad, other presidents asked if their airlines can fly to Kenya, or the tourism minister allows them to fly tourists to Mombasa – forgetting about KQ. Part of their future engagement with government will be on licensing of other airlines. On a question about nationalizing the airline, Joseph said that this had been ruled out and that KQ would remain a public company.

Banks left out to dry: Some shareholders asked if the banks agreed to the conversion? Banks lend depositors money to get it back and not for shares – and do not take KQ’s problems to other banks where this will make us miss dividends. There is a court case brought by some banks that will be ruled on August 10.

Fleet and performance CEO Mikosz spoke about monitoring the perception created in media about delays and cancellation at KQ and which unfairly gave the airline a bad impression. He said that flying 160 flights per days you expect 2-5% are expected to have some delays and this was standard in the aviation industry, but their stats were good.

Minority shareholders: Several minority shareholders said they had voiced issues at past AGM’s about high ticket prices, low dividends, and other issues who had been ignored and who were told that the airline was alright. Michael Joseph said he was an independent director and he and others were there to look out for minority shareholders.

Shareholders at the KQ EGM unanimously voted for the lengthy balance sheet restructuring that was done in a single vote.

Another circular will be issued with terms for shareholders investing afresh in the airline.

The next meeting will be a regular shareholder’s AGM on September 21.

KQ EGM swag: transport to/from town, t-shirt, packed lunch by NAS.

WDR 2017: Governance and the rule of law

WDR2017, the World Development Report from the World Bank for 2017, looks at governance and the rule of law around the world and how they can impact countries and economic development.

Illustrative pic from the Star Newspaper to show what a large sum of cash will look like

some excerpts;

  • Elections alone are not enough to bring change – even when citizens manage to remove politicians whose performance is poor or diverges from their preferences, elections alone offer no credible guarantee that, once elected, new leaders will not shirk their electoral promises and credibly commit to citizens’ demands.
  • Local elites can capture public spending despite participatory programs; as they can disproportionately sway expenditure decisions
  • Inequality begets inequality In societies in which inequality is high as the effectiveness of governance to deliver on equity outcomes can be weakened structurally because those at the top of the income ladder not only have control over a disproportionate amount of wealth and resources, but also have a disproportionate ability to influence the policy process.
  • Devolve: By multiplying the number of more or less autonomous arenas within which public authority is exercised, decentralization increases the opportunities for policy innovations and the emergence of effective leaders. Often these innovations are spurred by political outsiders, who may not have access to the national policy arena but are more likely to acquire citizen support locally and spur local institutional reforms.
  • Female leaders are less prone to patronage politics and corruption.
  • Media content is often defined by elites leading to a bias, but new media can counteract this.
  • Political parties are on average the least-trusted political institution worldwide
  • Politically connected firms gain undue advantage in countries through using market regulations to favor firms, granting import licenses to favored firms, and diverting credit.
  • Land redistribution policies often fail due to transaction costs, incomplete contracts, and political agreements.
  • The Panama Papers highlighted legal and illegal ways in which assets found their way to 40 countries: Funds are legally earned through tax evasion and evading currency controls and shifting profits, but also illegally by exploiting natural resources, violating intellectual property rights, corruption, embezzlement, drug trafficking, and human smuggling etc.

See the 2016 WDR report.

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

Kenya’s Money in the Past: Kalonzo Musyoka

Excerpts from his recently published official biography – Against All Odds. 

Background

  • – He worked at customs department at the port of Mombasa where he was disgusted by the bribery he saw. He did his pupillage at Kaplan & Straton. Later he got a Rotary Club scholarship to study business management at Cyprus and he was poached to work at Manu Chandaria’s Comcraft in the legal department.
  • Lost the 1983 election and came fourth. But when the MP was shot two years later by a policeman, occasioning a by-election, Kalonzo reluctantly entered that and won.
  • He has always been touched by the poverty he saw when he grew up and launched the Kalonzo Musyoka Foundation in January 2006 which worked with Shelter Afrique to launch affordable housing for rural women in Kitui.

Cabinet & Economic Intrigues

  • KANU era: Mwingi is one of the fastest growing towns in Kenya because of the water it gets from Kiambere-Mwingi. But that was only after he fought off powerful forces after he secured $116 million from the Italian government – a powerful voice who wanted it to go to the National Water & Pipeline Corporation but Kalonzo steered it to TARDA so it did not become a white elephant.
  • CHOGM The Commonwealth Summit in New Zealand which was attended by Mandela was almost overshadowed by ‘Bull of Auckland’ incident. But Kalonzo explained the incident to officials there so that it did not reach the media there or affect the ongoing summit. But it did leak afterward in the Kenya media.
  • When Tony Blair praised him before President Moi after the 1997 CHOGM, he knew had lost his Foreign Affairs docket – and after the elections, he was moved to the Education & Manpower ministry.
  • In 1998 he fled teachers striking outside his office by hiding in his wife’s car. He then got Mulu Mutisya and elders to negotiate a settlement with teachers union (KNUT) and the strike was called off the following day.
  • Moi was shocked at the excesses of Mobutu when they visited Gbadolite – his hometown and said “River Ubangi could generate electricity for all of Africa.
  • South Africa: After Kenya had in 1963 turned down an ANC request to set up a base in Nairobi, Moi worked hard to mend fences with South Africa after Mandela was freed, and Mandela thanked Moi for $1 million that Kenya gave to ANC during apartheid struggle. Mandela also made a secret visit to Nairobi when he fell ill on a flight in April 1990, then returned for an official visit in July.
  • NARC: Free primary education was Kalonzo’s brainchild as education minister. When Kibaki became the NARC candidate in 2002, Kalonzo gave the campaign team all the papers and policies that he had written – including on FPE that was soon implemented by the new government. 
  • MOU breach: Happened when Kibaki moved Kalonzo from Foreign Affairs to Natural Resources. All NARC summit leaders had a choice of their ministerial dockets – and he had chosen Foreign Affairs, Raila had taken Roads & Public Works and Moody chose Home Affairs. 
  • Jubilee: After beating back a “feeble” Musalia (for president) effort, Uhuru and Ruto turned on to him; and his reunion with Raila started the day Uhuru and Ruto returned from the ICC hearings and after (vice president) Kalonzo had met them at the airport and driven around Nairobi with them.

The book is available to buy here.

KQ Restructuring extended to Banks and Shareholders

This week Kenya Airways (KQ) announced the next phase of their restructuring, with a focus on their balance sheet.

While shareholders have been aware of the erosion of their equity at the airline, the reality may still be a shock.  A Business Daily story quotes a Genghis Capital report which projects that the airlines 78,000 shareholders will be several diluted as the airline has to put some equity back on its balance sheet. In the process of conversion and providing guarantees,  the airline’s largest shareholder, the Government of Kenya, will increase its stake to 41% as that of KLM will reduce to 19%.

The support confirmed by the Cabinet included conversion of the Government of Kenya loans into equity, and provision of contingent guarantees subject to parliamentary approval in exchange for material concessions to be provided as part of the financial restructuring, which would secure future funding of the company and would more importantly NOT require Government to provide CASH as part of the restructuring.

And coming on board as new shareholders will be several commercial banks (possibly as many as 11 banks) who will own 34% of the airline after they swap some loans for equity. Kenya Airways principal bankers are Citibank, Standard Chartered, Barclays, Equity and National Bank. Some of the main facilities are aircraft loans secured from Citibank NA, Citi/JP Morgan, African Export – Import Bank/ Standard Chartered Bank as well as an engine loan from Co-operative Bank. Some banks who had advanced different short-term facilities to the airline, up through their 2015 financial year include Equity Bank, Jamii Bora, KCB, CBA, I & M, Chase, National Bank, Diamond Trust, Co-operative, NIC and Ecobank.

See also: An investor asks if it the right time to buy KQ shares?