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This research report was prepared by the Research Department of Old Mutual Securities Limited. Old Mutual Securities Limited is a securities trading company licensed by the Capital Markets Authority (Kenya) for the purpose of facilitating trade on the Nairobi Securities Exchange.

Here are our views on the news making headlines today for Kenya:
Kenya Airways CEO Mbuvi Ngunze last week said the airline will sell five older planes and some of its land, and is negotiating a bridging loan to help it through a cash crunch caused by a drop in passenger numbers. The carrier, part-owned by Air France-KLM, made a KES12.5 billion loss in the six months to September last year after a spate of terror attacks in Kenya made it tough to fill its fleet of new Boeing 787 Dreamliner’s. At the end of the financial year to March 2014, the carrier’s net debt was KES 77.8 billion.

Our View: This is a noble move as the Company recently turned to debt to pay its workforce as it flies under the weight of liquidity problems, exerting pressure on the existing debt burden of KES 136 billion as at HY14. The long-term debt position of the company significantly exceeds the shareholders contribution (with a long-term debt to equity ratio of 6.3x as at HY14) while its total revenues remain almost at par with the long-term debt position which means capital restructuring is inevitable. In our view, the assets sale will improve liquidity in the short-term though the company might turn back to shareholders in the near future for additional capital injection or rather look for a strategic partner to inject capital in exchange of a notable stake in the company.

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