Telkom Kenya has requested the Kenyan government and its parent company, France Telkom, for a Ksh5.8 billion ($69 million) short term emergency loan to last until June to avoid a liquidity crisis that could see the firm default on its bank loans and other supplier debt starting in April. In total, the company is requesting a Ksh10.5 billion ($125 million) bailout from the shareholders in 2012.

It is also asking its two shareholders to hold on their expectations of repayment of interest and principal amounting to hundred millions of dollars in order to save lines of credit from Standard Chartered and KCB worth Ksh12.5 billion ($149 billion), which it has not only fully exhausted, but whose expiry dates are in March, April and August. The company already owes Ksh1.9 billion to trade suppliers on which it has delayed payment for months, and now says it could hold off honouring these debts for months if it does not get a cash injection from shareholders.

According to interviews with insiders and confidential documents prepared by management that Telkom Kenya board has been reviewing as part of the preparation of a five-year business plan that ends in 2016, the company has requested Ksh10.9 billion ($130 million) in shareholder loans to support operations, financing and capital spending in 2012. 

The emergency loan is required to repay two unsecured loans Telkom Kenya took from Standard Chartered Bank amounting to Ksh7.6 billion ($616 million) whose payment is falling due in the next two months. It also owes KCB Ksh1.5 billion ($122 million) in an overdraft loan, which is due for renewal in August 2012 in addition to a Ksh1 billion ($81 million) one-year loan due for renewal in November. 

The first Stanchart loan is an 18-month term debt borrowed in September 2010 on which the last payment of Ksh333 million ($27 million) must be cleared by Tuesday, March 20.  The second one-year loan amounting to $90 million and repayable in either dollars or Kenya shillings is due in April.  In addition, Telkom Kenya enjoys a Ksh1.5 billion ($122 million) overdraft with StanChart.
Bingeing on debt

Over the next five years, Telkom Kenya’s management says it is likely to borrow Ksh30 billion ($357 million), of which the Kenyan taxpayer will repay 49 per cent — the shares that the Treasury owns.

So far, Telkom Kenya has Ksh41 billion ($488 million) in shareholder loans on its book, which combined with bank loans have been costing Ksh9.5 billion ($113 million) in interest payments, which is more than the revenue the company made in 2012 (Ksh9.2 million) selling fixed and mobile phone airtime and data. Telkom, due to its weak balance sheet — and in spite of France Telecom and Kenya government guarantees — has been borrowing at around 22 per cent from commercial banks, with its interest based at the rate Barclays Bank of Kenya offers its customers, also known as the base lending rate (which is the gold standard for the market).

If Telkom Kenya were to take on another major shareholder loan, its debts, if the current one is not repaid — as the management has requested — would hit $845 million in a five-year period when the Kenyan telecommunication industry is expected to stagnate. The interest payments and the need to invest heavily in new technology and its ability to reach more customers and provide them quality service, could throw the long-term viability of the business in doubt. Telkom in 2011 made Ksh9.2 billion ($110million) in revenues and a Ksh18 billion ($214 million) net loss.

Over the next five years, it expects to make a cumulative revenue of Ksh77 billion ($923 million), and a net loss of Ksh72 billion ($858 million). This could force shareholders to forgive these loans by turning them into permanent capital, known in the finance world as equity, which does not pay interest, but dividends from ownership of shares.

This is the second shareholder loan that Telkom Kenya has requested from its shareholders in five years. In March 2008, Dominique Saint-Jean wrote to Joseph Kinyua, the permanent secretary at the Ministry of Finance and Michel Barre, the chairman of Orange East Africa, requesting a Ksh6.3 billion ($76 million) loan.
The four scenarios

In its presentation to the board outlining the current financial situation, the management argues that without a cash injection from shareholders, it can only afford to pay salaries, loan interests and basic necessities. All other payments such as interconnection charges to its rivals Safaricom, Yu, Airtel and frequency payments to the regulator, the Communication Commission of Kenya, amounting to Ksh872 million ($10.5 million), will have to be delayed.

In this situation, which the management calls “we cash out what we can,” Telkom Kenya hits a brick wall. “Without funding, we cannot address the operational needs (2011 delayed payments) nor repay Standard Chartered’s short term loan (Ksh334 million) and withholding tax on interest due on ASB (amounting to Ksh422 million in March).” ASB, also known as Atlas Services Belgium, is a wholly owned division of France Telecom that lends to its subsidiaries around the world. Repaying the Stanchart loan is key to renewing the existing lines of credit.

To come out of this situation, the management has built three scenarios. In the best case, the shareholders agree to lend Ksh6 billion between March and June this year and a further Ksh4 billion ($48 million) in the second half of 2012. They would also have to agree to freeze all loan and interest repayments turned into permanent capital. In this situation, the banks would be happy and this is all the cash injection the shareholders would be required to make between 2012 and 2016.

In second scenario, which is called “worst case,” Standard Chartered and KCB sensing the liquidity crisis say that all their loans must be pre-paid in March, but still the shareholders loans have not been repaid. In this situation, the company would owe Ksh13.3 billion ($160 million) in bank loans, salary and other operational arrears. As the finances of the business deteriorate, and as Orange customers flee because rivals refuse to complete their calls through their network, the shareholders would be required to put in Ksh18 billion ($217 million) by June 2012 and in total Ksh20.8 billion ($250.6 million) by end of this year. The business would be limited to paying salaries and basic needs.

In the base case situation, which is what the company had budgeted, the company would borrow Ksh20.4 billion ($245 million) from external sources and business will continue as usual.