Inspection of EXIM’s 2014 Transaction with Kenya Airways · (KQ) financing to ascertain the adequacy of the Bank’s due diligence, risk assessment, ... A final commitment is an

Office of Inspector General

Export-Import Bank

of the United States

Inspection of EXIM’s 2014 Transaction with

Kenya Airways

September 26, 2018

OIG-INS-18-01

EXPORT‐IMPORTBANK– OFFICEOF INSPECTORGENERAL

The Export ‐Import Bank of the United States (EXIM or the Bank) is the official export credit agency of the United States. EXIM is an independent, self‐sustaining executive agency and a wholly‐owned U.S. government corporation. The Bank’s mission is to support jobs in the United States by facilitating the export of U.S. goods and services. EXIM provides competitive export financing and ensures a level playing field for U.S. exports in the global marketplace.

The Office of Inspector General (OIG), an independent office within EXIM, was statutorily created in 2002 and organized in 2007. The mission of the OIG is to conduct and supervise audits, investigations, inspections, and evaluations related to agency programs and operations; provide leadership and coordination as well as recommend policies that will promote economy, efficiency, and effectiveness in such programs and operations; and prevent and detect fraud, waste, abuse, and mismanagement.

This inspection was conducted in accordance with the 2012 Quality Standards for Inspection and Evaluation as defined by the Council of Inspectors General on Integrity and Efficiency. This report does not constitute a Government audit and therefore, it was not conducted following the Generally Accepted Government Auditing Standards (GAGAS).

INSPECTION REPORTOIG‐INS‐18‐01

Office of Inspector General

To: DavidSena,SeniorVicePresident, OfficeofBoardAuthorizedFinance

From: JenniferFain,ActingAssistantInspectorGeneral,Audits and Evaluations

Subject: InspectionofEXIM’s2014TransactionwithKenyaAirwaysAP088412XX,XA, XB,andPC088413XX

Date: September26,2018

Attachedpleasefindthe finalinspection reportontheInspectionof EXIM’s2014Transaction withKenya Airways.Thereportoutlinestwo recommendations for corrective action.OnSeptember21,2018,EXIM provided itsmanagementresponsetoadraftofthisreportagreeingwiththe recommendations.We consider management’scorrectiveactionstoberesponsive.Therecommendationswillbecloseduponcompletionandverificationoftheimplementation of thoserecommendations.

Weappreciatethe courtesiesandcooperation extendedto usduringtheinspection.Ifyouhavequestionsorcommentsregarding the final report,pleasecontactmeat(202)565‐3439.

cc: JeffreyGerrish,ActingPresidentandChairmanJeffreyGoettman, ExecutiveVicePresidentandChiefOperating OfficerKevinTurner,SeniorVicePresidentandGeneralCounselMargaux Matter, Senior Vice President and Chief of Staff KennethTinsley,SeniorVice President andChiefRiskOfficerInciTonguch‐Murray,ActingSenior VicePresidentandChiefFinancialOfficerDavidFiore,Acting Vice President, TransportationDivisionCristopolis Dieguez, Director, Internal Controls and Compliance Goda McEachern, Business Compliance Analyst Parisa Salehi, Acting Inspector General, OIGElizabethSweetland,CounselonDetail,OIGEricaWardley,Deputy Assistant Inspector Generalfor Audits and Evaluations,OIGCourtneyPotter, Audit Manager,OIGLiam Bresnahan,Financial Analyst, OIG

Attachment: InspectionofEXIM’s 2014TransactionwithKenyaAirways AP088412XX,XA,XB,andPC088413XX


InspectionReportonKenyaAirwaysExecutive Summary OIG‐INS‐18‐01,September2018

Why We Did This Inspection

WecompletedaninspectionofEXIM’sKenyaAirways (KQ)financingtoascertaintheadequacyoftheBank’sduediligence,riskassessment,transactionstructuring,andpolicycompliance.Atthetimeofourreview,theKQfinancingconstitutedthelargest non‐sovereign aircraftcreditontheBank’sWatch ListandthefirstrestructuringofanEXIM‐financedaircraft transaction in recentyears.

What We Recommend

WemadetworecommendationstoimprovetheTransportationDivision’screditreviewprocess:

1. Updatepoliciesandprocedurestoensurethe analysisoftheborrower’sfinancialprojectionsandassumptionsisfullydocumentedandsupportedinthetransaction records(e.g.,BoardMemo).

2. Revise thetransportationorigination riskrating modeltoensurethe finalratingoutcomescomporttotheBank’sBCLriskratingscaleof1to11.Thiswouldincludeupdatingrelatedpoliciesandprocedures.

What We Found

TheKQtransaction comprisedan $821.4millioncomprehensiveguarantee tosupportKenyaAirway’spurchaseofsevenaircraftandaspareengine in2014.Additional aircraftwere purchasedusingprivatesectorfinancing.KQ’saircraft purchaseswerepartofabroaderstrategytoexpandandmodernize its existing fleet and werelargely debtfinanced.TheresultingincreaseinKQ’sfinancialleverage,coupledwithincreasedcompetition andadverseeventsprecipitatedtheneedforKQ to restructureitsdebtandleaseobligationsin2017.

WefoundthatEXIMgenerally conductedsufficientduediligence,assessedrisk,and adequatelystructuredthetransaction inaccordancewithBankpoliciesandprocedures.TheBankalsoeffectivelymonitoredKQ’sperformancefromtransaction approvalinMarch2014throughtheendofthe restructuringperiodinNovember2017.

EXIMsuccessfullyrestructuredtheKQtransaction.However,theBankcanmorefullydocumenttheanalysisofprojectedfinancialresultsandassumptionswhenestablishingtheabilityofthe borrowertorepayitsdebt.WhileEXIMwasabletosuccessfully restructurethisdealandprotecttheinterestsofthe U.S.Government,morefullydocumentingtheanalysisofprojected financialresults andassumptionswhenestablishingtheborrower’sabilitytorepaywillprovidegreatertransparencyto theoriginationprocessandhelptobetterinformdecisions.

Lastly,wefoundthattheBankcanimprovethetransportationoriginationriskratingmodeltoaddresslimitationsinthescale usedtodeterminethefinalBudgetCostLevel(BCL)riskratingforatransaction.Wemadetworecommendations toaddressidentifiedareas ofimprovement.

For additional information, contact the Office of Inspector General at (202) 565-3908 or visit www.exim.gov/about/oig

http://www.exim.gov/about/oig


TABLE OF CONTENTS EXECUTIVE SUMMARY ..................................................................................................................... i

TABLE OF CONTENTS ...................................................................................................................... ii

LIST OF FIGURES............................................................................................................................. iii

LIST OF TABLES............................................................................................................................... iii

ABBREVIATIONS AND GLOSSARY.................................................................................................... 4

INTRODUCTION............................................................................................................................... 6

SCOPE AND METHODOLOGY .......................................................................................................... 6

BACKGROUND................................................................................................................................. 7

RESULTS IN BRIEF.......................................................................................................................... 13

APPENDIXES .................................................................................................................................. 27

Appendix A: Management Response and OIG Evaluation...................................................... 27

Appendix B: Inspection Methodology and Prior Reports ....................................................... 31

Appendix C: KQ’s Financial Condition – Contributing Factors................................................ 33

Appendix D: KQ Revenue and Margins – Historical, Projected, and Actual ........................... 36

Appendix E: KQ Operating Statistics – Historical, Projected, and Actual ............................... 37

ACKNOWLEDGEMENTS................................................................................................................. 38


ii


LIST OF FIGURES

Figure 1: EXIM Finance Lease Structure ....................................................................................... 10

Figure 2: Debt & Lease Outstanding FYs 2011 ‐ 2017................................................................... 33

Figure 3: KQ Operating Profit vs. Net Finance Cost FYs 2011 – 2017........................................... 34

Figure 4: KQ Operating Revenue Growth (Actual and Projected) to Margin ............................... 34

Figure 5: KQ Projected vs. Actual Revenue................................................................................... 35

LIST OF TABLES

Table 1: Summary of Management’s Comments on the Recommendations .............................. 30

Table 2: KQ Revenue and Margin – Historical and Projected as of March 31st........................... 36

Table 4: KQ Operating Statistics – Historical and Projected as of March 31st............................. 37

Table 3: KQ Revenue and Margin – Actual as of March 31st ....................................................... 36

Table 5: KQ Operating Statistics – Actual as of March 31st ......................................................... 37


iii


ABBREVIATIONS AND GLOSSARY

Term Description

ASU The2011AircraftSectorUnderstandingprovidesaframework forthepredictable, consistent,andtransparentuseofofficiallysupportedexportcredits.The2011ASUlevelsthe playingfieldacrosstheglobalaviationindustryamongmanufacturers,airlines,andexportcreditagencies.

BankorEXIM Export‐ImportBankoftheUnitedStates BCLorRiskRating

TheBudget CostLevelisarisk ratingsystemofEXIMthatrates atransactiononaslidingscaleof1(lowrisk)to11(highrisk).TheBCLratingdetermineslossreservesallocatedbythe Bankforatransaction.

Board TheBoard ofDirectors,EXIM,isresponsibleforapprovingallmediumandlong‐termtransactionsofmore than$10 millionorexceedingseven years repayment.

BoardMemo AmemorandumsubmittedtotheEXIMBoardaspartof theprocessforapprovingatransactionforBanksupport.

CapeTownConvention

TheCape TownConventiononInternationalInterests in MobileEquipmentisan internationaltreatythatstandardizestransactionsinvolvingmovableproperty,suchasaircraft, rail,andspaceequipment.Thetreaty includesinternationalstandardsforsalecontractregistration, security interests,andleases.

CAGR CompoundAnnualGrowthRate DSCR DebtServiceCoverage Ratio,ascalculatedbyTDandTPMD, is

EBITDAR/(interestexpense,lease rental,and principalpayments ondebt)

EBITDAR EarningsBeforeInterest,Tax,Depreciation,Amortization,andRentECA ExportCreditAgencyFinalCommitment

Afinalcommitment is anauthorizationof financingbyEXIM.

FY FiscalYear GoK GovernmentofKenyaInvestmentGrade

IssuerratingsaboveBBBorBaa,whichrangesfrom‘extremelystrongcapacitytomeetfinancialcommitments’(AAAorAaa)downto‘adequate capacitytomeetfinancialcommitmentsbutmoresubjecttoadverseeconomicconditions’(BBBorBaa).Investmentgradebondsarejudgedbytheratingagency aslikelyenoughtomeet paymentobligations.

KLM KLMRoyalDutchAirlinesKQ Kenya AirwaysPLC, formerlyKenya AirwaysLimited LoanManual EXIM’sLoan,GuaranteeandInsuranceManual,which setsforththe

policiesand proceduresforduediligence,structuringandassetmanagementofBanktransactions.

Obligor TheBorrower,anentitythat islegallyobligatedtorepaytheEXIMfinancing.

OECD OrganisationforEconomicCo‐operationand Development OIG OfficeofInspectorGeneral,EXIM


4


Term Description

OperativeDate Thedatethatatransactionhassatisfiedallconditionsprecedentandisavailable forfunding.

PreliminaryCommitment

APreliminaryCommitmentis an offerof EXIMfinancingsubject totheawardof theexportcontract and theBank’sreviewofaFinalCommitmentapplication.Preliminary Commitmentsare mostcommonlyusedinaircraft transactionswhenthepurchaserhasnotyetmadeapurchasedecisionor whenthetransactioninvolvesmultipledeliveries.

PSOR TheprimarysourceofrepaymentistheentitywhichEXIM willprimarily relyuponforrepaymentofthe directorguaranteedloan.

TD TransportationDivision,EXIM TPMD TransportationPortfolioManagementDivision, EXIMWatchList A listofEXIM transactionsthatthe Bankhasdeterminedrepresentsa low

tomoderatelikelihoodofimpairment.


5


INTRODUCTION

Wecompletedan inspectionoftheExport‐ImportBankoftheUnitedStates(EXIMortheBank)2014KenyaAirways(KQ) transaction(AP088412XX, XA,and XB).1 TheobjectiveoftheinspectionwastoascertaintheadequacyoftheBank’s due diligence,riskassessment, transaction structuring, andpolicycomplianceasitrelates to thetransaction.Weinitiatedthereview aspartofourannual workplan.Severalfactorsmotivated thisinspection.It wasthefirstOfficeofInspectorGeneral (OIG)inspectionofan EXIMaircrafttransactionanditrepresentsthefirstrestructuringofanEXIM‐supportedaircraft transactionin recentyears.Theobligorwasalsothelargest non‐sovereign aircraftcredit ontheBank’sWatchListat thetimeof selection forinspection.

SCOPE AND METHODOLOGY

Toachieve ourobjective,weemployedacombination ofqualitativeandquantitative techniques aspartofourreview ofthe2014KQtransactionincluding areview offinancialandlegaldocumentation;review ofinternal procedures andpolicies;interviews ofEXIMstaffand externalparties;and researchoflaws,rules,regulations,andindustry practices. Theinspectionwasperformedin Washington,DC,with a sitevisittoLondon,UKand Nairobi,KenyainJanuary2018to interviewtransaction participants.Adetailedsummaryoftheinspectionmethodologyand asummaryofpriorreportsis providedinAppendixBof thisreport.

Points of Inquiry

Thefollowingpointsof inquirydirectedourfocusandhelpedtoguideourinspection.

POINT OF INQUIRY 1: Did the Bank conduct sufficient due diligence, assess risk, and adequately structure the transaction at origination?

POINT OF INQUIRY 2: Did the Bank effectively monitor obligor performance post origination?

POINT OF INQUIRY 3: Did the Bank effectively manage the restructuring process?

Weconductedthisinspection fromJuly2017toSeptember2018 inaccordancewiththe Quality Standards for Inspection and Evaluation issuedbytheCouncilofInspectorsGeneralonIntegrityandEfficiency.2 Webelievethatthe evidence obtainedprovidesa reasonablebasisforthefindingsandconclusionsinthisreport.

1 The2014KQtransactionwas comprisedof foursub‐transactions:aFinalCommitment foracomprehensiveguaranteeofthreesub‐transactions(AP088412XX, XA,andXB),anda Preliminary Commitment for acomprehensive guarantee of one sub‐transaction (PC088413XX).ThePreliminary Commitment waslaterwithdrawnby EXIM.

2 See https://www.ignet.gov/sites/default/files/files/committees/inspect‐eval/iestds12r.pdf.


6

https://www.ignet.gov/sites/default/files/files/committees/inspect-eval/iestds12r.pdf


BACKGROUND

EXIM Aircraft Portfolio

Comprised ofwide and narrow‐bodyaircraft, businessjets andhelicopters,the totalexposureofEXIM’saircraftportfoliorepresented48.6percent of the Bank’s$69.5billionportfolioas ofDecember31,2017.3 Transactionswithin theportfolioareprimarilystructured asasset‐basedwithEXIMguaranteestolenderswhofinancethepurchaseoftheaircraft. TheBankmaintainsa first‐prioritysecurityinterest inthe aircraftascollateral throughoutthelifeof the transaction,andcanexercise remedies if needed.An exampleofa remedyincludestherepossession andsubsequentdispositionof the aircraft.

Over time,thesizeof theaircraftportfoliohas shifted with marketconditionssuchasthe2007‐2009 worldrecessionwhere EXIM’sfinancingof aircraft increased.Forexample,the Bankfinanced27‐30percentof an aircraftmanufacturer’sdeliveries between2009and 2012.4 Thepercentagedecreasedto 17percent after2012 andwasdown to4percentin2015duetoimprovedmarketconditionsfor aircraft financings.5 Congressionalactionshavealsocontributedtoadecreasein thesizeoftheaircraft portfolio.The2015lapseinEXIM’sauthorityandthe ongoinglackofaquorumonitsBoard ofDirectors(Board)hasfurtheredthedecreaseinthesize oftheaircraftportfolio.6 SinceJuly20,2015,thelackofaBoardquorumhasprecludedEXIMstafffrompresentingmediumandlong‐termtransactionsover$10millionforBoardapproval.

AsofDecember31,2017, theBank’sestimatedvalueofaircraft collateralinthe portfolioexceededthe valueofaircraftexposureby40percent.7 Thedefaultratefor EXIM’saircraft portfoliowas0.009percent.8

African Market and Outlook

AlthoughAfricais thesecondmostpopulatedcontinent,theAfricanaviationmarketcurrentlyaccountsforonly3percentoftheworld’sairtraffic.9 Africa wastheweakestperforming regionin theworldin termsofprofitabilitywitha netpost‐taxlossof$100

3 See EXIM’s Portfolio Risk Management Report, datedDecember2017.

4 See

5 Ibid.

(b) (4)

6 See https://www.wsj.com/articles/white‐house‐in‐shift‐pushes‐to‐revive‐u‐s‐export‐import‐bank‐1528968601.

7 Supra note3. Toreduceportfoliorisk,EXIMco‐finances (i.e.,reinsures)with other export credit agencies. Asof September30,2017,EXIM’stotaloutstanding exposurefor its portfolio was$69.1billion.Ofthis exposure,$4.1billion(5.9 percent) ofrisk for transactions authorizedbetweenfiscalyears2005and2015wasreinsured.Theserisk sharingagreements wereprimarilyin transactionsinvolvingwide‐body aircraft.

8 EXIM’s Default Rate Report,datedDecember2017.

9 See https://businesstech.co.za/news/general/85952/the‐biggest‐airlines‐in‐africa/.


7

https://businesstech.co.za/news/general/85952/the-biggest-airlines-in-africa/

https://www.wsj.com/articles/white-house-in-shift-pushes-to-revive-u-s-export-import-bank-1528968601

https://www.wsj.com/articles/white-house-in-shift-pushes-to-revive-u-s-export-import-bank-1528968601


millionin2017.10 In2018,theregionisexpected tosupport demandgrowthof8 percent,capacityexpansionof7.5percent,andasimilarprojectednet post‐taxlossof$100million.11

2014 Transaction with Kenya Airways

Obligor History

Foundedin 1977,KQ is the national flagcarrier of Kenyaandis based at Jomo Kenyatta International Airport (JKIA) in Nairobi, Kenya. Theprincipalactivitiesof KQaretheinternational,regional, anddomesticcarriage ofpassengersandcargobyair,theprovisionofgroundhandling servicestootherairlines,andthehandling ofimportandexportcargo.

Atthetime ofthisreport,theGovernmentof Kenya(GoK)isKQ’slargestshareholderwitha48.9percent interest inthecarrier.KQ’slongstandingstrategicpartnershipsince1995withKLMRoyalDutchAirlines(KLM)created aworldwidenetwork ofjointservices.BothKLMandKQ aremembersoftheSkyTeamGlobalAirlineAlliance, whichalsoincludesDeltaAirlinesand AirFranceamongthe19airline members.KQiscurrentlytheonlySkyTeam memberlocatedinAfrica.12

KQoperates59intracontinentalflightsandinternationalroutestosix destinationsintheMiddleEastandAsia,andthreedestinationsinEurope.Theairline’sportfolioalsoincludestwowhollyownedsubsidiaries,alow‐costAfrica‐only carrier,JamboJetandAfrican CargoHandling Limited. KQ is Africa’s sixthlargest airline intotalaircraft fleet,with36aircraftcurrentlyinservice.13 KQisthethirdlargestairlineinsub‐SaharanAfricabehind South African Airways and Ethiopian Airwayswith4.5millionpassengersflowninfiscalyear(FY)2017.14

Transaction Description

10 See http://www.iata.org/pressroom/pr/Pages/2017‐12‐05‐01.aspx.

11 Ibid.

12 EXIM’sKQBoardMemo, datedJanuary2014.

13 See https://centreforaviation.com/insights/analysis/ethiopian‐airlines‐2015‐outlook‐more‐rapid‐expansion‐as‐it‐becomes‐africas‐largest‐airline‐204559 andKQAnnual ReportFY2017availableat https://corporate.kenya‐airways.com/investors‐and‐shareholders/annual‐reports/en/.

14 SeeKQAnnual ReportFY 2017availableat https://corporate.kenya‐airways.com/investors‐and‐shareholders/annual‐reports/en/.

In2007,KQordered andsubmittedanapplication toEXIMforfinancing support.TheBankreviewedKQ’sapplicationandsubsequentlyissuedaPreliminary Commitment—anofferofEXIMfinancing subjecttotheawardoftheexportcontract andtheBank’sreviewof aFinalCommitmentapplication.

EXIM’sPreliminaryCommitment expiredinAugust2007. Therefore,KQwasrequiredtoresubmitarequesttothe Bankfor financing support.

(b) (4)

(b) (4)

(b) (4)


8

https://corporate.kenya-airways.com/investors-and-shareholders/annual-reports/en/


https://centreforaviation.com/insights/analysis/ethiopian%E2%80%90airlines%E2%80%902015%E2%80%90outlook%E2%80%90more%E2%80%90rapidexpansion%E2%80%90as%E2%80%90it%E2%80%90becomes%E2%80%90africas%E2%80%90largest%E2%80%90airline%E2%80%90204559

http://www.iata.org/pressroom/pr/Pages/2017-12-05-01.aspx

https://centreforaviation.com/insights/analysis/ethiopian%E2%80%90airlines%E2%80%902015%E2%80%90outlook%E2%80%90more%E2%80%90rapidexpansion%E2%80%90as%E2%80%90it%E2%80%90becomes%E2%80%90africas%E2%80%90largest%E2%80%90airline%E2%80%90204559



InJanuary 2014,KQ requesteda FinalCommitmentfora comprehensiveguarantee intheamountof$821.4 milliontosupporttheexportof

.15 Accordingtotheagreement,themanufactureragreedtodeliver allaircraftandengines betweenMarch2014andOctober 2014.KQ alsorequestedaPreliminaryCommitmentfor acomprehensive guarantee intheamountof$337.7milliontosupporttheexportof .

OnMarch13,2014,EXIM’sBoardapprovedboththeFinalCommitment and the PreliminaryCommitment.16 Ultimately,theBankdidnotconvert thePreliminary CommitmentforthethreeadditionalaircrafttoaFinalCommitment

(b) (4)

(b) (4)

(b) (4)

Transaction Structure

Asastandardasset‐basedfinancingwithout asovereign guarantee, the2014KQtransaction wasstructuredusing aspecialpurposecompany(SPC)andfinancelease.Figure1belowincludesanillustrationofanEXIMfinanceleasestructureforaircrafttransactions.17 AstheSPC,TsavoAircraftFinancingLLC(Tsavo)asobligorownsandleasestheEXIMguaranteed aircrafttoKQpursuant to12‐year asset‐backedfinanceleaseswithstraight‐lineamortization.Theprimarysourceofrepayment(PSOR) forthetransaction isthecashflowgeneration oftheLessee,KQ,whichmakesleasepaymentstotheborrowerLessor,Tsavo.Thesecondaryorsupportingsourceofrepayment is theresidualvalueofthesecuredaircraft asmeasuredbytheloantovalueratio.

JPMorganChaseandCitigroupGlobalMarkets,Inc.weretheEXIMguaranteedlendersunderthe2014transaction.Wells FargoBank servedasthesecuritytrusteeof theEXIMguarantee. TheAfrican Export‐ImportBankprovidedsubordinated financing for theportionoftheaircraft priceandacquisitionfeesnot supportedbytheEXIMguaranteedfinancing.

15

undertheFinalCommitment forKQ was co‐financed (i.e.,reinsured)by therebyreducing EXIM’sexposurebyapproximately

(b) (4) (b) (4) (b (b) (4)(b) (4)(b) (4)

percent of each aircraft and percent of each aircraft financed

16 See https://www.exim.gov/news/minutes/board‐meeting‐minutes‐2014‐03‐13.

17 See https://www.exim.gov/what‐we‐do/loan‐guarantee/transportation/finance‐lease‐structure.


9

https://www.exim.gov/what-we-do/loan-guarantee/transportation/finance-lease-structure

https://www.exim.gov/news/minutes/board-meeting-minutes-2014-03-13


Figure 1: EXIM Finance Lease Structure

CommercialLender

15% of Loan PurchasePayment Price

SPC“Lessor”

Airline“Lessee”

EXIMGuaranteedLender(s)

U.S.Manufacturer

EXIMGuarantee

Aircraft Loan Payment

85% of Purchase Aircraft Lease Purchase Guaranteeprice Lease Rentals Price

Source: EXIM

Transaction Closing

KQreceived theaircraftapprovedunderthe2014transactionoveraseriesofeightmonths,beginninginMarch2014.Aseachaircraftbecameavailablefor delivery,aseparateclosingwasheld,beginningwiththefirstclosingonMarch31,2014,andendingwiththefinalclosingonOctober17,2014.KQsubsequentlydrewdownonthefacilityapprovedbytheEXIMBoard tofundthepurchase of theaircraft.Thefacilitywasfullydrawndownby October2014.

Obligor History: Post Closing

Leasepaymentswerescheduledtobepaid 90days inadvanceof thecorrespondingloan payments.

Lessthanayearafterthefinalclosing,KQrestructureditsoperationsandcapitalstructureto reduceleverage and

(b) (4)

(b) (4)

increaseliquidity.In 2016,KQ announcedtheeffortknownas“OperationPride”torestructure itsoperations.OnNovember2017, KQannouncedthat all majorstakeholders,includingEXIM,alsoagreed toacapitalrestructuringeffortknownas“ProjectSafari.”

Financial Distress and Restructuring

Factors Contributing to KQ’s Financial Distress

SeveralfactorscontributedtoKQ’sdeterioratingfinancialconditionandtheneedtorestructureoperationsandfinancial obligations. Specifically, theairline experienceda significantincreaseindebtand leaseobligationscoupled with lowerthanexpectedrevenuegrowthandhigherthan expectedcosts.KQ’sobligations quadrupledfrom$580.8


10


millionin2012to$2,488.5millionin2016tofinancethe fleetmodernization and expansion.18 Indescribingtheairline’sdifficultfinancialcondition,KQ’s Chairmanconfirmedthat“theoveralllevelofdebtoftheCompanyhasbecomeunsustainablyhigh”andthat“a return toprofitabilityforinvestorsbasedonthe current balancesheetstructurewouldbeexceptionallychallenging,andhighlyunlikelytooccur.”19

AlthoughKQprojectedthatoperatingrevenuewouldincrease,theairline experiencedrelativelyflat

revenueandhigherthanexpected costs.

The decreaseinrevenueswasattributedtovariousexternalfactorssuchas:increasedcompetition,actsofterrorisminAfrica,governmentimposedtravelwarnings,andothercrises,

allofwhichdelayedtheairline’sabilitytofullyexecuteitsoperational businessplan.

20

(b) (4)

(b) (4)

(b) (4)

(b) (4)

KQ’s Operations Restructuring Plan

In2016,KQembarkedon“Operation Pride,”aprogramtoimprovecompanyprofitabilitythroughrevenueenhancement,costreductionbusinessmodelrevisions,andcapitalstructureoptimization.21 UnderOperationPride,KQsold assets;reducedstaffandroutes;replacedexecutivepositions;andupdatedprocessesforrisk,pricing,andrevenuemanagement.22

KQ’s Capital Restructuring Plan

KQalsoembarkedonarecapitalizationandfinancialrestructuringplan,knownas“ProjectSafari,”tobetterpositiontheairlineforlong‐termsustainability.OnJuly16,2017,KQpublicallyannouncedplanstorestructurethecompanyandproposedaseriesofinter‐conditionaltransactionsinanattempttoimprovetheviability oftheairline’scapital

18 See KQ’sAnnualReports andFinancialStatementsfor yearsending March31,2012andMarch31,2016, at https://corporate.kenya‐airways.com/investors‐and‐shareholders/annual‐reports/en/.

19 See KQ’s2017Circular toShareholdersat https://www.kenya‐airways.com/uploadedFiles/Content/ About_Us/Investor_Information/Project%20Safari_Shareholders%20Circular%20(Approved%20Versio n).pdf.

20 Supra note 12 and August 2016 Restructuring Consultant Report.

21 See https://www.kenya‐airways.com/uploadedFiles/Content/About_Us/Investor_Information/ Investor‐Briefing‐21‐July‐2016.PDF.

22 See https://www.kenya‐airways.com/uploadedFiles/Content/About_Us/Investor_Information/ Book%20KQ%2010996%20Annual%20Report_Website.pdf.


11

https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Book%20KQ%2010996%20Annual%20Report_Website.pdf

https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Investor-Briefing-21-July-2016.PDF

https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Project%20Safari_Shareholders%20Circular%20(Approved%20Version).pdf


https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Investor-Briefing-21-July-2016.PDF

https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Book%20KQ%2010996%20Annual%20Report_Website.pdf




structure. 23 OnNovember16,2017,KQannouncedthatithadcompletedthefollowingstepsaspartoftherestructuringprogram:24

DebtReductionandEquityConversion:ReducedKQ’sgrossdebtbyconvertingsubordinateddebts,includingGoK andlocal KenyanBankloans, toequitywiththe abilitytoconvertanadditional US$75millionoffurtherindebtednesstoequityin thefuture.25

LessorRepaymentScheduleRestructuring:ProvidedcashflowreliefofUS$360f inancing

moreKQshares.KQintroducedan employeestockoptionplanto qualifyingemployees. 28

millionbyrestructuringthetimingofrepaymentduetooperatingandlessors, .Therestructuring oflessorrepaymentscheduleswouldbeaccomplishedbydeferringfinancingleasepaymentsofUS$189millionandoperatingleasepaymentsofUS$171 million

.26

GoKSupport:TheGoKagreedtothefollowingprovisions:(i)theissuanceofaUS$525millionsovereignguaranteetoEXIM;and(ii)theissuance ofaUS$225millionsovereignguaranteetotheKenyanBanksthatagreedtoconvert theirloanstoequityandprovideUS$175millioninnewloanfacilitiesforKQoperationsbackedbytheGoK’ssovereignguarantee.

7

Other:KLMcommittedtosupportKQthroughin‐kindcontributionsofnon‐cashassetsinexchangefornewshares.Existingshareholdershavetheopportunitytobuy

(b) (4)

(b) (4)

(b) (4)

23 Supra note19.

24 See https://www.kenya‐airways.com/uploadedFiles/Content/About_Us/Investor_Information/ Public%20Announcement%20completion%20of%20the%20restructuring.pdf.

25 Ibid.

26 Supra note19.

27 Supra notes19 and24.

28 Supra note24.


12

https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Public%20Announcement%20completion%20of%20the%20restructuring.pdf

https://www.kenya-airways.com/uploadedFiles/Content/About_Us/Investor_Information/Public%20Announcement%20completion%20of%20the%20restructuring.pdf


RESULTS IN BRIEF

Theobjectiveof theinspection wastoascertain theadequacyoftheBank’sduediligence,riskassessment,transactionstructuring, andpolicycomplianceasitrelatestothetransaction.WefoundthatEXIMgenerally conductedsufficientduediligence,assessedrisk,andadequatelystructuredthetransactioninaccordancewithBankpoliciesandprocedures.TheBankalsoeffectivelymonitoredKQ’sperformancefromtransactionapprovalinMarch2014throughtheend ofthe restructuringperiodinNovember2017.

Wecompletedaninspectionof EXIM’s2014KQ transaction,acomprehensiveofguaranteeintheamountof$821.4milliontosupporttheexport

(b) (4)

EXIMsuccessfullyrestructuredtheKQtransaction.However,the Bankcanmorefullydocumentitsanalysisofprojectedfinancialresultsandassumptionswhenestablishingtheabilityof theborrowertorepayitsdebt.Lastly,wefound thattheBankcan improvethetransportationoriginationriskratingmodeltoaddress limitations inthescaleusedtodeterminethefinalBudgetCost Level(BCL)risk ratingforatransaction.Wemadetworecommendations toaddress identifiedareasof improvement.

POINT OF INQUIRY 1: Did the Bank conduct sufficient due diligence, assess risk, and adequately structure the transaction at origination?

Applicable Standards

1. EXIMpoliciesandproceduresfor origination andrestructuring:

a. Chapter 7 Standard Long‐Term Preliminary Commitments and Final CommitmentsofEXIM’sLoan,GuaranteeandInsuranceManual(LoanManual),datedJanuary2013;

b. Chapter 13 Aircraft Finance oftheLoanManual,datedJanuary2013;

c. TransportationDivision’s“Tools” in Ex‐Im Bank’s Aircraft “Toolbox”memorandum(ToolboxMemo),dated2002; and

d. TransportationDivision’s Risk Assessment System for Ex‐Im Bank Supported Large Aircraft Transactions (RiskAssessment), datedJune 1997.

2. Federalguidanceon internalcontrolsoutlinedintheGeneralAccountabilityOffice’s(GAO’s) Standards for Internal Controls for the Federal Government, datedNovember 1999;29 andtheOfficeofManagementandBudget’s(OMB)CircularA‐123 Revised, Management’s Responsibility for Internal Controls,datedDecember21,2004.30

3. Internationalagreementsandprotocolforaircraft financings:

29 See https://www.gao.gov/assets/80/76455.pdf.

30 See https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/ a123/a123_rev.pdf.


13

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/a123/a123_rev.pdf

https://www.gao.gov/assets/80/76455.pdf

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/omb/circulars/a123/a123_rev.pdf


requirementinpartbyconductingarisk a ssessmentprocessfor aircrafttransactions. AccordingtoChapter13ofEXIM’s LoanManual,“theobjectiveofthe riskassessmentprocessistoestablishareasonableassuranceofrepaymentfor thetransaction

TheLoanManualstates,“[t]heassessmentofaircraftcollateralisan importantconsiderationforasset‐basedtransactions

InaccordancewithChapter7oftheLoanManual,theTransportation Division(TD)loan officerperformsarisk assessmentandduediligencetoestablishreasonableassuranceofrepayment. Therisk assessmentprocessincludesconsideration ofthecountryriskrating;analysisoftheborrower’soperations,financial statements analysis,projectedfinancial results,and collateralanalysis; and areviewofqualitative factors. Theanalysisof

debtandobtain financingfromexternalsources.

(b) (4)

(b) (4)

(b) (4)

a. OrganisationforEconomicCo‐operationand Development’s(OECD) Sector Understanding on Export Credits for Civil Aircraft (2011ASU),August2011,31OECD’s Sector Understanding on Export Credits for Civil Aircraft (2007ASU),July2007,32 andOECD’s Large Aircraft Sector Understanding (1986LASU);and

b. CapeTown ConventiononInternationalInterestsinMobileEquipment.33

4. Creditagencyriskratingcriteriaforairlines.34

EXIM Policies and Procedures

Origination and Structuring

Section2(b)(1)ofEXIM’sCharter requirestheestablishmentof reasonableassuranceof repayment foralltransactions authorized.35 TheBankimplements the statutory

forexample, aids inthe establishmentof theborrower’sabilityto service

31 See Sector Understanding on Export Credits for Civil Aircraft,1September2011,availableathttp://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=tad/asu(2011)1&doclanguage=en.

32See Sector Understanding on Export Credits for Civil Aircraft,27July2007, http://www.oecd.org/ officialdocuments/publicdisplaydocumentpdf/?cote=tad/pg(2007)4/FINAL&doclanguage=en.

33See Convention on International Interests in Mobile Equipment,datedJune9,2017,availableat http://www.unidroit.org/instruments/security‐interests/cape‐town‐convention.

34 See Key Credit Factors: Criteria for Rating the Airline Industry available at https://www.standardandpoors.com/ and Global Passenger Airlines, available at https://www.moodys.com/.

35 See The Charter of the Export‐Import Bank of the United States at https://www.exim.gov/sites/ default/files/2015_Charter_‐_Final_As_Codified_‐_02‐29‐2016.pdf.


14

https://www.exim.gov/sites/default/files/2015_Charter-Final_As_Codified-02-29-2016.pdf

https://www.moodys.com

https://www.standardandpoors.com

http://www.unidroit.org/instruments/security-interests/cape-town-convention

http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=tad/pg(2007)4/FINAL&doclanguage=en

http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=tad/asu(2011)1&doclanguage=en

http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=tad/asu(2011)1&doclanguage=en

http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=tad/pg(2007)4/FINAL&doclanguage=en

https://www.exim.gov/sites/default/files/2015_Charter-Final_As_Codified-02-29-2016.pdf


Anaircraftriskratingscoring sheetiscompletedbytheTDloanofficerfor thetransactiontodeterminetheoverall BCLriskratingbased ondefined qualitative andquantitativefactorssuch asindustry position, regulatoryenvironment, financialflexibility,EBITDARmargin, and DebttoNetWorth.36 Eachfactorisriskratedona scaleof1(leastrisk)to8 (mostrisk).Foreachrisk ratinglevel,definitionsandranges areprovidedforthequalitative andquantitative factors,respectively.Thefactors areaveragedtoarriveatacompositescore.Structuralandcollateral enhancementscanbe considered toenhancethecompositescoreindeterminingthefinalBCLriskrating forthetransaction.The resultsoftherisk assessment andduediligencearepresentedina Board MemothatissubmittedtoEXIM’sBoardforconsiderationandapproval.

Structuring

EXIM‐supportedaircraftfinancings aregenerallystructuredas asset‐backedwithafinance

thecreditworthiness ofthetransactionandenableEx‐ImBanktoconcludethata

(b) (4)lease.Accordingtothe ToolboxMemo, servesto“...to enhance

‘reasonableassurance ofrepayment’exists.” Asset‐basedfinancingallowstheobligortousecollateraltoimprovetheoverallcreditprofileandfinancingtermsofthetransaction.TheBankusescrosscollateraland crossdefaultprovisionswhenstructuringaircrafttransactions withthesameborrower.The ToolboxMemoprovides optionsthatallowforflexibilityin structuring transactionssothatriskisreduced toanacceptablelevel.Exampletoolsavailableforstructuringaircraft financingsinclude the useofa specialpurpose vehicle(e.g.,SpecialPurposeCompanyor SPC)andfinancingleasestructure,afirstprioritymortgage andsecurity interest, crosscollateralization,andsovereignguarantee.

Federal Guidance on Internal Controls

Asprescribedin OMBCircularA‐123, Management’s Responsibility for Internal Control,EXIM“managementhasafundamentalresponsibilityto developandmaintain effectiveinternalcontrol.”37 InternalcontrolisaprocesseffectedbyEXIM’sBoardofDirectorsandmanagement,designedtoprovide reasonableassuranceaboutthe achievement oftheBank’smissionandobjectivesinregard toeffectiveness andefficiencyofoperations, reliabilityof financialreporting,andcompliancewithlawsandregulations.Asstatedin the GAO’s Standards for Internal Control in the Federal Government,“controlactivitiesarethepolicies,procedures,techniques,andmechanismsthat enforcemanagement’s directives...[and]... [t]heyhelpensurethat actionsare takentoaddressrisks.”38

Managementisresponsiblefordesigningcontrolactivitiestoachieve an entity’s objectivesandtorespondtorisksinitsinternalcontrol system.Acommoncontrolactivity identified intheGAO standardsis“appropriatedocumentationof transactionsandinternalcontrol.”39

36 EBITDAR marginisEarningsBeforeInterest,Tax,Depreciation, Amortization,and Rent as a percentageof totalrevenue.Debtto NetWorth is a ratio showing a firm’s ability tomeasure its existing debt against totalequity.

37 Supra note30.

38 Supra note29.

39 Ibid.


15


Specifically, thestandardsstatethat,“Internalcontroland alltransactionsandothersignificant eventsneed tobeclearlydocumented,and the documentationshouldbereadilyavailable forexamination.Thedocumentation shouldappearinmanagementdirectives,administrativepolicies,oroperatingmanualsandmaybeinpaperor electronicform.Alldocumentationandrecordsshould beproperlymanagedandmaintained.”40

International Agreements and Protocol

Aircraft Sector Understanding

TheOECD’s 2011ASU, a non‐bindingagreementamongst participants,provides astandardizedframeworkfortheuseofofficially supportedexportcreditsforthe saleorleaseof aircraft. TheASU’sstandardized frameworkprovidesexportcreditagencies(ECAs)withuniformfinancingrulessothatpurchasersselecttransactionsbasedonproduct‐qualityand notthetermsoffered byECAs.TheASUestablishes therangeof financialterms andconditionsthatECAsmayofferwhenfinancingtheexportof civilaircraft.TheASUhighlightsincludestandardization ofobligorrating,transactionpricing,and risk mitigation techniques. TheASUhasbeenrenegotiatedandreplacedtwotimes.

Cape Town Convention

The2001CapeTown Convention establishedaninternationallegalframeworkfor thecreation,protection, enforcement, perfection, andpriorityof interestsinaircraft (i.e.,the “Aircraft Protocol”)in2006.41 Thecreationof international standards fortransportationequipment registration andlegal remediesfor default,includingrepossession,was modeledonmodernasset‐basedfinancepracticesandprovidesproperrecourse to creditorsin countries withlawsthatwouldotherwisenotbecreditor‐friendly. Asof2017,seventy‐threeContractingStates andoneRegionalEconomicIntegrationOrganisation(i.e., theEuropeanUnion),includingmanycountriesinwhichEXIMhas completedaircraftfinancings, haveratifiedtheAircraftProtocol.42

Credit Agency Criteria43

Theairline industry is acyclicalandcapital‐intensivesector thatisvulnerabletoexogenousshocks(e.g.,increase in costoffuel,inflation).Inadditiontomacroeconomic andsector‐basedrisks, anairline carrier’screditprofileis determinedbycompanyspecific qualitative andquantitative factors:

Qualitative factors includeanairlinecarrier’scompetitive strength,businessmix, operatingstructure,andfleet/maintenance characteristics;and

Quantitative orfinancialmetricstypicallyaddressthe airline carrier’soperatingmargins, freecashflow,capitalstructure,andliquidity.

40 Ibid.

41 Supra note33.

42 See Aircraft ProtocolStatus, available at http://www.unidroit.org/status‐2001capetown‐aircraft.

43 Supra note34.


16

http://www.unidroit.org/status-2001capetown-aircraft


Finding 1: EXIM generally conducted sufficient due diligence, assessed risk, and adequately structured the KQ transaction. However, the Bank can more fully describe its analysis of borrower projected financial results and assumptions and improve the transportation risk rating model used at origination.

EXIMgenerallyconductedsufficientduediligence,assessedrisk and adequately structuredthe2014 KQ transactionatorigination.InaccordancewithBank policiesandprocedures,TDstaffidentifiedand disclosedkeytransactionrisks inthe BoardMemorandum includingsectorandevent‐specificrisks,increasedcompetition,higher debtlevels,andrisingoperatingcosts.Asastandardasset‐basedfinancing,the KQtransactionwasappropriatelystructured usinganSPCand financelease agreement.To reduce risk toanacceptablelevel,theBankstructuredthefinancing torequire, forexample, quarterlyratherthansemi‐annualrepayment,a firstpriority mortgage andsecurity interestin theaircraft, cross‐collateralizationwith pastandfutureBanksupportedaircraft, andadvancedleasepaymentsbytheairlinetotheSPC. Inan effort tofurtherreducerisk EXIMalsoauthorizedtheuseofthe“saleandleaseback option”ofthefleet whichwouldenableKQto accessfundsand reducetheBank’sexposuretotheairline.WealsodeterminedthattheKQtransaction structurecompliedwithinternationalagreementsand protectedEXIM’ssecurity interestsin theaircraftandengines throughtheuse ofabankruptcyremotestructure.Lastly,theKQtransactionwassufficientlycollateralized.AsofMay2017,thetotalvalueofcollateralofthe financedaircraft exceededthe valueofEXIMloansbyapproximately18percent.44

Finding 1A: Documentation of EXIM’s assessment of borrower projected financial results should be improved.

Notwithstanding theabove,wefoundthatEXIMcanimproveitsdocumentation oftheanalysisof projectedfinancialresultsandassumptionswhenestablishingtheabilityoftheborrowertorepayitsdebt.Less thanayearafterthefinalclosingofthe2014EXIMtransaction, KQrestructuredits operationsandfinancialobligations.45 Thisdevelopment,whichwasinfluenced inpartbytheknown risksdisclosedintheBoardMemo,demonstratestheneedfortheBanktobetter accountfor itsanalysis within thetransactiondocumentation.Improveddocumentationof theBank’s analysiswill providegreatertransparencytotheoriginationprocessandhelptobetterinformdecisions.

Pursuantto TD’sRiskAssessment policyand procedures, “theprojectionsmust bebasedonconservative,reasonableassumptionsinordertobeconsidered valid,andtheloanofficershouldbeabletofullyexplainanddefendanymarkedupwardswing intheprojecteddataelementsincomparisontothe historicalresults.”InaccordancewithChapter13ofEXIM’sLoanManual, “ananalysisofprojectedfinancial resultsassistsindeterminingtheborrower’scapacitytorepayamortizingindebtednessanditsabilityto

44 EXIM’s Annual Risk Rating Report,August 2017.

45 See Finding3 of thisreport for a discussion of the restructuring of the2014KQtransaction.

raiseexternalfinancing. (b) (4)


17


(b) (4)

ToassessEXIM’sanalysisanddue diligencefortheKQtransaction,wereviewedsupporting documentationforthe riskassessment,suchastheprojectedfinancialresultsandassumptions,providedinInformationMemosanddisclosedin the BoardMemocoveringthe periodFY 2014toFY 2018.Wealsoreviewedactual financialresultspresented inKQ’sInformationMemosandAnnualReportsforthe periodFY2011toFY2017.46

Basedonourreview,andconfirmedbyEXIM,wedeterminedthat severalfactorscontributedtoKQ’sdeterioratingfinancialconditionandtheneedtorestructureoperations

transaction.

Lastly,variousexternalfactors suchasincreasedcompetition, actsofterrorisminAfrica,

andfinancialobligationsinlessthanayearofthefinalclosingforthe2014EXIM(b) (4)

governmentimposedtravelwarnings,andothercrisesfurtherprecipitatedKQ’sdeterioratingfinancialcondition. Theresultsof ourreview areincludedinAppendixCofthisreport.

Inourreviewofthesupportingdocumentation,wefoundthatEXIMcanmorefullydocumentitsanalysisofprojectedfinancialsandassumptionsusedtoestablishKQ’sabilitytorepayitsdebt.For example,the Bank’s documentationdid notfullydescribe howthe sectorand event‐drivenissues

impactKQ’s abilitytoservice debt obligations.

Absentacompleterecordofthe TD loanofficer’sriskassessmentandduediligencetoestablishreasonableassuranceofrepayment,increasesthe risk thatnotallrelevantinformation wasconsidered.Further,bynothavingacompleterecorditmakes itdifficultfortheBankwhenaskedtoprovideabasisforthedecisionsit madein authorizingthetransaction.WhileEXIMwasable tosuccessfullyrestructurethisdealandprotecttheinterestsoftheU.S.Government, morefullydocumentingtheanalysis ofprojectedfinancialresultsand assumptionswhenestablishingtheborrower’sabilitytorepaywillprovidegreater transparencytotheoriginationprocessandhelptobetterinformdecisions.

46 The Board Memocontainedactual financialresults coveringFY 2011throughsixmonthsended September30,2013.

might impactKQ’sabilitytorepayitsdebt.Nordiditdescribealternativeoutcomesoradjustforriskthatmay

(b) (4)


18


Finding 1B: EXIM’s transportation origination risk rating model can be improved.

Tovalidate EXIM’sassessmentof riskforKQ,wereviewedtheaircraftriskratingscoringsheetcompletedbytheTDloanofficer.Althoughweobservedno anomaliesin thecompletionofthesheetforKQ, we identifiedlimitationsinthescale usedtodeterminethefinalBCLriskrating forthetransaction.Specifically,thetransportationriskratingmodelutilizedatoriginationdoesnotuse thesameBCLscalethat is usedby theBankforriskratingnon‐transportationtransactions.Insteadofusinga scaleof1(lowrisk)to11(highrisk),thetransportationrisk ratingmodelusesariskrating scaleof1(leastrisk)to8(mostrisk)torisk rate eachfactoratorigination. As aresult,the ratingscalelimitsan unsecuredtransportationtransactionratingtoaBCL8eveninthosecaseswhentheborrower’sactualcreditmetricsmayfallintoahigherriskcategory,suchasa BCL9to 11.

Toillustrate,theriskratingscoringsheetfor theKQtransactionscored (b) (4)

Indiscussions,EXIMstaffacknowledgedthe ratingscalelimitationsof thetransportation riskrating modelusedatorigination.Bankstaff noted,however, that (b) (4)

Theratingscalelimitationalso differsfromthepracticesobservedbythecreditrating agencies.Forexample, theBCL1 to8scaleusedbytheBankfor transportation transactions isequivalenttoMoody’srating range ofAa1toB3.However,underMoody’sairlineratingsystem,qualitativeandquantitative factors can beratedwithin a broaderrange,equivalenttoEXIM’srisk ratingscaleofBCL1to11.Bylimiting initialsub‐scoresatoriginationtoascaleofBCL1 to8,EXIMprecludestransportationtransactionsfromratinganysub‐componentabove8(i.e.,a9to11).Asaresult,the overallrisklevelfora transaction canneverbe higher thanaBCL8underthe current transportation riskratingmodelfororigination. Therefore, theriskratingfora transportationtransactionatorigination maynotfullyreflecttheassociated risk.

RECOMMENDATIONS

WerecommendthattheSenior VicePresident,Officeof BoardAuthorizedFinance:


19


1. Updatepoliciesand proceduresto ensuretheanalysisoftheborrower’sfinancialprojections andassumptionsisfullydocumentedandsupportedinthetransactionrecords(e.g.,BoardMemo).

2. Revise thetransportationoriginationriskratingmodeltoensurethe finalratingoutcomescomporttotheBank’sBCLriskratingscaleof1to11.Thiswouldincludeupdatingrelatedpoliciesandprocedures.

Management Response:

SeeAppendixA,ManagementResponseandOIGEvaluation.

POINT OF INQUIRY 2: Did the Bank effectively monitor obligor performance post origination?


1. EXIMpoliciesandproceduresforpost‐operativemonitoring:

a. Chapter 13 Aircraft Finance oftheLoanManual,datedJanuary2013;

b. Chapter 22 Post Operative Monitoring oftheLoanManual,datedJanuary2013;

c. TPMDPolicyManual(Manual),undated;and

d. EXIM’s Enhanced Monitoring Management Policy,2016.

e. EXIM’s Watch List Credit Policy,2016

EXIM Policies and Procedures

Credit Transfer Policy

Anaircraft transaction istransferredfromtheTransportation Division (TD)totheTransportationPortfolioMonitoringDivision(TPMD)onceitis approvedbytheBoardandmadeoperative;alltransaction pre‐closingrequirements,such asConditionPrecedentstoClosing,havebeenresolved;and thetransaction hasbeenfully disbursed.Attransfer, TD turnsover toTPMDallapplicable information, suchasthedisbursementmemorandumand closingdocuments.

EXIM Aircraft Post‐Operative Monitoring Procedures

TheprimarydocumentthatoutlinestheBank’spoliciesandproceduresforproactivemanagementistheTPMDPolicyManual.TheManualfocusesonmonitoringthefinancialconditionofthevariousobligors,maintenance,andconditionofthemortgagedcollateralandactively managing post‐operativematterssuchasamendments,waivers,consents,andrestructurings.TheManualisreviewedannuallyandupdated as needed.Once a creditistransferredfromTD,itismanaged andmonitoredbyTPMD.Anobligor’sratingandtherationalesupportinga rating isdocumentedin aTPMDriskratingreportonan annualandasneededbasis.The riskrating reportincludes amonitoringplan;character,reputational,andtransactionintegrityresults;anddocumentationtosupport theratingrationale.TPMDisalsoresponsiblefor monitoring theuse,maintenance,andconditionofthecollateralandmanagingtransaction amendments,waivers, consents, and,if necessary,restructurings.


20


EXIM Watch List Credit Policy

Anapprovedtransaction issubjecttoreviewunderthe Bank’songoingmonitoringofits portfolioofcredits.Aspartof thisprocess,theOfficeoftheChiefFinancialOfficer(OCFO)conductsmonthlyexposurereviews.TheWatch List,includedin EXIM’sinternal portfolioriskmanagementreport,documentscredits intheBank’sportfolio wheretheborrower’sabilitytoservicerepaymentcouldbeaffected. Thislistisbrokenintothreeparts: ProjectsandCorporates,WorkingCapital, andTransportation.47 Theeventsorsituationsexperiencedbythesecreditsareofapolitical,commercial,operationaland/ortechnicalnature. Abriefing ispresentedbyleadershipfromthedivision directlyresponsibleforacreditontheWatchListtothePresidentofthe Bankand other seniormanagementregardingtherisksassociatedwiththecredit. Aborrowercan beremovedfromtheWatchListwhenacourseofactionis agreedupon,enacted,andthesituation isremedied.

EXIM Enhanced Monitoring Policy

enhancedmonitoringplan(EMP)thatmaybetemporary orlong‐term.CircumstancesthatmaytriggeranEMPcanbeborrower‐specific(e.g.,missedpayment)ornon‐borrower‐specific(e.g.,politicalviolence).

deemedtobehighriskdueto Thesetransactions,perpolicy,requirean

(b) (4) and/oris high‐riskcreditisatransactionthatcontainsaBCLrat ingof(b) (4)

TPMDconductsenhancedmonitoringwhenthe Bankdeemsatransactionhigh‐risk.A

Oncethe transactionhasbeen identifiedand confirmed eligible forenhancedmonitoring,theVice President (VP) ofthedivisiondirectlyresponsibleforthetransactionselectsacross‐divisionalteamtoformulateanenhancedmonitoringstrategy forthetransactiongoingforward.Examplesofunderlyingstrategiesaresite visits, assetinspections,retentionofexpertconsultants,accelerated/enhancedproductionoffinancialstatements and/or stress tests. Depending onthenatureofthe transaction,the teammayconsistof representationfromvariousBank divisionsunderthe Officeof Board Authorized Finance,theOfficeofGeneralCounsel,andoutsideadvisors.Theteamisresponsiblefortheimplementationofthe strategy,andperiodicreevaluation ofthetransactiongoingforward.Updates aregiventoseniorlevelmanagement viaaweeklyMonitoredCreditMeeting.

Finding 2: EXIM effectively monitored KQ performance in accordance with Bank policies and procedures.

WefoundthatEXIMeffectivelymonitoredKQperformancein accordance withBank policiesand procedures fromtransactionapprovalinMarch2014 throughtheendoftherestructuringperiod inNovember2017.Specifically,weconfirmed complianceinthe areasbelowandtheresultswere asfollows:

47 EXIM’s Major Delinquent Debt, Impaired Credits & Watch List asof June2016.


21


Evidence of EXIM monitoring using the internal Bank Watch List

Inaccordancewiththe TPMDPolicyManual,

48

(b) (4)

(b) (4)

Adherence to enhanced monitoring procedures

AccordingtoEXIM’sEnhancedMonitoringManagementPolicy,TPMD conductsenhancedmonitoring whentheBankdeemsatransaction high‐risk. TPMDworkedwithKQ torestructure thetransactionandplacedthetransactionunderenhancedmonitoringprocedures. EXIMrecognized that thetransactionwarrantedclosermonitoring in early2015,andperenhancedmonitoring guidelines, theBank wantedadditionaldivisionstomonitorthecreditdevelopments. Thetransactionwassubjectto anEMPwhichaligned

(b) (4) (b) (4)withtheBank’sdowngradeof the transaction’sriskrating from a toa in2015.

Re‐rating of transaction through TPMD monitoring

duetotheobligor’sdeteriorating financialstatusandcredit. Toassess theairline’sability toaccess liquidity,the Bank’s2015annual riskrating reportincludeda reviewoftheportfolioandthevalueofcollateral,landandpotentiallease‐backs.Furthermore,as aresultofthedowngrade, theBanksentanaircraft inspectionteamtoinspect theEXIM‐financedfleet.Theresults oftheinspectionsweredocumentedintheBank’s2017annualriskratingreport.

AccordingtotheTPMD PolicyManual,anobligor’sriskratingandtherationalesupportingratingsare documentedina TPMD riskrating reporton anannualorasneeded basis.In

(b) (4) (b) (4)August2015,EXIMdowngradedtheKQtransaction froma to a

Use of EXIM hired aircraft inspections

AccordingtotheTPMD PolicyManual,thedivisionisresponsiblefor monitoring theuse,maintenance,andconditionof thecollateral.TheBankengaged anaircraftinspectionfirmtoconducttwoinitialinspectionsoftheEXIM‐financedaircraft. TheinspectionswereconductedtoensurethattheBank’ssecurity interest intheaircraft wasprotectedand recordswerewellmaintained.

TheApril2016inspection includedtwoaircraftthatwerefinanced underthe2014KQtransaction andtwoaircraft thatwere financedunderaseparate2005EXIM‐guaranteedfacilityandcrosscollateralizedwithotherEXIMfinancings. (b) (4)

48 EXIMdocuments theperformance ofacreditwhentheborrower’s abilitytoservice repaymentcouldbeaffected.Pursuant toOCFO policy,thisdocumentationis included in EXIM’sinternalportfolio risk management report.


22


.49

Asubsequentroundof KQaircraft inspections wereconductedin October2016on fouradditionalaircraftfinancedunderthe2014KQ transaction.

(b) (4) (b) (4)

(b) (4)

RECOMMENDATIONS

OIGdoesnotmakeanyrecommendationsrelatedtothis finding.

POINT OF INQUIRY 3: Did the Bank effectively manage the restructuring process?


1. EXIMpoliciesandproceduresfor restructuring:

a. TPMDPolicyManual(Manual),undated.

EXIM Guidelines for Restructuring

AccordingtotheTPMD PolicyManual,thedebtofatransaction mayberestructured

51 TPMDconsidersrestructuringrequestsonacase bycasebasis after assessinganobligor’scurrent financialcondition,futurebusinessprospects,andfleet

(b) (4)

49 The2005aircraft havebeenpaidinfullas of June2017.

50 TPMDPolicyManual.

51 Ibid.


23


collateralvalue.

52

(b) (4)

Pursuantto theTPMD PolicyManual,restructuringsmustbereviewedand approvedbytheBank’s BoardofDirectors.AsEXIMlackedaquorumonitsBoardatthetime,therestructuringwasapprovedin May2017byseniormanagementunderspecialdelegationofauthorityandinaccordancewith Bankpoliciesandprocedures.53

Finding 3: EXIM successfully restructured the 2014 KQ transaction in accordance with Bank policies and procedures.

Inlate2017,EXIMfinalizedasuccessfulrestructuringofthe 2014 KQ transaction.The

engine. As partofthe restructuring,theBank agreedtoa (b) (4)restructuredtransaction includedthe2014financingofsevena ircraft,andonespare

Basedonouranalysis, weconcludedthatEXIMproperlydisclosedthetermsandconditions oftherestructuringof thetransaction,includingthepotentialrisks,toBank seniorleadership.Moreover,EXIM successfullymitigatedthedisclosedrisks.Wealso observedthatthe Constitution ofKenya, 2010 (2010Constitution)supportsthetermsofthesovereignguaranteebyoutliningthemechanismfor debtrepaymenttoitslenders.IntheeventthatEXIMneedstoinvoketheguarantee,thetermsof theConstitutionofKenyaprovideaclearrepaymentprocess.54 Specifically,wefoundthefollowing:

EXIM assessed KQ’s financial condition and business prospects as a restructuring candidate in accordance with Bank policies and procedures

EXIM’sTPMDPolicyManualstatesthattheTDconsidersrestructuring requestsonacasebycasebasisafterassessingan obligor’scurrentfinancial condition,futurebusinessprospects,andfleet collateralvalue.55

Furthermore, theOIGfoundevidence oftheBank’sdue diligence.Specificallyduringrestructuring,participants suchasrepresentativesfrom theGoK,legalcounsel,and

(b) (4)

52 Ibid.

53 EXIM’sSpecialDelegation ofAuthorityBoard Resolution as of July16,2015.

54 See theConstitutionof Kenya,2010at http://www.kenyalaw.org/lex/actview.xql?actid=Const2010 andthePublicManagement Finance Management Act,No.18of 2012at http://www.kenyalaw.org/lex// actview.xql?actid=No.18of2012.

55 Supra note50.


24

http://www.kenyalaw.org/lex//actview.xql?actid=No.18of2012

http://www.kenyalaw.org/lex/actview.xql?actid=Const2010

http://www.kenyalaw.org/lex//actview.xql?actid=No.18of2012


thethird‐partyfinancialrestructuringfirmdisclosedthat theBankengaged inconstantcommunicationthroughouttheprocess.

EXIM properly disclosed the risks posed by the restructuring and sought approval

restructuringwasapprovedin May2017byseniormanagementunderspecialdelegationofauthorityandinaccordancewith Bankpoliciesandprocedures.56 InNovember2017,KQformallyannouncedthatallparties,includingtheGoK,KLM,andvariouslenders,hadagreedtothetermsof therestructuring.

AsEXIMlackedaquorumonitsBoardatthetime,thePursuantto theTPMD PolicyManual,(b) (4)

WefoundthattheBankdisclosedkeyrisksinthetermsandconditionsoftherestructuring,includingkeydifferencesbetween theproposedGoKguaranteeandsovereignguaranteesthatEXIMhadacceptedinpriortransactions.Forexample, the GoKguaranteeis (b) (4)

Toaddress theserisks, theBank’srestructuringmemorandumoutlinedapotentialremedyforboth (b) (4)

EXIM restructured the transaction in accordance with international agreements and Bank policies

TheBankadheredtointernationalagreementsandBank policies and procedures whenitrestructuredthe2014 KQtransaction.TheBankensured thatits interest inthe airframesandengineswasregisteredontheInternationalRegistry. TheBankfurtherreducedriskbyensuringthatithad a perfected securityinterestintheaircraft andspareengine. ItdidsobyamendingtheUniformCommercialCode financingstatementsto reflect KQ’s name changefrom“KenyaAirwaysLimited”to“KenyaAirways PLC.”

Sovereign guarantee is well supported by Kenyan Authorities and law

byKenyalaw.Ininterviewswith GoKofficials,welearned that KQis viewedasastrategicasset tothe Kenyaneconomyand thusthegovernmentwaswilling toprovidea guaranteetoensure itsoperations.Wealsoconfirmedwithinterviewparticipantsthat the GoK guarantee isnon‐discretionary;meaning ifthe debtiscalleditmustbepaidaccordingto Kenyalaw.

efoundthesovereignguaranteetobewellsupported

PolicyManual, AccordingtotheTPMD (b) (4)

56 Supra note53.


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The2010Constitution offersstrong,lender‐friendlyprotectionsondebtrepaymentbytheGoK.Forexample,itoutlines theprocedures within the GoKfor repaymentofloansand guarantees.57 TheConsolidatedFund,outlined inArticle206oftheConstitution,is themainaccountformoneyraisedandreceived fortheKenyanNational Government.IfKQweretodefaultontheloan,EXIM couldseekrepayment directly fromtheConsolidatedFundwithoutadditionalactionsbytheParliamentofKenyabecausethesovereignguaranteehasalreadyreceivedparliamentary approvalfor funds distributionfromtheKenyanDebtManagementDepartment.Wefoundthattherestructuringwassuccessfulinensuringrepaymentof theEXIM‐supporteddebt.

RECOMMENDATIONS

OIGdoesnotmakeanyrecommendationsrelatedtothis finding.

57 See theConstitutionof Kenya,2010,availableat http://www.kenyalaw.org/ lex/actview.xql?actid=Const2010.


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Reducing Risk. Unleashing Opportunity.

September 21, 2018

Parisa SalehiActing Inspector GeneralOffice of the Inspector GeneralExport-Import Bank of the United States811 Vermont Avenue, NWWashington, DC 20571

Dear Ms. Salehi,

Thank you for providing the Export-Import Bank of the United States (“EXIM Bank” or “the Bank”) management with the Office of the Inspector General’s (“OIG”) inspection report on “2014 Transaction with Kenya Airways”, OIG-INS-18-01, dated September 14, 2018 (the “KQ Inspection”). Management continues to support the OIG’s work which complements the Bank’s efforts to continually improve its processes. EXIM Bank is proud of the strong and cooperative relationship it has with the OIG.

EXIM Bank recognizes our staff for their excellence in underwriting and monitoring of this transaction. Through its staff the Bank supported U.S. exports and protected U.S. taxpayers. The Bank appreciates the OIG’s acknowledgment that EXIM “generally conducted sufficient due diligence, assessed risk, and adequately structured the transaction in accordance with Bank policies and procedures.”

EXIM also values that the OIG noted that “EXIM was able to successfully restructure this deal and protect the interests of the U.S. Government” and that “the restructuring was successful in ensuring repayment of the EXIM-supported debt.”

Additionally, EXIM appreciates the OIG’s conclusion that “the Bank also effectively monitored KQ’s performance from transaction approval in March 2014 through the end of the restructuring period in November 2017” and that EXIM “properly disclosed the terms and conditions of the restructuring of the transaction” and “successfully mitigated the disclosed risks”, to include that “the sovereign guarantee is well supported by Kenyan Authorities and law.”

The Bank is proud of its efforts resulting in a successful restructuring and appreciates the OIG’s recognition of the numerous challenges surrounding it, to include “increased competition, acts of terrorism in Africa, government imposed travel warnings, and other crises, [...]


APPENDIXES

Appendix A: Management Response and OIG Evaluation

(b) (4)(b) (4)


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Jeffrey Goettman

The Bank continuously strives to improve its policies and practices and agrees to both OIG recommendations issued in this report.

Recommendation 1: that the Senior Vice President, Office of Board Authorized Finance, update policies and procedures to ensure the analysis of the borrower’s financial projections and assumptions is fully documented and supported in the transaction records (c.g., Board Memo).

Management response: Management agrees with this recommendation. EXIM Bank notes that staff conducted a comprehensive analysis of the borrower’s financial projections and assumptions but recognizes that it can strengthen its efforts of documenting it more fully in the transaction records. As such EXIM will update policies and procedures to ensure the analysis of the borrower’s financial projections and assumptions is fully documented and supported in the transaction records.

Recommendation 2: that the Senior Vice President, Office of Board Authorized Finance, revise the transportation origination risk rating model to ensure the final rating outcomes comport to the Bank’s BCL risk rating scale of 1 to 11. This would include updating related policies and procedures.

Management response: Management agrees with this recommendation. EXIM will revise the transportation origination risk rating model to ensure the final rating outcomes comport to the Bank’s BCL risk rating scale of 1 to 11 and update its guidance accordingly.

We thank the OIG for your efforts to ensure the Bank’s policies and procedures continue to improve, as well as the work you do with us to protect EXIM funds from fraud, waste, and abuse. We look forward to strengthening our working relationship and continuing to work closely with the Office of the Inspector General.

Sincerely,

Executive Vice President & Chief Operating Officer Export-Import Bank of the United States



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OIG Evaluation

OnSeptember21,2018,EXIMprovided itsmanagement response to adraftofthisreport,agreeingwiththetworecommendations. The response identified the Bank’sactionstoaddress therecommendations. OIGconsiders theBank’s actionssufficienttoresolvethereported recommendations,whichwillremain openuntil OIGdetermines thattheagreeduponcorrective actionsarecomplete andresponsiveto thereported recommendations.TheBank’s managementresponsetothereportedrecommendations andOIG’sassessmentoftheresponseareas follows:

RECOMMENDATION 1

Recommendation 1:Updatepoliciesandprocedures toensuretheanalysisoftheborrower’sfinancialprojections andassumptionsis fullydocumentedandsupportedinthe transaction records(e.g.,BoardMemo).

Management Response: Managementagrees withthisrecommendation.EXIMBanknotesthatstaffconductedacomprehensiveanalysis oftheborrower’s financialprojectionsand assumptionsbutrecognizes thatit canstrengthenits effortsofdocumentingit morefullyin thetransactionrecords. Assuch EXIMwillupdatepoliciesand procedurestoensuretheanalysisoftheborrower’sfinancialprojections andassumptionsis fullydocumentedandsupportedinthetransactionrecords.

Evaluation of Management’s Response: Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.

RECOMMENDATION 2

Recommendation 2:Revisethe transportationoriginationriskratingmodeltoensurethefinalratingoutcomescomportto theBank’sBCLriskratingscaleof 1to11.Thiswould includeupdating relatedpoliciesandprocedures.

Management Response: Managementagrees withthisrecommendation.EXIMwillrevise thetransportationoriginationrisk ratingmodeltoensurethe finalratingoutcomescomporttotheBank’s BCLriskratingscaleof 1 to11and updateitsguidanceaccordingly.

Evaluation of Management’s Response: Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.


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Table 1: Summary of Management’s Comments on the Recommendations

Rec. No.

Corrective Action: Taken or Planned

’

Expected Completion

Date58

Resolved: Yes or No59

Open or Closed

60

1 UpdateswillbemadetotheBank spoliciesandproceduresthatrequiretheanalysisofborrowerfinancialprojectionsandassumptionstobefullydocumentedandsupported.

’

Notargetcompletiondate

provided

Yes Open

2 Revisionswillbe made to theBank stransportationoriginationriskmodeltoalignitwiththeBCLriskratingscaleof1to11.Bank guidancewill alsobeupdated.

Notargetcompletiondate

provided

Yes Open

58 EXIMOIGhas requested target completiondatesforeachof the outstandingrecommendations.

59 “Resolved” means that (1)Managementconcurswiththerecommendation, and theplanned, ongoing,and completed corrective action is consistentwith the recommendation;or(2)Management doesnot concurwith therecommendation,butalternate actionmeetsthe intentoftherecommendation.

60 Upon determination bythe EXIM OIGthattheagreed‐uponcorrective actionhas beencompleted and isresponsivetotherecommendation, therecommendationcanbeclosed.


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Appendix B: Inspection Methodology and Prior Reports

Inspection Methodology

Duringtheinspection,weemployedacombination ofqualitative andquantitativetechniques, aswellasdocumentationreviews. Weconductedtheinspection fromJuly2017toSeptember2018,primarilyin Washington, DC,withasitevisittoLondon,UKandNairobi,KenyainJanuary2018. Weutilized thefollowingtechniquesduringtheresearchandfieldworkphasesofthereview:

1. Reviewedthetransaction’sfinancialandlegal documents,internalandexternalreportsand correspondencerelatedtothetransaction.

2. InterviewedBankstafffromTD, TPMD,OfficeofBoardAuthorizedFinance,andOfficeofGeneralCounsel.

3. Interviewedexternalpartiesincludingrepresentativesoftheborrower/lessee,legaladvisor, financialadvisor,GoKandU.S.governmentofficialslocatedinKenya.

4. Reviewedpublicandopensource documentsregardingtheborrowerandthetransaction.

5. Conducted onsite interviewswith externalpartiesinJanuary2018 inLondon, UK andNairobi,Kenya.

Toaddress transaction specific issuesthefollowingwas performed:

1. Researched aircraft industrybackgroundandtrends, includingthe Africanaviation market.

2. Researched aircraft financerating guidance.

3. Researched internationalagreementsandprotocolsuchasthe2011 OECDASU andtheCape TownConvention.

Prior Reports

EXIM OIG Report (OIG‐EV‐17‐05)

InFY2017, OIGcompletedanevaluationof TPMD’srisk‐ratingpoliciesandprocedures.61Theevaluationdeterminedthat thedivisionwasgenerally adheringto theriskreview and monitoring procedures outlinedin currentpolicyguidelines.As partoftheevaluation,wecomparedTPMD’scurrentcredit riskreviewprocesstoleadingpractices.Althoughthedivision’sprocessbroadlytracks thosepractices,wefoundsomeareasthatshouldbe addressedto ensurealignment.For example, whereas internalguidanceprovides quantitative metricsto assesskey risks,itlacksbenchmarksforindividualriskfactorratings.Second,wefoundthata keyEXIMcreditmetricdidnot align withcredit rating

61 See EXIMOIG’s Report on Transportation Portfolio Management Division’s Risk Rating Process (OIG‐EV‐17‐05,dated August 30,2017)availableat https://www.exim.gov/sites/default/files/oig/reports/ Final%20TPMD%20%20Report%20‐%20Redacted.pdf.


31

https://www.exim.gov/sites/default/files/oig/reports/Final%20TPMD%20%20Report%20-%20Redacted.pdf

https://www.exim.gov/sites/default/files/oig/reports/Final%20TPMD%20%20Report%20-%20Redacted.pdf


agencypracticesandthatcertainaspectsofthe Bank’squalitativeframeworkresultedininconsistencieswithin theratingprocess.Asa result,weconcludedthattheTPMDriskratingprocesswassusceptibleto non‐replicabilityand inaccurateriskratingprofiles.Inaddition,we foundthatEXIMcontinuestousedifferent riskratingmodelsfororiginationandmonitoring transportationtransactions.Further,EXIMhadnotestablisheda timelineforimplementingrecommendationsmadein the2015S&PCapitalIQRiskSolutionsevaluation reportontheBank’sriskratingmodel.62 Lastly,wefoundthattheBankconductsaircraftinspectionsonanad‐hocorasneededbasis, andthosefindingsfromaircraft inspectionswerenot alwaysfullyintegratedinto TPMD riskratingreports.Ourreportmadethreerecommendations tostrengthenTPMD’sriskrating policiesandprocedures. Asofthedateof thisreport, all three recommendations are closed.

62 S&P CapitalIQRisk Solutions’Conceptual Soundness and Outcomes Testing Review Report, dated October 28,2015.


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Appendix C: KQ’s Financial Condition – Contributing Factors

(b) (4)

63

64

(b) (4)

(b) (4)

INSPECTIONREPORTOIG‐INS‐18‐01

33



34

(b) (4)


(b) (4)

(b) (4)


35


Appendix D: KQ Revenue and Margins – Historical, Projected, and Actual

(b) (4)


36


Appendix E: KQ Operating Statistics – Historical, Projected, and Actual

(b) (4)


37


ACKNOWLEDGEMENTS

Thisreportwaspreparedbythe Officeof Inspections and Evaluations,OfficeofInspectorGeneralfor theExport‐ImportBankoftheUnitedStates.Severalindividualscontributedtothisreport includingDanielWong,Inspector;LiamBresnahan,FinancialAnalyst;LisaClark,Paralegal;andJenniferFain, ActingAssistant Inspector GeneralforAuditsandEvaluations.


38

Office of Inspector General Export-Import Bank of the United States 811 Vermont Avenue, NW Washington, DC 20571 202-565-3908 www.exim.gov/about/oig

http://www.exim.gov/about/oig

Inspection of EXIM’s 2014 Transaction with Kenya Airways · (KQ) financing to ascertain the adequacy of the Bank’s due diligence, risk assessment, ... A final commitment is an

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