(Updates with takeover exemption request, shares reaction)
NAIROBI, Nov 13 (Reuters) - The Kenyan government and domestic lenders have agreed to convert more than $400 million of Kenya Airways' debt into equity, increasing the state's stake in the airline to almost 50 percent.
The airline is undergoing a $700 million financial restructuring aimed at reducing its debts and returning to profitability after posting heavy losses, including Kenya's biggest annual corporate loss of 26 billion shillings ($251 million) in the financial year 2016.
The government is converting more than $200 million of shilling and dollar-denominated loans, the airline said in a statement on Monday to the Nairobi Securities Exchange.
The agreement will increase the government's stake from 29.8 percent to 48.9 percent. Air France-KLM has a 26.7 percent stake in the airline.
The deal gives 11 local banks a 38.1 percent stake, which will be held in a special purpose vehicle called KQ Lenders Co. Both the government and the lenders still have outstanding portions of debt to be converted at a later date, they said.
They have applied to the market regulator for exemption from making a take-over offer, in line with regulations, since the transaction is aimed at rescuing the carrier.
Kenya Airways shares were unchanged at 5.65 shillings ($0.0546) after the announcement. "It is a hefty dilution but a lot of people knew it was coming," said Aly Khan Satchu, an independent trader and analyst.
Last month, the company said it was in talks with the government as it sought help in coping with competition from foreign carriers operating flights to its Nairobi hub. ($1 = 103.5000 Kenyan shillings) (Reporting by Maggie Fick and Duncan Miriri; Editing by Hugh Lawson)