EDT: Otherwise the only explanation I can offer you is that the king of Denegal is utterly incompetent and chose to honor some long forgotten treaty to enter the war on the side of Abagaard instead of settling his own country's political instability.
Ben and Galen, if you're reading this thread I'm trusting you not to look in the spoiler.
Anyway, I've decided to incorporate several of the suggestions you've all provided: The king knows the mercenaries are there but, due to them being so far north doesn't realize exactly how big the army is. More importantly, he knows the Loyalists' plans involve claiming they have the true heir to the throne within their ranks and intends to have this claimant assassinated in order to neutralize the Loyalist threat. From his perspective, it's a lot better solution than to pull his armies out of Reece and fight the mercenaries.