Nakheel - Intercompany Funding

Looking at the pattern of intercompany funding at Nakheel from fiscal year end ("FYE") 2005 through 30 June 2009, it's clear that during the second half of 2008 there was a fundamental change.  Prior to that point Nakheel was a net debtor to the "Group".  At 30 June it was in rough balance.  In the happy state of  being "neither a lender nor a borrower".  After that period it became a net provider of funds to the Group.  And for quite significant amounts.   In fact for an amount that would allow it to settle the 14 December Sukuk without any difficulty.

A real estate development company is a heavy consumer of cash.  It supports its assets through a combination of accounts payable and accruals which would include construction and other costs.  As well as from advance payments from customers.  And debt.  Lots of debt.  It's rare that a company involved in development is a cash cow - a provider of funds to other members of its group.  Usually the holding company arranges cash for its real estate subsidiary.   It's hard to imagine a company still actively developing mega projects raising cash to fund the parent.  But it's this latter behavior which seems to have occurred sometime after 30 June 2008.

That timing coincides with the recent economic slowdown.  And my guess is that Dubai World needed cash and Nakheel was a convenient source.

Let's look at the history using Nakheel's financials.   We'll use annual reports to look at two years data in most cases.

Some "tafsir" on notation.

1. DF = Due From.  These are amounts that related companies owe to Nakheel.  They are in effect extensions of credit by Nakheel.  They would appear in the balance sheet under the caption accounts receivable on the asset side of the balance sheet.  
2. DT= Due To.  These amounts are owed to Group companies by Nakheel.  And are a form of borrowing.  They appear under the caption accounts payable on the liability side of the balance sheet. 
3. There is also the Shareholders' Account which is another source of funds.  The treatment of this changed during the period.  In the earlier years it's reported separately and must be factored in to the DT position.  For example, in the 2006 annual report.
   
4. DF-DT = Net position.  When this is negative, the Group is funding Nakheel.  When it is positive Nakheel is funding the Group. 
   
5. There is also a category appearing on the asset side of the balance sheet "loans to a related party".  These are all loans to Dubai World.  The DF and DT assets and liabilities are not only to the parent but to other related entities, which would include the government.  Keep that in mind as we go through the analysis.  I think it's very relevant for the 30 June 2009 position.
6. There is of course nothing sinister in intragroup transactions.  These can be part of the normal course of business.  What one does look for are patterns and changes in pattern.   In the amounts involved.  Or the net position among the firms.  Has a cash user suddenly become a cash provider.  These might be indications that something has changed.
   

Now to the data.

1. At FYE 2005, Nakheel's Net Position was AED0.3 billion - AED 8.4 billion = AED8.1 billion.    There were no loans to related parties.  The Group was funding Nahkeel in an amount of AED8.1 billion.
2. At FYE 2006, Nakheel's Net Position was AED0.6 billion - AED 6.7 billion = AED6.1 billion.  There were loans of AED2.8 billion from Nakheel to Dubai World.  Thus the net position was Group funding to Nakheel of AED6.1 billion - AED2.8 billion or AED3.3 billion
3. At FYE 2007, Nakheel's Net Position was AED 1.8 billion - AED6.0 billion = AED4.2 billion.  Related party loans were AED2.5 billion.  Thus the Group was funding Nakheel for AED1.7 billion (AED 4.2 billion - AED 2.5 billion).
4. At 30 June 2008 the Net Position was AED1.3 billion - AED6.1 billion = AED4.8 billion.  At that point related party loans were AED4.8 billion.  Thus, there was no funding either way - AED4.8 billion - AED4.8 billion.
5. At FYE 2008 the Net Position was AED8.3 billion - AED4.5 billion = (AED3.8 billion).  This is the first time the Net Position has been negative.  As well there were related party loans of AED 9.3 billion.  Thus, Nakheel is now funding the Group for AED13.1 billion.  And that coincidentally is a bit more the amount of the payment due 14 December of AED12.9 billion.  And one might make the argument that the borrowings during 2008 by Nakheel of US$750 million (AED2.1 billion) and AED3.6 billion largely were used to fund Dubai World.  Why?  See below the analysis of the growth in Accruals and Advance Payments.
   
6. At 30 June 2009, the Net Position was AED10.1 billion - AED 7.1 billion = (AED3.0 billion).  Related party loans had increased to AED9.8 billion.  Thus, it appears that Nakheel is funding the Group for AED12.8 billion.  But, the AED 3 billion loan received from a related party came from the Dubai Stabilization Fund (technically a related party) but not from Dubai World so the funding position vis-a-vis Dubai World is actually AED15.8 billion.

 Growth in accounts payable and advances.

1. FYE 2005:  AP = AED 4.1 billion,  Advances=AED15.5 billion.
2. FYE 2006:  AP=AED12.4 billion.   Advances=AED09.7 billion.
3. FYE 2007:  AP=AED14.1 billion.   Advances=AED12.2 billion.
4. 30June 08:  AP=AED16.3 billion.    Advances=AED18.4 billion.
5. FYE 2008:  AP=AED22.8 billion.    Advances=AED28.8 billion.
6. 30June 09:  AP=AED28.6 billion.    Advances=AED27.9 billion.

The debt raised wasn't used to pay these liabilities down.  Nor was it devoted solely to construction and other development costs.  If it had been, then Nakheel would not have been able to fund the Group.

On a related note, these amounts should be considered among the liabilities that Nakheel has to pay or restructure along with their debt instruments.  Though it should be noted that customer advances are repaid by handing over the promised real property to the client.  It's only in the case of a failure to build and deliver the property that a refund would be due.

The point of this is that even if the restructuring is limited to Nakheel and Limitless there is a lot more than US$26 billion in liabilities to be dealt with.