Prepaying all bank debts will allow Nakheel to return to its former glories
On 25 June, Nakheel chairman, Ali Rashid Lootah, announced what he calls the most significant milestone in the history of the Dubai-based property developer.
The announcement revealed that by the end of August this year Nakheel will be free of bank debt after prepaying AED5.54bn ($1.5bn) of bank loans, for which the last instalment was not due until March 2018. The move, while surprising, was not a complete shock as Nakheel already prepaid AED2.35bn of bank debt in February.
The prepayment will have significant implications on Nakheels strategy for the future.
With no bank debts, the developer is free from restrictive covenants it says severely hampered its ability to develop new projects and grow. It is very difficult to invest money that banks consider to be theirs.
Prepaying also allows the company to look for funding at rates that are much more competitive than the punitive rates the company was subjected to when it was forced to restructure in 2011.
These two factors mean that Nakheel now has much better options when it is considering plans for new projects. The companys stated focus is to develop more cash-generating assets that will give a steady, consistent cash flow and protect it from the peaks and troughs of off-plan residential sales that nearly destroyed the company in the past.
The problem with developing cash-generating assets is that such projects do not generate an initial influx of investment like projects sold off-plan, and therefore require funding. By prepaying its bank loans, Nakheel hopes it can now secure funding for the projects at far more competitive rates, making them more viable.
Nakheel also says the ability to tap competitively priced financing also means the magnitude of projects can increase. Given that the developer has already launched an impressive pipeline of new projects over the past two years, the real milestone is not that bank debts are being prepaid. The milestone is Nakheel is back.
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