By Lynne Roberts
Report on family-owned corporates says traditional ratings do not always capture true financial strength.
Family-owned companies in the GCC often have hidden credit strengths, according to a report released today.
The report by Moody’s Investors Service, ‘Family-Owned Corporates in the GCC’ looks at the key issues involved in assessing credit strengths of family owned companies in the Middle East. It examines typical corporate structures, accounting and transparency issues, capital structure and liquidity and analytical considerations.
The report explains why a traditional ratings approach may not always capture the actual financial strength of such companies, and how factors such as asset coverage and shareholder support can enhance credit ratings.
Author Philipp Lotter, senior credit officer at Moody’s, said ownership structure and limited public financial disclosure presented the main analytical challenges.
However, despite a lack of obligation for corporations to publicly report results, the quality of private annual accounts, and the willingness of companies to share information on a confidential basis, is often high.
The report emphasises core shareholder background, as well as the complexity and stability of the corporate structure, looking for sustainability and without regular in and out movement of assets.
Many large family-owned or closely held companies in the GCC tend to diversify core operations, often comprising real-estate and construction and energy activities, and complemented by large land banks and investment portfolios. The region is home to a number of classic conglomerates where such structures make good business sense due to a lack of specialisation across primary industry sectors, the report concludes.
Many GCC companies rely heavily on short-term funding, which can depend on the strength of banking relationships rather than contractual commitment, and this trend is particularly evident in family-owned companies. The use of uncommitted lines to meet potential short-term liquidity needs remains a source of some uncertainty. However, this is set to change with the development of regional capital markets and the gathering momentum of Islamic financing.