Dubai: Family businesses from the GCC region are likely to face increased funding and credit rating constraints due to ownership restrictions, governance limitations and geographical and cash flow limitations, according to credit rating agency Moody’s.
Ownership restrictions, corporate governance limitations and a lack of geographical or cash flow diversification are the key credit risk challenges faced by GCC’s family owned businesses from a rating perspective,
For most family businesses, their focus of activities in one country or the region brings with it concentration risks. Despite their financial strength, the high geographical concentration of their operations leaves them vulnerable to external shocks.
“In our view, part of their success in their home markets stems from their embedded positions, intimate knowledge of the market and possibly advantages the companies enjoy that they may not have when embarking on growth outside the region,” said Martin Kohlhase vice president and senior credit officer of Moody’s.
Lack of cash flow diversification can be a source of credit weakness. Although family-owned companies might be well diversified in terms of business lines, their operations often tend to be anchored around one or two major cash flow generating units that might cross subsidise smaller or nascent and loss-making operations.
Moody’s said the assumption of financial support from private shareholders can’t be taken as a guaranteed credit enhancement. While the willingness to provide financial support by a strong sponsor/owner is viewed as positive, it has often been difficult when challenges arise to depend on private wealth as a source of financial support.
Issues relating to transparency, disclosure and corporate governance often come up as constraints to credit ratings. Moody’s said heavy reliance of family owned business on bank funding can pose a risk to liquidity. The ownership and legal structures often limit access to other types of funding. For example, international creditors may not be comfortable with the company’s legal structure, whilst regional banks might be willing to lend, albeit on condition that certain creditor enhancements, such as corporate guarantees or asset pledges, are included in the terms.
Security over land may not be granted to non-local banks on account of legal ownership constraints over title deeds or the inability of non-GCC nationals to own land outside of designated areas.
Stock market listings of family-owned businesses in the GCC that have certain legal corporate structures are rare, given the possible existence of dual-class shares or side agreements that may not be enforceable in court.
Despite such restrictions some of the long-established merchant families with businesses that are entrenched in their respective markets enjoy access to attractively priced sources of funding from local banks.
