Moody's reports: Family-owned GCC companies often display hidden credit strengths

In a new Special Comment examining the key characteristics and issues involved in assessing the credit strength of family-owned companies in the Middle East.

'The main analytical challenges in assessing the credit quality of family-owned companies in the GCC, where such groups are commonplace, are the ownership structure and the limited public financial disclosure,' says Dubai/DIFC-based Philipp Lotter, Moody's Senior Credit Officer and author of the report.

Moody's new report, entitled 'Family-Owned Corporates in the GCC', looks at four keys areas: (i) Typical Corporate Structures; (ii) Accounting & Transparency Issues; (iii) Capital Structure & Liquidity; and (iv) Analytical Considerations.

According to Moody's, many large family-owned or closely held companies in the GCC encompass diversified core operations, often comprising real estate, construction and energy activities complemented by large land banks and investment portfolios. The region is home to numerous classic conglomerates, where such structures can make solid business sense due to the lack of specialisation across primary industry sectors.

The report also notes that, in the absence of any obligation for closely held corporations to publicly report their results, the availability of public information can often be sketchy. When assessing a company's financial strength, Moody's has so far relied on private annual accounts, often prepared under International Financial Reporting Standards and audited by international audit firms. However, Moody's notes that the quality of information, and indeed companies' willingness to share such information on a confidential basis, is often high.

Moody's observes that many companies in the GCC - be they closely held or publicly quoted - rely heavily on short-term funding, which often depends on the strength of their banking relationships rather than any contractual commitment. This trend is further exacerbated amongst family-owned companies. The use of uncommitted lines to meet potential short-term liquidity needs remains a source of some uncertainty. However, with the development of regional capital markets and Islamic financing gathering momentum, Moody's expects this tendency to gradually change.

Finally, Moody's explains why a traditional rating approach may not always capture the actual financial strength of such companies and how specific factors, such as asset coverage and shareholder support, can enhance credit ratings.