Reluctance to be rated is hurting Gulf conglomerates

Ratings agency Moody’s has called on family-owned conglomerates in the Gulf Cooperation Council (GCC) to reform so that it is easier to rate them. At the moment it is often the case that structural problems in GCC firms mean that they are given lower credit ratings than their performance would suggest they should. This makes it hard for them to access capital markets, meaning that they have to rely on bank funding.

Many family-owned companies in the GCC are financially conservative, with committed long-standing shareholders, which “can make an assessment of their credit quality a complex exercise and pose risks that can result in lower credit ratings for these companies compared with their global peers,” said a recent report published by Moody’s called Challenges in Rating Family-Owned Corporates in the GCC.

Speaking to Family Capital the report’s author, Martin Kohlhase, added: “We’ve also faced some issues with disclosure, transparency and governance. These are the main challenges we observe when it comes to family-owned conglomerates in the GCC.”

One issue is the UAE’s so-called agency law. The emirate has free zones, where foreign nationals can own businesses, but outside those UAE nationals must own at least 51% of a company. This has led to situations where locally owned family businesses were overexposed to credit and liquidity shocks because “ownership restrictions for non-GCC nationals outside designated free zones can inhibit the ability to upstream cash from onshore activities,” says Kohlhase. “Side agreements can be included in constitutional documents that effectively overcome these constraints, but their enforceability has not yet been tested in regional courts.”

This is compounded by the prevalence of dual classes of shareholding in GCC businesses. This is a common way of circumventing the foreign ownership restrictions, but comes with problems. For one, courts might not  recognise foreigners’ rights. And secondly, it is not clear who owns cash flows or profits. “Class A might give you, as a GCC national, 51% ownership of the company. But it might only entitle you, for example, to a 10% or 5% share of profits or dividends”, says Kohlhase.

The research found that ownership restrictions often constrained access to capital markets while privately owned companies also faced obstacles in obtaining international stock market listings owing to their corporate legal structures. Focus of activities in one country or the region led to concentration risks, while lack of cash flow diversification was a possible source of credit weakness.

Moody’s has had success rating some Gulf businesses, including Dubai Holding Commercial Operations Group (DHCOG), a global investment holding company with interests in 24 countries owned by Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President and ruler of Dubai. And some corporations in Dubai welcome the chance to obtain privately monitored ratings, but many are reluctant to make ratings public.  

In fact, there is widespread resistance to issuing the sort of information that could lead to good quality, public ratings. Kohlhase says that businesses often publish data annually, rather than on a quarterly basis, and often with a lag of six-seven months. This is poor compared to the US Securities and Exchange Commission’s requirement that companies issue reports for a bond or sukuk document 90 days after closing of the fiscal year.

Better ratings would improve life for Gulf corporates. But is the message getting through? Not really. “There might be improvements here and there, very tiny steps,” Kohlhase says. “But it’s not changed in the seven-and-a-half years I’ve been here.” If they want to thrive in the modern world, the GCC’s many powerful family-owned conglomerates would profit from letting some light into their dealings.