Ownership restrictions, corporate governance limitations and a lack of geographical or cash flow diversification are among the most common credit risk challenges when rating GCC-based family-owned companies, a report said.

These factors can result in more conservative ratings being assigned than otherwise suggested by their stronger financial risk metrics, according to the new report entitled "Challenges in Rating Family-Owned Corporates in the GCC" published by Moody's Investors Service.

GCC-based family firms often have in place ownership restrictions for non-GCC nationals outside of designated free zones, which inhibit the ability to upstream cash from onshore activities, according to Moody's. This places constraints on the ability of creditors to exercise some of their rights in the event of distress.

Ownership limitations for many GCC family-owned firms can also create constraints in terms of accessing the capital markets, says Moody's, resulting in a heavy reliance on bank funding. The rating agency noted that privately-owned companies may face obstacles in international stock-market listings or expose shareholders to certain risks, and certain lenders may not be able to utilise secured lending given restrictions on foreclosing assets.

And although GCC nationals do not face such limitations, there have been cases where the corporate wealth was not ring-fenced and segregated from personal wealth, such as the comingling of corporate and personal assets, leaving creditors exposed to potential dividend or asset leakage, said the rating agency.

Another common credit challenge among certain GCC family-owned companies is their high geographical concentration on one country or region which leaves them vulnerable to external shocks. However, this could also explain part of their success, which could stem from the embedded position and intimate knowledge in their home markets.

Other credit risks of GCC family-owned companies include a lack of cash flow diversification, as operations tend to be anchored around one or two major divisions, as well as limitations related to transparency, the frequency of disclosure of non-financial data and corporate governance.

However, Moody's noted that GCC family-owned firms will often benefit from financial support from a strong sponsor or owner, although this benefit can sometimes be difficult to quantify within the rating as it may be difficult to independently validate the level of wealth and whether sufficient liquidity exists to provide support on a timely basis if needed. – TradeArabia News Service