Family businesses are a pillar of the GCC economies. They have grown exponentially from their humble beginnings to become conglomerates that span an array of sectors from real estate to motoring. Their well-being and dynamism are crucial for the region.
Although a lot of pressure is placed on family businesses to go public via initial private offerings, family businesses could benefit tremendously from issuing debt instruments such as bonds or sukuk. So why consider taking this route?
1. Ambitious growth plans
Family businesses have grown and matured to the extent that some are practically unrecognisable from earlier days. The keys to success have included old-fashioned business acumen, favourable environments, access to bank lending and internally generated cash.
Now many are reaching for new heights by tapping other markets. For that, they will need real funding, probably more than can be generated internally or readily secured from banks. Global debt capital markets, and increasingly regional ones, offer the scale that is needed for businesses to invest and expand geographically. This wider footprint will serve the family businesses and the region well should economies in the GCC or the Middle East and North Africa slow down.
2. Maintaining control and ownership
There is no disputing the value of listing the family companies, but the reality is that many are not ready for that step. Accessing the debt markets allows family businesses to remain private and under the control of the founders or their successors. For entrepreneurs who are not ready to part with full ownership, bonds are a way of raising long-term capital that does not dilute equity. In other words, future returns on equity need not be shared. And many companies with solid cash flows are debt-free, so there is significant scope for further returns on equity.
3. Dealing with risk by diversifying sources and changing the terms
Relationship lending or borrowing has retained an attraction, as it is perceived to offer flexible timing and accommodative terms, all with no need for public disclosure. And bankers have been keen to hold on to those lines, often offering very aggressive pricing. But those bank lines will not remain as open as they have traditionally. Sustained lower oil prices are feeding through to the banks in the form of lower liquidity. And regulatory changes such as exposure limits increasingly constrain the use of bank balance sheets.
Family companies that have established their credentials with the fixed income community will take it in stride. They can also benefit from longer tenors than banks are able to provide and access to larger funding amounts. Bonds also offer chief financial officers and treasurers an opportunity to diversify funding sources to include a mix of global and regional investors.
4. Sound corporate governance
At the same time, companies benefit from subjecting themselves to the rigours of the capital market experience, involving prospectus disclosure, due diligence and investor meetings. For family businesses – we mean the medium and large firms that are prominent in the region – preparing for disclosure may prompt constructive changes in management and governance that promote the long-term interests of the company and its stakeholders.
Credit ratings enable family groups to establish independent financial benchmarks and communicate a positive message around management quality and the corporate governance framework. A high investment grade rating is not an absolute requisite for accessing long-term capital. Lower ratings can help to open the door. At the outset of a process, the credit rating services can give preliminary indications of the outcome, and once the rating is assigned, they can provide it on a confidential basis with no obligation to release.
5. Regulators are getting it
The Gulf Capital Market Association (GCMA) works closely with regional regulators to improve the debt market’s proposition for issuers and investors. New and upcoming regulations will facilitate private placements, reduce administrative burdens, lower fees, streamline approvals, tailor disclosure requirements and provide more choice of issuance structures.
More efficient local systems will complement the access to international bond markets that is enjoyed by big state-linked enterprises and pioneering family businesses while lowering the threshold for initial issuance size to open the door to more private companies. Long-awaited improvements in bankruptcy legislation are starting to appear. And the value of allowing global investors access to GCC markets via international clearing is increasingly recognised. GCMA also provides consistent advice across the region, thus promoting standardisation.
Finally, the region’s governments are starting to issue bonds. This is a potential game changer in that lively government bond markets will enable yield curves that allow for pricing of corporate bonds. A virtuous circle is beginning to take shape.
Michael Grifferty is the president of The Gulf Capital Market Association, a regional trade group representing firms committed to the Arabian Gulf debt market