S&P report identifies factors to unlock GCC access to capital
Companies in the Gulf could improve their access to capital markets and cut the cost of raising debt by strengthening their management and governance practices, Standard & Poor’s Ratings Services said in a new report “Stronger Corporate Governance Could Unlock Capital Market Access For Gulf Companies.”
The Saudi Gazette says that the report highlights a key theme being discussed today at the fourth annual S&P Financial Leaders’ Forum in Abu Dhabi. The Forum will provide a platform for discussing GCC regional challenges that are vital for international financial competitiveness, including the role of transparency and corporate governance.
Corporate governance is an Achilles’ heel for corporations in the Gulf Cooperation Council (GCC), the report says. Just two companies (or 6.3 percent) of the 32 we rate in the region have “strong” management & governance scores, the highest of our four categories. This compares with 9.5 percent for EMEA companies and 7.5 percent globally.
What’s more, we believe that the management and governance standards of companies in the region as a whole are likely to be lower on average, because the median of our rated corporate issuers in the GCC is relatively high at ‘BBB+’ (including government support).
A Standard & Poor’s management and governance (M&G) score is one of the factors we use to determine our credit ratings. The categories are “strong,” “satisfactory,” “fair,” or “weak.”
“We believe the two companies with strong M&G scores – Majid Al Futtaim Holding LLC (MAF) and Saudi Basic Industries Corp. (SABIC) – have been able to improve their access to capital market funding by raising their governance standards, said Standard & Poor’s credit analyst Tommy Trask.
“For example, MAF, a UAE-based family owned business, has been able to obtain an investment-grade rating in part on the strength of its senior management team and its governance standards. This, in turn, has allowed it to diversify its funding sources, access longer-tenor debt, and reduce its overall funding cost.”
Lagging governance standards can deter international investors from looking for opportunities in the Gulf region, in our view. Potential investors face closely controlled company ownership, a general lack of transparency, and the vagaries of individual states’ jurisdictions with respect to creditor protection. This leaves them open to the risk of weak management and, in extreme cases, fraud. Meanwhile, excess liquidity led some GCC corporations in the past to invest opportunistically in promising projects and investments, sometimes without adequately recognizing the risks involved, in our view.
“Recent developments suggest that companies, as well as regulators and governments, are beginning to take corporate governance more seriously,” said Trask. “Yet, while developments are taking place in legislation, we believe companies will need time to make a cultural shift toward greater transparency and to develop expertise within the governance area.”
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