x Abu Dhabi, UAESaturday 22 July 2017

End of easy credit for Gulf's mighty family businesses

Insight From selling ice cream to building petrochemical plants, the big Gulf families dominate the region's commercial landscape.

The new logo of financial group BNP Paribas Fortis is seen on the window of a bank in Brussels.
The new logo of financial group BNP Paribas Fortis is seen on the window of a bank in Brussels.

From selling ice cream to building petrochemical plants, the big Gulf families dominate the region's commercial landscape and have long traded on their reputation. But that is now being questioned for the first time as bankers reassess so-called "name lending" to Gulf-based family conglomerates in the wake of the crisis surrounding Saudi Arabia's Saad and Al Gosaibi groups. Many banks, including the international giants BNP Paribas and Citigroup and local institutions such as Abu Dhabi Commercial Bank, Mashreqbank and First Gulf Bank, have admitted being exposed to the two Saudi groups, both of which are undergoing massive debt restructurings. "Almost every single bank we talk to in the UAE is seeing an increased occurrence of renegotiating and restructuring loans, often with family-owned businesses," says Mardig Haladjian, who heads GCC banking coverage for Moody's Investors Service. Now analysts and investors across the Gulf are asking why some families have been permitted to accumulate an apparently unsustainable burden of debt. Pointing an accusing finger at the families themselves may be misguided, however. "Family businesses are suddenly being maligned and unfairly so. This is a systemic issue," says Neven Hendricks, who heads the Middle Eastern financial services industry practice for Deloitte, the advisory and accountancy firm. Instead, some of the blame is being laid on banks that are now paying the price for lending decisions that were based on reputation rather than creditworthiness, observers say. "Decades-old practices such as name lending are coming under scrutiny." Mr Haladjian says. While these ways of doing business are "perfectly fine during the good times, they can turn into credit's Achilles heel in the bad times", he says. Name lending often results in too little collateral and inadequate pricing. The real issue, according to Mr Hendricks, is "the questionable quality of assets sitting on the banks' books. Is anyone asking the banks whether they have applied the necessary prudential restrictions on lending and whether their asset and liability management conform with best practice?" Bank regulators should also ask themselves some serious questions, experts say. As regional bankers gradually reveal their exposure to Saad and Al Gosaibi, it has becomes apparent that banks do not know the exposure of family businesses, while analysts have no means of estimating how much banks have lent them. There is no credit information system that gives an overview of a company's obligations, the way a credit bureau provides a bank with details of a loan applicant's salary, payment behaviour and outstanding loans. Nasser Saidi, the chief economist at the Dubai International Financial Centre, says: "We need a GCC-wide centralised credit reporting on loans, commitments or guarantees anybody has given to businesses. "That would help banks to get a more comprehensive view of the obligations of a company." Bank regulators may need to intervene to examine how grave the situation has become for lenders that have yet to disclose exposure to distressed family-run groups. Mr Hendricks says: "You have a pretty serious situation out there. The Central Bank may want to do some stress-testing on banks to see how big the hole is, it may want to assist banks, to give family-owned businesses some grace to get their finances in order." Like other, more conventionally-structured corporations, the family groups were content to ride the wave of cheap money made even more plentiful through the oil-fuelled boom years. They financed many acquisitions that were "nice to have" but non-essential using short-term funds generously handed out by international banks. "They acquired a lot of assets and bolted them on. There was a lot of unstructured leveraging," Mr Hendricks says. This "restless entrepreneur" syndrome is typical of any company that operates within a context of strong economic growth, limited competition and abundant capital, according to a study by Booz and Co, the consultancy. Four out of five businesses in the Middle East are family-run or family-owned. About US$1 trillion (Dh3.67tn) in family-owned assets is expected to be handed down to the next generation within five to 10 years. Two thirds of all Dubai-based family businesses are active in trade. There are 30,000 family businesses in Dubai alone, making the potential fallout from distressed lending even more pronounced. Deepak Tolani, a banking analyst at Al Mal Capital, says: "There is a particular danger here because two dozen large ones dominate." The days when the region's big-name families could expect to be courted by the titans of Wall Street and the Square Mile could be drawing to a close. Instead, many family businesses are now renegotiating loans with their bankers or, worse, finding themselves completely shut off. Many banks are blankly shutting down new lending, notably to family businesses. "The banks get to a stage where they refuse to renegotiate credit facilities with customers," Mr Hendricks says. "We have seen cases where companies with absolutely enviable earnings have been told by banks, 'We are shutting down'.They are literally battening their hatches." For some analysts, the likelihood of banks calling on cross-guarantees between the distressed and healthy parts of family groups is increasing. But that could destabilise the sector further and potentially cause even greater problems for lenders. "The last thing you would want is family businesses throwing assets into the market. We all know that when the market tanks, asset values fall way beyond their fair values," Mr Hendricks says. "That may result in substantial defaults." Typically, property financing and investments are the weak links in the business and tend to get into difficulties first, analysts say. However, despite increasing evidence that the asset quality of family groups could deteriorate further, the diversification of the region's large families could help them come through the crisis intact. Dealerships and trading businesses are still generating sufficient cash for many groups. The financial troubles at Saudi Arabia's Al Gosaibi group emerged when its banking unit, The International Banking Corporation, defaulted on loans in May, prompting wider jitters across the whole group. The country's central bank subsequently froze the personal accounts of Maan al Sanea, the billionaire founder of the Saad Group. Both groups have since entered restructuring talks with their global lenders. The defaults at Saad and Al Gosaibi have also focused attention on succession issues, as intra-family disputes are understood to have aggravated some of the problems facing the companies. Only one in 10 family businesses survives beyond the third generation. While families should prepare carefully for handing over to the next generation, bankers should also anticipate how the transfer of power within the leadership of large family groups could affect their relationship. Amin Nasser, a partner at PricewaterhouseCoopers, says: "This whole issue of family business succession has become a huge concern in Middle East. Bankers should look beyond the balance sheets and ask whether family continuity and succession plans are in place. The lack of a proper succession plan can break up a business." But while life may never seem the same again for many family concerns after Saad and Al Gosaibi and the financial crisis, selling ice cream at least remains a lucrative activity, for now. The family-owned Galadari Group, which has the local Baskin-Robbins licence, just opened its 450th store in the GCC. "And there are more coming up," says Khaled Soliman, the company's chief operating officer. Clearly some family firms are not licked yet. uharnischfeger@thenational.ae