Family Ownership Is No Bar To Creditworthiness In Europe

There have been numerous studies commenting on the effect of family ownership on a company's performance and in this report, we analyze whether there is a link between this type of ownership and creditworthiness. Based on the sample of companies that we've analyzed (which excludes utilities, project finance entities, financial services companies, and corporate securitizations), we make three observations: First, the credit factors for rated family owned companies seem to be on average marginally better than for rated corporates as a whole. Second, there is no systematic positive or negative bias on creditworthiness based purely on family ownership. Third, our sample of rated family owned companies shows a wide disparity in terms of credit characteristics.

Overview

- The median rating of a family owned company in our public portfolio is marginally higher, at 'BB+', than that of our overall nonfinancial corporate rated portfolio in EMEA ('BB'). That said, there are fewer family owned companies in the 'BBB' and 'B' categories compared with our rated issuer base as a whole.
- Our rating transition statistics show that family owned companies have displayed greater resilience over the past five years versus our entire rated portfolio. However, the number of family owned companies in this group is small compared to the overall issuer group, so we would need to confirm these trends over the next economic cycle as the universe of rated family owned companies expands.
- The management and governance (M&G) of family owned companies is marginally better than for rated issuers overall, with 18% of companies assigned a "strong" M&G score, compared with 13.1% for our rated issuer base in EMEA.
- On the credit negative side, family owned businesses are susceptible to succession planning issues and have less flexibility with regard to new equity issuance.
- Rated family owned companies are a diverse group in terms of size, industry, and country of incorporation, and there is no systematic positive or negative impact on creditworthiness from such ownership compared with our rated issuers as a whole.

On the credit positive side, we generally find that family owned companies have a longer-term investment horizon and more conservative business strategies than their publicly listed peers. Our rating transition data show that there is higher rating stability for family owned companies compared with our overall credit portfolio in EMEA. And when assessing management and governance (M&G)-–which is a broad range of oversight and direction conducted by an enterprise's owners, board representatives, executives, and functional managers-–we find that there is a higher percentage of family owned companies in the top category compared with the total rated portfolio. Family owned companies also have slightly less leverage, particularly in the broad 'B' category, which is typically dominated by private equity-owned companies.
However, family ownership can also carry credit negatives compared with listed public companies, including "key man" risk, succession planning, and less flexibility with regard to issuance of new equity. In terms of financial policy, our view is very dependent on the company situation, as there is a wide variation in family owned companies' views on leverage and dividend policies...

Read more below (PDF 15 pages).