Fitch: Governance Weak at Turkish Privately-owned Corporates

Turkish privately owned corporates’ ratings are constrained by poor corporate governance, including the absence of an independent board, weak transparency and limited disclosure practices, says Fitch Ratings.

The credit ratings agency (CRA) says that although corporate governance practices are steadily improving in Turkey, through the implementation of 2012 commercial code and other incentives regulations introduced by Capital Market Board (CMB), a move in company culture toward more independency, transparency and disclosure could still take some time, specifically for privately owned corporates that are still to adopt these practices.

Lagging governance standards can discourage international investors from looking for opportunities in Turkey as they face closely controlled company ownership and general lack of transparency, says Fitch. Turkish companies can improve their access to capital markets and cut the cost of raising debt by strengthening their management and governance practices.

Fitch cites household appliances manufacturer Arcelik, which it says is implementing developed risk-management policies and procedures, is also transparent about its operations and has clear investment strategies and financial policies. These measures have enabled the company to tap international capital markets at more favourable rates.

Individual private ownership of a rated entity often results in fewer equity and debt funding options than for listed entities. Fitch considers key man risk as high among Turkish corporates, and it is not unusual for one person to hold more than one key position in the company. Dominant owner/managers can represent key man concentration risk, which makes the role of truly independent directors of central importance to corporate governance analysis.

Risks also stem from the influence of family shareholders on corporate strategy and operations; related-party transactions; management succession; and dividend policies that may favour family interests over the interests of other stakeholders. Related-party transactions may affect the rating of an entity if they are carried out to the benefit of a related party at the expense of the rated entity.

Nevertheless, Fitch recognises that family ownership also brings benefits, such as commitment to long-term strategic goals and tapping family wealth to aid business growth. Influential owners have habitually, with their own standing and influence, created competitive benefits for their companies. Yet, issues such as the availability of new equity, either for on-going expansion or during times of distress, are difficult to evaluate for companies in private ownership. The actual wealth of an individual owner or other considerations such as succession, willingness for ownership to be diluted or to commit funds under different circumstances, is also often hard to determine.

As a result, Fitch tends not to incorporate the financial strength of an individual or family into its ratings, or to assign ‘implied’ ratings to groups of companies that lack a formal legal relationship with each other.

The CRA concludes by stressing that improved governance practices will not, by themselves, positively affect a credit rating. However, poor governance practices can result in lower ratings than quantitative and qualitative credit factors may otherwise imply.

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