Finc2012 Optimal Capital Structure Leighton Holdings Ltd

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EXECUTIVE SUMMARY
The following report contains a critical analysis of the capital structure strategy employed by Leighton Holdings Ltd during the Global Financial Crisis (GFC) and also an assessment of optimal capital structure Leighton should use to fund future investments.
Examination of the changes of the capital structure of the company over pre-GFC and post-GFC period (2004-2010) reveals a range of considerations were deliberated in the financing decision; these include not only the capital market conditions but also the size and urgency of funding required as well as costs and availability of alternate sources of funds.
Applying various theoretical hypotheses in conjunction with a comparative study using Peer Firms, the report
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This is most vividly evidenced in the rise in interbank credit spreads(Figure1), which have a fundamental impact on bank borrowing rates available to bank customers. The hike in the spread and the continued volatility reflected tight liquidity conditions as well as higher credit risks (ASX 2009). Consequently, in 2008 the volume of Australian business loans dropped by 74% and number of deals fell by 60%, whilst the tenors of loans were drastically reduced (KMPG 2008). The impact was serious for Leighton with its reliance on long term financing to fund capital assets and the resulting short-term mix increasing the risk of premature liquidation of assets due to an inability to roll-over debt(Leighton Annual Report 2009).
Figure [ 1 ]: Interbank Market Spreads source: (ASX 2010)
Figure [ 1 ]: Interbank Market Spreads source: (ASX 2010)
Debt covenants under new loans were also tightened and banks enforced restrictions on unsecured debt, as well as increasing the monitoring of the firms adherence to these new terms. These changes have the ultimate effect of increasing the borrowing rates as lenders attempt to recover their cost as lenders pass on costs through higher interest rates (Brealey et al. 2011).
The equity market, although heavily depressed since 2007, provided a much needed safety valve to shift financing away from debt to equity, especially considering the underdeveloped

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