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 finds the current debt/equity mix lies in the high range of estimated optimal values. The current structure does compensate for the current volatility by reducing exposure to debt markets but also attempts to efficiently exploit a recent recovery in debt markets.
Nonetheless, on the backing of peer analysis, Leighton should reduce its reliance on debt to better position itself against uncertainty and also exploit its advantages in debt markets to refinance debts for longer terms, hence locking in current rates.
INTRODUCTION
Leighton Holdings Ltd (LEI), the largest construction and contract mining service providers in Australia, has significant exposure both internationally and in a number of diverse markets. It’s core business however, which will be the focus of this report, is founded on construction, contract mining and infrastructure development, operating through its main subsidiaries ‘Leighton Contractors’ and ‘Thiess’.
During the GFC and in its aftermath, the landscape for lending and equity investment changed dramatically and continually. Although Australian equity markets were marked by heightened volatility and sharp