Financial Industry: the Worst Financial Crisis - Research Paper Example

Introduction The global financial crisis (GFC) that began in August 2007 and grown progressively worse has had a dramatic and profound effect on millions of businesses and business owners around the world (Swagel, 2009). Small businesses and large corporations alike have felt the impact of what is being hailed as the worst financial crisis since the Great Depression to the extent that numerous banks and lending companies, like the Lehman Brothers, Fannie Mae, and Freddie Mac, have failed and required billions of dollars from the Treasury department to bail them out (Swagel, 2009). Throughout this crisis, the real estate market has experienced dramatic drops in property prices and the loss of real value to assets resulting in an estimated A$750 billion dollars in lost revenue in the U.S. markets alone (Hatzius, 2008). Despite this GFC that has caused so many businesses to fail, Lend Lease Group has managed to remain profitable, acquiring multiple billion-dollar accounts between 2007 and 2011 (Who We Are, n.d.). By taking advantage of the timing and cycles of the financial industry, Lend Lease Group was able to benefit from the downturn within the real estate markets to maximize their assets and remain a viable contender within their industry. Lend Lease Group (LLC): Lend Lease Group is a publicly traded enterprise and is one of the world’s leading, fully integrated property management suppliers, providing a worldwide network of clients with the benefits of their strong skills in development, investment management, project and construction management, and asset and property management (Who We Are, n.d.). The company was founded in Sydney, Australia in 1958 by a Dutch immigrant named Dick Dusseldorp, whose vision was to create a company that would successfully combine the four main aspects of corporate growth: property, financing, development and investment (Who We Are, n.d.). With the goal of becoming the leading international property and infrastructure group, Lend Lease Group has grown exponentially since its inception and is committed to pioneering sustainable solutions, forging partnerships with like-minded innovative conglomerates, and delivering strong investment returns (Who We Are, n.d.). The company’s main areas of operation are Australia, Asia, America, and Europe, including holdings in the Middle East, and Lend Lease Group has built a reputation for creating iconic precincts, spaces and buildings (Who We Are, n.d.). Sustainability is a fundamental aspect of the company’s cultural views, design and investment in new technologies is the cornerstone of their growth potential, and the company is committed to supplying the future of sustainable property and infrastructural solutions (Who We Are, n.d.). Observe the affect of the GFC from 2007 to 2011 As one of the few providers of fully integrated property and infrastructure solutions in the world, Lend Lease Group specializes in multiple sectors, including commercial, residential, retirement, retail, healthcare, education, mixed-use, government, industrial, and pharmaceutical (Who We Are, n.d.). Although the theoretical analyses predict that uncertainties produced through GFC tends to create hesitation that increases the “separation between the marginal product of capital which justifies investment and the marginal product of capital which justifies disinvestment”, Lend Lease Group currently has an excess of A$10.7 billion in funds under management (Bloom, Bound, & Van Reenen, 2007, p.391; Lend Lease, n.d.). Although the company has seen a decline in overall revenues from A$7,544 million in half-year December 2007 to A$4,319 million in half-year December 2010, the operating profit after tax has been marginally steady, with the company reporting A$250 million in half-year December 2007 and A$ 220 million in half-year December 2010, an increase from A$188 million and A$176 million for half-years December 2009 and 2008, respectively (Lend Lease Group, n.d.). Lend Lease Group also has a market capitalization of A$4.9 billion as of 31st December 2010 (Who We Are, n.d.). Despite the tenuous nature of the global financial market, Lend Lease Group has acquired numerous high-stakes projects, producing a network of assets worth billions of dollars. Between 2007 and 2009, Bovis Lend Lease is selected by the World Trade Centre Memorial Foundation as Construction Manager of the A$360 million Memorial and Museum to be built at Ground Zero in New York City and the £1.5 billion ‘urban regeneration’ in London which includes Athletes Village at Stratford City (Who We Are, n.d.). Since 2010, Lend Lease Group has won a major £1.5 billion contract to revitalize Elephant & Castle precinct in London (Who We Are, n.d.). They were also chosen to commence A$2.5 billion key metropolitan regeneration of Brisbane’s historic RNA showground site (Who We Are, n.d.). Additional projects include the £1.3 billion stage two regeneration of one of UK’s largest mixed-use developments at Stratford City, the first stage of the A$400 million Alkimos community development in Western Australia, and the acquisition of Valemus Australia, the parent company of Abigroup, Baulderstone and Conneq for A$960 million (Who We Are, n.d.). Notwithstanding the financial turmoil of the global market, Lend Lease Group has continued to grow and expand as worldwide innovators of property and infrastructure solutions, acquiring The Crosby Group plc and being selected as the recipient of the NSW Prime Minister’s Community Business Partnership Award for Excellence (Who We Are, n.d.). Business strategy prior to the GFC and post GFC Prior GFC Strategy Prior to the onset of the GFC, the focus of Treasury officials was on mitigation of risk through prevention and for this purpose broad outlines of appropriate responses were constructed to provide a flexible template in the event that a crisis did develop that would allow for alterations according to the circumstances (Swagel, 2009). Although numerous circumstances were considered, like unexpected external crises such as terrorist attacks, “natural disasters, or massive power blackouts; market driven events such as the failure of a major financial institution, a large sovereign default, or huge losses at hedge funds; as well as slower-moving macroeconomic developments such as an energy price shock, a prolonged economic downturn that sparked wholesale corporate bankruptcies, or a large and disorderly movement in the exchange value of the dollar” (Swagel, 2009, p.6). However, these issues were not predicted to be imminent when the models were created in 2006 (Swagel, 2009). As property management experts covering various sectors of the industry, such as , commercial, residential, retail, retirement and social infrastructure, Lend Lease Group employed a stratagem that would allow the company to offer solutions across multiple sections of the industry where they would be able to produce the best property and infrastructure outcomes (Who We Are, n.d.). The company also formed partnerships to make use of capital from multiple sources to maximize investors and capital returns (Who We Are, n.d.). Post GFC Strategy The main development following the events that led to the current GFC created a new focus on holistic ways to approach sustainability (Sustainability, n.d.). Understanding and integrating methods that will allow the company to use sustainable materials and methods have been employed in every aspect of Lend Lease Group’s business strategy, planning and operation (Sustainability, n.d.). The development of Information and Communication Technology (ICT) has enabled the creation of smarter systems that combine the various technologies into a comprehensive, multifunctional networking infrastructure that will “connect information sources and provide the capability to focus on data analysis and performance reporting” (Sustainability, n.d.). A broader technological base helps to streamline information analysis and sharing by providing automated and faster compilation of information with increased transparency across the organization and allows for the analysis of multiple streams of data simultaneously rather than just analyzing one segment of data, like profits, to provide a comprehensive picture of the company’s performance (Sustainability, n.d.). All of these factors have been implemented to contribute to greater business efficiency and the ability to make informed decisions to keep Lend Lease Group a leader of change in all markets in which they operate. Changes to gearing Lend Lease Group changed their corporate structure in 2007 when Chief Financial Officer, Roger Burrows stepped down from his role and left the Group after handing over his responsibilities to fellow senior executive, Steve McCann after enjoying a 20-year career with Lend Lease Group (Archive News, n.d.). Mr McCann accepted the role of Group Finance Director and continue as Chief Executive of Investment Management, a role he assumed in 2005 (Archive News, n.d.). Note capital raisings Lend Lease Group has remained at the foprefront of their industry despite the GFC, securing approval from the US Department of the Army for a construction project totaling an estimated A$157 million for modifications to the development scope at its Island Palm Communities project in Hawaii (Current News, n.d.). The company has also secured contracts to upgrade Section B of the Bruce Highway between Cooroy and Curra in Queensland worth A$106 (Current News, n.d.). Abigroup, which is part of Lend Lease Group’s acquired as part of the Valemus transaction in March, will deliver on the contract, which includes a new interchange, bridgeworks and local road connections for the proposed four lane divided highway due for completion in 2012 (Current News, n.d.). Abigroupacquired an additional contract after reaching an agreement with Queensland Health as Managing Contractor concerning Stage 2 of the A$1.4 billion Queensland Children’s Hospital (QCH) in Brisbane, which is estimated to net Abigroup about A$900 million (Current News, n.d.). Acquisition of the A$122.5 million contract for the refurbishment and expansion of the University of New South Wales (UNSW) Wallace Wurth building as part of the Wallace Wurth Redevelopment, which involves a 10,000sqm expansion and significant refurbishment of the existing Wallace Wurth building at UNSW’s Kensington campus, will enable the university to provide increased research and teaching spaces for biomedical scientists and research related medical graduates (Current News, n.d.). The redevelopment will be delivered by Lend Lease Group’s project management & construction subsidiaries and is slotted for completion in March 2014, with the completed facility housing over 25,000sqm of space for research, teaching, administrative and specialised facilities as well as over 1,400 research staff and 700 students of the Faculty of Medicine’s School of Medical Sciences and the Kirby Institute (Current News, n.d.). Note asset sales Lend Lease Group announced their arrangement to sell their interest in the King of Prussia shopping mall to the Morgan Stanley Prime Property Fund at an estimated US$1.25 billion (Current News, n.d.). The company has a 50% interest in the mall and received net proceeds in the area of US$545 million, after taking into account the asset level debt, which yielded a net profit of about US$100 million on the sale (Current News, n.d.). Earlier this year, the company requested to be delisted from the New Zealand Securities Exchange (NZSX in order to reduce compliance costs (Current News, n.d.). Lend Lease Group also exchanged contracts for the sale of their 25% share of PoMo mixed-use asset located near Orchard Road in Singapore which they purchased in 2007 (Current News, n.d.). This sale yielded a gross consideration of S$255 million and was completed in April, which produced a profit of about A$24 million net of debt repayments (Current News, n.d.). Note refinancing Lend Lease Group has recently announced the acquisition of an A$975 million syndicated loan facility through financing with an initial targeted amount of A$750 million, increased to A$975 million with strong support from lenders (Current News, n.d.). The proceeds will be used to refinance the Group’s fully drawn A$570 million club facility that was maturing in December 2011 (Current News, n.d.). Lend Lease Group Chief Financial Officer, Brad Soller, insists that the refinancing demonstrates the company’s strong credit profile and gives the company the additional capacity and flexibility to fund the Group’s pipeline (Current News, n.d.). Discuss business strategy and possible set up for future problems In 2009, the shares of Lend Lease Corporation Limited (“LLC”) and the units in Lend Lease Trust (“LLT”) were combined as stapled securities have hence been traded as one security under the name of Lend Lease Group on the Australian Securities Exchange and the New Zealand Stock Exchange (Distribution History, n.d.). According to the company press release: “LLT was 100% owned by the Company prior to approval of the stapling proposal. Units in LLT were distributed on 20 November 2009 to LLC shareholders as a fully franked ‘in specie’ dividend with a value of 0.1 cent each. That value becomes the initial CGT cost base in each LLT unit distributed ‘in specie’ to effect the stapling” (Distribution History, n.d.). This strategy enabled the company to raise additional assets while consolidating current assets in an equity financing scheme. However, this also split ownership of the entire among the investors and gives them interest in the company as well as profit sharing in the form of dividends. The origins of the issues Declining real residential investment that began in the fourth quarter of 2005 and continued through the third quarter of 2008 detracted a cumulative total of 2.5 percentage points from the real GDP growth within the real estate markets (Hatzius, 2008). The decline income in the housing sector caused downward trends to form within other sectors of the economy, causing a spiral effect (Hatzius, 2008). Employees within the construction and real estate industries that had been laid off began to spend less within consumer markets, homebuilders and subcontractors decreased their investments in homebuilding and construction equipment, and this created less of a demand for commercial development and non-residential construction (Hatzius, 2008). These subsequent effects have had just as strong of an effect on the economy as the decreases in spending since they were essentially the catalysts that caused the downward turns in consumer markets. The negative market trends led to decreases in the property values and mortgage liquidity, creating a negative wealth effect that spread throughout the economy resulting in a continual increase in unemployment rates that perpetuated the continuation of the economic decline. Homeowners that developed a pattern of living beyond their means by borrowing against the rising value of their home have been forced to retract this dangerous pattern and cut back on their spending due to the decreasing values of their homes (Hatzius, 2008). Even those who did not outspend their income have been forced to reduce their consumption in response to the deterioration of their appraised wealth and their permanent income through loss of employment (Hatzius, 2008). Hatzius observes, “Most studies analyzing this issue find evidence for a housing wealth effect, but its size varies widely depending on the time period and the empirical design” (2008, p.196). The losses on mortgage credit severely depleted the “equity capital of leveraged financial institutions”, which resulted in a reduction of the financial leverage offered and effectively depleted the amount of credit available to individuals and businesses alike (Hatzius, 2008, p.196). The general inability to move ahead of the curve The extended and continued success of the company adequately demonstrates their ability to stay ahead of the curve and make sound business decisions that have protected them from failing during this GFC. The acquisition of contracts like the Bruce Highway upgrade builds on Abigroup’s leadership position in the roads sector, which is a core competency for the business and improves the overall company image of Lend Lease Group as a whole (Current News, n.d.). The acquisition of the contract to complete the second phase of the college also adds to the Group’s “pipeline in its targeted growth market of tertiary education” (Current News, n.d.). With a strong profit growth of margin of 17.2% and an operating profit after tax of A$220.2 million for the half year, 17.2% above prior period, Lend Lease Group delivers a strong financial report to their investors (Current News, n.d.). The company additionally reported a “sstatutory profit after tax of A$226.5 million for the half year, 10.5% above prior period, an interim distribution of 20 cents per security, franked to 50%, continued pipeline momentum across the Group, and a strong balance sheet with capacity to fund pipeline of opportunities” (Current News, n.d.). Possible affects of government intervention Australia’s banking system consists of the ‘four pillars’ or four large banks that provide the majority of Australia’s local banking credit. These four banks have increased their exposure to residential mortgages, over the last few decades despite the increasingly declining housing market. It is the practice of these four banks to lend money to one another and they are generally considered too big to fail, however, with this system, the failure of one bank could easily trigger the collapse of all four banks. Recent events suggest that if such an event were to occur, the Australian Government would bail out the banks and prevent them from collapsing. This would require the Government to borrow the funds from outside sources, sell bonds, or print additional money for this purpose. The repercussions of such action could be that borrowing or bond sales would increase the Government’s financial liability. An increased risk such as this would have the following effects: An increase in the cost of borrowing for the Government and local companies including banks A decrease in the amount of credit easily available to individuals as well as businesses An increase in the Governmental deficit and the amount of the annual interest payable An increase in local interest rates, which would make it more expensive for the public to pay off debt or assume new debt and possibly reduce the ability of the public to buy property. Should the Government decide to resort to printing new money, the result would be that the value of the Australian dollar would depreciate, causing credit problems similar to the ones mentioned above. Long term affects on company performance “Every day, over one million people around the world work, live, or shop in assets we have created” is a statement the company takes enormous pride in (Capabilities, n.d.). Lend Lease is one of the world’s leading providers of fully integrated property and infrastructure solutions with operational facilities all over the world (Capabilities, n.d.). With over 50 years of experiential knowledge, Lend Lease Group’s understanding of property management and market cycles enables the achievement of the best property and infrastructure outcomes for all stakeholders (Capabilities, n.d.). From the origination of opportunities to the supplication of exceptional property and infrastructure outcomes, Lend Lease Group has capabilities that encompass the entire property management chain and allows the implementation of the best possible solutions for clients and investors (Capabilities, n.d.). Long term strategic implications With numerous projects, both long and short term, currently in production, the long-term strategic implications of Lend Lease Group are quite positive. Projects like Armadale, Cairns Central, Caneland Central, CS Square, Erina Fair, Greensborough Plaza, Lakeside Joondalup, Macarthur Square, Menai Marketplace, Mid City, and many others within the Australian retail sector alone prove that the company is still conducting brisk business despite the GFC we are currently experiencing (View by Location: Australia, n.d.). There are also multiple projects underway for the communities, commercial, and infrastructure segments of the company’s project profile that includes project in the other national markets serviced by Lend Lease Group, some of which are contracted through the various subsidiary companies owned and operated by Lend Lease Group. The company’s current strategy includes implementation of the sustainability aspect of the company’s production platform. Conclusion Despite this GFC that has caused so many businesses to fail, Lend Lease Group has managed to remain profitable, acquiring multiple billion-dollar accounts between 2007 and 2011 (Who We Are, n.d.). The onset of the GFC that began in 2007 has had resounding repercussions within the financial industry on a global level. This crisis has deeply impacted the real estate market with dramatic drops in property prices and the loss of real value to assets resulting in billions of dollars in lost revenue in markets worldwide (Hatzius, 2008). By taking advantage of the timing and cycles of the financial industry, Lend Lease Group was able to benefit from the downturn within the real estate markets to maximize their assets and remain a viable contender within their industry. Through implementation of a lucrative equity financing scheme and timely selling of assets, Lend Lease Group has managed to maintain a positive cash flow that has kept them competitive within their industry and allowed them to assume a position of leadership within these difficult financial times. References Archive News. (n.d.). Lend Lease. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/all/28AF12DF189AFAE1CA257273007B20F3?OpenDocument Bloom, N., Bond, S., & van Reenen, J. (2007, April). Uncertainty and investment dynamics. The Review of Economic Studies, 74(2), 391-415. Retrieved from http://www.jstor.org/stable/4626145.pdf Capabilities. (n.d.). Lend Lease. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/all/ob_pvc Current News. (n.d.). Lend Lease. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/webnewscurrent?openview&start=1&count=999999 Distribution History. (n.d.). Lend Lease. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/all/fi_sharedividend Hatzius, J. (2008). Beyond leveraged losses: The balance sheet effects of the home price downturn. Brookings Papers on Economic Activity, 195-227. Retrieved from http://www.jstor.org/stable/27720399.pdf Lend Lease Group. (n.d.). Half Year Consolidated Financial Report December 2010. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/images/pdf_fiveyear_profile_hy2011.pdf/A$file/pdf_fiveyear_profile_hy2011.pdf Reis, R. (2009). Interpreting the unconventional U.S. monetary policy of 2007–09. Brookings Papers on Economic Activity, 119-165. http://www.jstor.org/stable/25652731.pdf Swagel, P. (2009). The financial crisis: An inside view. Brookings Papers on Economic Activity, 1-63. Retrieved from http://www.jstor.org/stable/25652713.pdf View by Location: Australia. (n.d.). Lend Lease. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/all/pro_location_australia Who We Are: Overview, quick facts, core values, code of conduct, diversity & inclusion, history highlights. (n.d.). Lend Lease. Retrieved from http://www.lendlease.com.au/llweb/llc/main.nsf/all/all_whooverview Read More