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Screenshot of a breaking news alert e-mail from Q2 2017
Investment firm Leucadia National Corp (NYSE:LUK) has issued its Q1 results report, which included some interesting updates on its $300 million loan to retail forex broker FXCM. Leucadia lent the money to FXCM back in January 2015, enabling FXCM to overcome a $276 million loss it took in the form of unrecoverable negative client balances following the January 15, 2015 spike in the value of the Swiss Franc.
The most interesting note was Leucadia’s statement that it had already (nearly) recovered the full amount of cash it invested in FXCM, following recent principal repayments made on the loan after FXCM continued its sale of assets – most recently selling its popular DailyFX research site to IG Group Holdings plc (LON:IGG) for $40 million.
The loan, which bears interest at a lucrative rate of 20.5% per annum, still has a balance of $123 million as at quarter end – meaning that Leucadia is still being paid interest of about $6.3 million every quarter from FXCM, representing most of FXCM’s cash flow.
And, Leucadia owns 49.9% of the FXCM operating company, with the other 50.1% owned by Global Brokerage Inc (NASDAQ:GLBR), formerly FXCM Inc. In its Q1 financials Leucadia valued that equity position at $187 million, down from more than $310 million as at the end of 2016. The writedown reflected a drop in the “value” of FXCM thanks in large part to the scandal which unfolded during Q1, with FXCM and its longtime CEO Drew Niv banned from the US forex market for defrauding their clients regarding the nature of the company’s market making activities.
Nevertheless, Leucadia’s Q1 report highlights the brilliance of its loan/investment in FXCM. It was structured to effectively drain all of FXCM’s free cash flow directly to Leucadia for an extended period, while FXCM slowly sold off assets to repay the principal. And, once the loan plus above-market interest is eventually paid off, Leucadia still gets a ‘bonus’ in the form of owning half of the company, or whatever is left after all the asset sales.