FXCM faces January 2019 deadline as debt to Jefferies remains at $70M+ in Q3

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Quarterly filings for the end of Q3-2018 from investment company Jefferies Financial Group Inc (NYSE:JEF) – formerly known as Leucadia – indicate that the outstanding amount owed to Jefferies by Retail FX broker FXCM Group as at September 30, 2018 stood basically unchanged from at the end of Q2, at $70.6 million.

Which, basically means that during Q3 FXCM made $3.4 million of interest payments on the loan to Jefferies – the loan carries a fairly punitive 20.5% interest rate – less than the actual charged interest of $3.6 million. FXCM didn’t manage to repay any of the principal, such that the loan balance crept up to $70.6 million from $70.4 million as at the end of Q2.

The loan, which was already extended once, comes due in January 2019 and FXCM seems unlikely to come up with a loose $70 million+ over the next two months to fully repay the loan.

So, what does that all mean?

Well, if the loan was a purely third-party one, it would mean trouble for FXCM, or at least for its shareholders were the company declared insolvent if unable to repay its debt on time come January. However Jefferies is not exactly a third-party when it comes to FXCM. Jefferies already holds a 50% voting interest in FXCM, and via the renegotiated loan terms owns up to 75% of all future distributions from FXCM. FXCM’s recently updated logo (see above), which includes ‘A Leucadia Company’ in it (which we assume will be updated at some point to reflect the Jefferies rebrand), also indicates the influence (and effective control) that Jefferies has at FXCM. Oh, and FXCM’s Chairman is Jimmy Hallac, a Managing Director at Jefferies.

Operationally, FXCM has been chugging along posting fairly healthy and stable trading volumes each month. And whatever happens at the ownership level of FXCM, it really shouldn’t affect the operations of the company.

However we believe that something is likely to happen with the ownership structure between now and January 2019. Perhaps a sale of the company. Perhaps an agreement of some sort between Jefferies and Global Brokerage Inc, FXCM Group’s other large shareholder, whereby Jefferies takes full control of FXCM in return for cancelling the loan. Or, perhaps a different structure.

Jefferies is already seriously “in the black” on its FXCM investment, with Jefferies having already received cumulatively $347 million of principal, interest and fees from its initial $279 million loan to FXCM – a cash profit of $68 million.

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