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  • FXCM is doing great… and is in big trouble


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    Retail forex broker FXCM Inc (NYSE:FXCM) continues to report some of the highest FX trading volumes in the industry month by month, with May 2016 coming in at $280 billion.

    After narrowly avoiding bankruptcy early last year in the immediate aftermath of the January 15, 2015 surprise Swiss Franc spike by securing (over the course of a hectic 38 hour period) a $300 million rescue loan from Leucadia National Corp (NYSE:LUK), FXCM has amazingly been able to maintain its top-of-the-heap position in Retail Forex trading. It has done that despite FXCM having to jettison some divisions and businesses in order to start paying down that loan, such as FXCM Japan and FXCM Hong Kong.

    The company has been able to start regrowing its business, with FXCM Q1-2016 Revenues up 9% QoQ to $71.5 million.

    And FXCM is in big trouble.

    We’ll explain.

    As we described in the rosy picture painted above, it is hard to envision FXCM doing all that much better operationally than it is. In Q1 this year FXCM generated $71.5 million in Revenue and EBITDA earnings of $10.3 million – numbers which many other brokers would love to have.

    So what’s the problem?

    The aforementioned loan which FXCM took from Leucadia came with two key conditions: 1) Leucadia gets most of the ‘upside’ should FXCM be sold down the road, and 2) FXCM pays Leucadia a very high punitive rate of interest on the loan as long as it remains outstanding. The loan interest rate started off at 10% (per annum), and increases by 1.5% each quarter for as long as it is outstanding up to a maximum of 20.5% per annum.

    The Leucadia loan stood at $193 million owing as at the end of Q1. And at the current interest rate of 17.5% (it will reach the max 20.5% rate later this year), that means that FXCM is paying interest to Leucadia of about $8.4 million each quarter. If the loan principal stays at its current level those quarterly interest payments will hit $9.9 million later this year. Which is basically FXCM’s entire EBITDA.

    And FXCM has other debt to service, including $172 million of senior convertible notes paying interest of 2.25%.

    So what this all means is that FXCM is caught between a rock and a hard loan. The company still has a sterling reputation as one of the big and safe brokers in the FX sector, doing business with both retail and institutional clients. But as far as we can see, for the foreseeable future FXCM will be pouring its entire cash flow (and more) into servicing its debt.

    Drew Niv, FXCM

    FXCM CEO Drew Niv commented on the situation to LeapRate:

    FXCM together with discontinued operations, had $236 million in operating cash as of 3/31/16. We currently believe in the strategy we have laid out regarding asset sales to pay off our debt. Customers of FXCM are safe and should know that we are financially secure and remain a market leader with some of the best execution and technology in our industry.  We generate enough cash to make our interest payments and all client money is secure. As we have stated publicly before it will take years for shareholders to see any returns. Our priority is to repay our debt.

    Companies in FXCM’s situation often try to raise more equity capital to pay down some of the debt and re-balance the equity/debt equation. However condition # 1) in the Leucadia loan listed above makes that all but near impossible. Unless the money comes from Leucadia itself, or unless Leucadia agrees to convert some or all of its loan to FXCM into equity, who would buy new shares in a company where most of the upside (if things go well) goes to another party?

    It seems to us that the stock market has caught on to this whole FXCM conundrum thing. FXCM shares were down 9% two consecutive trading days at the end of last week, and began this week by trading down another 1%. While FXCM’s business still obviously has a lot of value, the value to shareholders is quite another issue.

    Related News

    • AN

      Still Bankrupt. FXPRO next from the fast lane

      • FXCM share is O !
        No matter how long it takes ; FXCM share value is Null .. Zero is more than enough for them ! just give em some time , let me come back to my post after 2 years.

        • it seems that it did not take FXCM the 2 years I bet on !
          9 months and here we are coming FXCM = 2$ !

        • @Omran G. Indraws
          Actually, 2 years from the original loan trigger (SNB decision, January, 2015) would have been more accurate.

          They could sell their stake in FastMatch and clear the loan….but still Leucadia would likely just discard the skeleton FXCM that remains.

          • lol
            I don’t know how Leucadia gave such loan to FXCM ! Are they idiots ?!
            the only solution for FXCM is to do what REFCO did in the past : hit and run / nail and bail !

            another point – FASTMATCH must kick FXCM out of its shareholders totally just to clean its books of bad reputation or bad rumors will start fire up against them >> its all about reputation.

            btw : add SNAP to your sell short list : never be a bagholder !

            • LeapRate Staff

              Hi @omrangindraws:disqus . I think that you, like a lot of people, don’t understand the Leucadia loan properly. It was a brilliant and very successful deal for them.

              First of all, they only ever gave FXCM $275M, more than $20M went off the top to their fully-owned investment bank Jefferies as a ‘fee’.

              Second, and most importantly, they very smartly set up the loan to milk FXCM for nearly every penny of free cash flow. For more than two years they have been milking tens of millions of dollars in high-coupon interest, taking up virtually all of FXCM’s cash flow. As the pieces get sold, the money first goes to pay back the principal on their loan, which is now down to the low $100M’s. I think they’ve already taken back more money than they put out. And, they still own most of the residual value in FXCM. Pretty smart deal.

    • Ken

      Brexit should finish them off…..will b-book the wrong way….again.

    • Marcin @ Protrader.com

      How about debt restructuring? Can’t they find anyone who would refinance this loan under better conditions? Come on!

      • Mit

        Presumably part of the deal with Leucadia not to engage with other parties for restructuring

      • LeapRate Staff

        Two reasons. 1) Doubtful they can get a loan that big for any reasonable rate or terms. Not when they already have $172M of other outstanding debt. And 2) Even if there is such a lender out there, it looks like Leucadia is calling the shots here. They’re very smart those guys, and look like they set things up to milk FXCM of all its cash flow for the foreseeable future, and want to keep things that way. Why wouldn’t they? I doubt that you can by a pencil now at FXCM without Leucadia’s approval.

    • Luke

      This article is way too negative. What the author forgot is that they got three remaining assets to sell which exceed their current outstanding debt by about 50 Million. A couple of days ago, there was News that a board member bought Shares, which does not surprise me. I aquire FXCM shares on a weekly basis. If they sell just one of their remaining assets the stock might skyrocket.

      • Stas

        What assets??? If they sell assets then they lose any revenues and cashflow they have now. Their ain’t no hidden diamonds in the vault here. The analysis is spot-on. Leucadia and their friends at Jefferies set this up to milk the company of every last dime. FXCM is being run for their benefit, no-one else’s. When there done there won’t be anything left for anyone else.

        • Luke

          Well if things are so bad, you should short the company and make a ton of money. I will bet against and buy. However, note that the FXCM share short interest decreased dramatically to 457,900 in june from 553,200 in may. In April short interest was 649,400 shares

          • Stas

            Short’s a bad bet here, the shares are already so low after the reverse split. remember that taking the revers split into account the shares are at like 80 cents compared to whateevr they used to trade at, like $10. Company is worth now $45mln. Not much money to be made on the short side. But you’re also wasting your time buying.

            • Luke

              I do not share your view at all. Let’s see what happens in the next couple of months when they sell one of their assets.

            • LetsTacoBout_It

              Looks like its continuing right on down. Hope you didn’t lose too much

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    FXCM is doing great... and is in big trouble

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