FXCM-Leucadia deal details – rising interest, forced sale after 3 years


Retail forex broker FXCM Inc (NYSE:FXCM) has just released more details on the $300 million lifeline provided by investment company Leucadia National Corp (NYSE:LUK), which will allow FXCM to remain onside its regulatory obligations after $225 million in losses suffered due to negative client balances in the wake of last week’s Swiss Franc move.

The deal has a somewhat complicated structure, but the key points are:

  • FXCM will be paying Leucadia interest of 10% on the $300 million loan. But that interest rate will rise by 1.5% each quarter, to a maximum of 17%. (The maximum would be hit in early 2016, if it remains outstanding that long.
  • Leucadia has the right to force FXCM to sell all its operations in three years.
  • In the event of a sale of FXCM (technically a new subsidiary called ‘FXCM Newco’, but that’s just structuring), Leucadia will get at least half of the sale proceeds, after being paid back in full on its loan.
  • If the sale exceeds a certain amount (could vary between $500 million and $680 million), Leucadia gets even more.

Now a little bit more on the deal structure.

Publicly traded FXCM is really a holding company, owning the shares of its operating and regulated subsidiaries. All those subsidiaries will be transferred under a new holding company (under FXCM) called ‘FXCM Newco’. FXCM will be placing all its main assets – its shares in its subsidiaries – into Newco. It is Newco which Leucadia is ultimately controlling, having a major say in any major moves in what happens at FXCM’s operating companies. And it is those operating companies, held through FXCM Newco, which Leucadia can ultimately force FXCM to sell after three years.

One more thought – the deal is clearly set up to encourage FXCM to pay down the loan as soon as possible or to sell the company. FXCM can repay the loan either by collecting on some of the negative client balances mentioned above, or through generating goold ol’ profit.

A 10% interest rate on a $300 million loan means $30 million in annual interest costs for FXCM.

That’s a lot.

In the first nine months of 2014, FXCM earned $66.5 million of EBITDA and had net income of just $1.4 million. A $30 million interest hit would wipe out a good chunk of FXCM’s operating income and would leave it with a large net loss. And the rising interest rate makes that calculation even worse with each passing quarter.

Leucadia’s deal buys time for FXCM to fix things and get back on track. But clearly, its main upside is in a sale of FXCM, although that may indeed come a bit further down the road.

The full details of FXCM’s loan from Leucadia can be seen here.

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FXCM-Leucadia deal details - rising interest, forced sale after 3 years

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