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Screenshot of a breaking news alert e-mail from Q2 2017
The forex arms race is officially on, as leading forex brokers gear up for increased capital requirements and industry consolidation.
The ink was barely dry on FXCM’s agreement with its banks to increase its credit facility by nearly $100 million to $250 million, and now comes word that rival retail forex broker Gain Capital is creating some dry powder of its own. Gain Capital (NYSE:GCAP), parent of Forex.com and Gain GTX, has announced that it is planning to raise $65 million (and possibly up to $75 million) via an offering of convertible notes.
Why all the capital raising? Well, a few reasons, but mainly:
- Increasing capital requirements – Forex brokers are facing increasing capital requirements in several jurisdictions around the world, forcing brokers to basically park money in a number of geographic spots. Staged implementation of Basel III requirements will soon supersede the capital requirements of individual country financial regulators, especially in Europe, forcing forex brokers to post increasing amounts of capital. Those with access to more (and cheaper) capital will have a distinct competitive advantage, another reason pushing brokers such as Plus500 and KVB Kunlun to go public.
- Cheap cost of capital – Share prices of retail forex brokers such as FXCM, Gain Capital, and Plus500 has risen nicely lately, making equity-related issuance an attractive alternative. Combining that with historically low interest rates makes now a great time to raise that ‘dry powder’ and be prepared for whatever opportunities or challenges arise.
- And last but not least…..Industry consolidation – we think that deals like Swissquote – MIG Bank, Gain Capital – GFT and FXCM – Alpari (US) are just the beginning. There is a lot more M&A activity to come in the coming months in the forex sector — and those with more cash and financial flexibility have a distinct advantage. On that note, we believe that the public companies have a major advantage, in having another avenue to raise money without leveraging themselves too much, as well as by being able to offer stock as acquisition currency, as Swissquote did in its acquisition of MIG Bank. This places brokers such as FXCM, Gain Capital, Swissquote and IG at a major advantage over competitors such as Alpari, Saxo Bank and CMC Markets. They simply have more, faster and easier ways to raise money.
The notes will be sold only to ‘qualified’ institutional buyers in a what is technically a private placement (under SEC Rule 144A). Retail investors will not be allowed to buy the bonds. While final terms of the notes will be negotiated between Gain Capital and the buyers, the interest rate Gain Capital will need to pay will likely be lower than a ‘straight’ bond offering, as buyers of the notes will have the opportunity to share in the upside of Gain Capital shares via the conversion-to-stock feature.
One last thought. The investment banks handling the offering are Jefferies and Keefe Bruyette. Neither Jefferies nor Keefe were involved in Gain Capital’s IPO, which was led by Morgan Stanley with help from Deutsche Bank, JMP Securities, Raymond James, and Sandler O’Neill. Gain Capital does have a board member, Joseph Schenk, who is a former CFO of Jefferies. Anyway, we’re sure there’s an interesting story behind the changeover in underwriters from the IPO.
For the complete Gain Capital press release on its planned convertible bond issue click here.