Retail forex broker FXCM Inc (NYSE:FXCM) and investment company Leucadia National Corp (NYSE:LUK) have announced a renegotiation of their loan and ‘letter’ agreements, which will see Leucadia take a direct 49.9% interest in FXCM’s operating companies. FXCM will retain the other 50.1%.
The other major changes to the original deal (which was renegotiated once already, to cut in a bigger stake for FXCM management) include giving FXCM one extra year to repay the $300 million loan to Leucadia (of which about $193 million remains outstanding), and giving FXCM management even more incentive to eventually sell FXCM at a high price.
Rich Handler (CEO) and Brian Friedman (President) from Leucadia stated:
We are pleased to affirm our long-term commitment and investment in FXCM and are excited about our prospects for success. We look forward to our role as board members of FXCM Group, LLC, and we believe that, together, Leucadia and FXCM can further strengthen and expand the FXCM platform.
FXCM CEO Drew Niv added:
We are delighted that Leucadia has shown its commitment to FXCM by becoming a long-term partner. This partnership can bring many benefits to FXCM shareholders, clients, and employees. Leucadia’s financial strength and its skill and expertise – including the deep expertise available at Jefferies – make it the ideal partner to help FXCM to continue to grow our business.
And now for the details…
The principal changes to the loan agreement include:
- The maturity date of the Credit Agreement has been extended by one year to January 16, 2018 to allow FXCM more time to optimize remaining asset sales. While FXCM is actively marketing the non-core assets it has identified to be sold, Leucadia and FXCM concluded that greater value could be realized for all stakeholders through additional time to complete the asset sales.
- FXCM will have the right to defer any three of the remaining interest payments by paying interest in kind, which will permit FXCM to maintaining flexibility to invest and grow its core business.
- Until the loan under the Credit Agreement is fully repaid, all distributions and sales proceeds will continue to be used solely to repay the principal and interest.
The main changes to the ‘Letter Agreement’ which previously gave Leucadia a percentage of any future sale proceeds of FXCM (but no direct equity ownership) include:
- The Letter Agreement was terminated effective September 1, 2016.
- FXCM’s operating companies residing in what used to be called FXCM Newco are re now held by FXCM Group LLC (just a renaming of FXCM Newco). Leucadia will own a 49.9% membership interest in FXCM Group, and FXCM Holdings LLC (a subsidiary of the publicly traded FXCM Inc) will own a 50.1% membership interest in FXCM Group.
- FXCM Group will be governed by an eight-member board of directors, comprising three directors appointed by Leucadia who will be Rich Handler, Brian Friedman and Jimmy Hallac, three directors appointed by FXCM who will be Drew Niv, William Ahdout and David Sakhai, and two independent directors, one each to be nominated by Leucadia and FXCM within the next 90 days.
- No FXCM Group distributions are permitted under the LLC Agreement until the principal and interest due under the Credit Agreement are repaid.
- Reflecting the new partnership, FXCM will share Leucadia’s right to request a sale process after January 16, 2018, subject to both Leucadia and FXCM reasonably accepting the highest reasonable sales price.
- FXCM Group (the operating companies) and FXCM Holdings LLC entered into a Management Agreement pursuant to which FXCM Holdings LLC will manage the assets and day-to-day operations of FXCM Group and its subsidiaries.
The new agreement also takes care of FXCM management, incentivizing them to both remain with FXCM and help sell the company for as high a price as possible.
Simultaneously with the execution of the new agreement, FXCM Group adopted the 2016 Incentive Bonus Plan for Founders and Executives, a long-term incentive program with a five-year vesting period, in order to retain and incentivize FXCM senior management to maximize cash flow generation and the growth of the business. Distributions under the incentive program will be made only after Leucadia’s principal and interest under the Credit Agreement are repaid and will equal the following:
- 10% of all distributions from FXCM Group up to $350 million;
- 12% of all distributions from FXCM Group from $350 million to $850 million; and
- 14% of all distributions from FXCM Group above $850 million.
Leucadia’s interest won’t be limited just to its 49% interest in FXCM Group. Leucadia will be entitled to receive additional distributions of proceeds that, when added to its 49.9% membership interest, result in the following distribution percentages:
|Old Waterfall||New Waterfall|
|Amounts due under Credit Agreement||100% Leucadia||100% Leucadia|
|Next $350 million||50% Leucadia / 50% FXCM||45% Leucadia / 45% FXCM / 10.0% FXCM Management|
|Next $500 million||90% Leucadia / 10% FXCM||79.2% Leucadia / 8.8% FXCM / 12.0% FXCM Management|
|All aggregate amounts thereafter||60% Leucadia / 40% FXCM||51.6% Leucadia / 34.4% FXCM / 14.0% FXCM Management|
It will be interesting to see how markets react when FXCM shares begin trading later today. Not too much changes from before, other than structurally. Stay tuned to LeapRate…