By Ron Finberg
Taking the unusual step of reporting after the close on a Friday last week was Leucadia National Corporation (N:LUK). Within the forex world, Leucadia is best known for having provided $300 million in financing to FXCM (N:FXCM) following the January 15th 2015 Swiss franc crisis that nearly sent the global broker out of business. In the aftermath, FXCM has been selling non-core assets to cover the debt and is emerging as a retail focused forex broker.
As part of its Q4 results, Leucadia provided an update on its relationship with FXCM. According to Leucadia, as of December 31st 2015, FXCM had $192.7 million debt outstanding with it after having paid $144.7 million of principal, interest and fees during 2015. The $192.7 million figure is a decrease from the $203 million amount reported by FXCM for the end of September.
In addition, the deal with Leucadia included variable payments that would be owed to Leucadia beyond the debt’s principal and interest portion of their agreement. These payments include 50% of the next $350 million, then 90% of the next $500 million and 60% of any amount thereafter. By including these payments, Leucadia in essence has set itself up for a large payday in the event that FXCM is sold, with it slated to collect well over 50% in any acquisition price. Also included was the right by Leucadia to require FXCM to sell itself; thus allowing Leucadia to profit on the variable portion of their financing agreement.
Towards the end of December 2015, shares of FXCM rocketed higher from below $6 to just under $20. While short covering had been cited as providing a boost to FXCM’s shares, helping ignite the firm were also rumors of an agreement with Leucadia of a debt restructure to allow for more long term value creation for FXCM shareholders. There can be no assurances that an agreement will be reached On this subject, Leucadia stated that it had in fact “discussed restructuring the variable portion of distributions in a manner that is consistent with a sustainable long-term and value-enhancing strategy for both companies”. However, it added that “there can be no assurances that an agreement will be reached”.
For Leucadia, the improvement in FXCM’s stock price allowed it to increase the stated fair value of its investment in FXCM to $625.7 million. This is an improvement from $613 million that was recorded by Leucadia in at September 30th 2015. Overall, according to Leucadia, the firm stated that it recognized $491.3 million of unrealized and realized gain on the FXCM investment for 2015.
Looking ahead for FXCM, the broker is slated to announce its Q4 and full year 2015 results on Thursday, March 10th. In prior statements, FXCM has stated its belief that it will repay the debt portion in full back to Leucadia this year. Assets set for sale to cover the debt are its minority stake in FastMatch and majority ownership in Lucid Markets. Beyond an update on asset sales, shareholders will be looking for any information about restructuring of the variable portion of payments with Leucadia. Also of note is that FXCM has increased retail revenue capture which has been poor since Q4 2014.