Financial holding company Leucadia National Corp (NYSE:LUK) has reported its Q1 results today, which revealed some very interesting insights into its $300 million loan made to retail forex broker FXCM Inc (NYSE:FXCM). The loan, of course, also give Leucadia a good portion of the future upside in FXCM.
First, it seems to us that one of the big winners from the Leucadia-FXCM hookup was investment bank Jefferies Group LLC, itself another Leucadia company.
Jefferies earned a $21 million advisory fee from the deal. Not bad for one weekend of work.
Also, readers of LeapRate will recall that Jefferies bought FXCM institutional FX division Faros Trading. We speculated at the time (since the sale price was not disclosed) that Jefferies got a ‘sweetheart’ deal, and we believe that Leucadia’s Q1 report confirms that. Turns out that no money was paid upfront to FXCM, as the payments to FXCM will be contingent on future net profits at Faros, if any.
Second, Leucadia itself has declared itself a huge winner in the deal. In its Q1 results Leucadia decided (with its accountants, of course) to award itself a $687 million gain from its loan to FXCM. Basically, Leucadia assumed it will be paid back the full $300 million from FXCM, plus a very high rate of interest along the way. In addition, Leucadia valued its future equity position in FXCM – or at least its share of a future sale of FXCM – at $687 million.
A fair assumption?
Well, FXCM’s market value before the infamous events of January 15 was about $1.2 billion. With Leucadia promised more than half the value of FXCM in an eventual sale of the company or its assets, it certainly is in the realm of possibility.
But if things don’t go well at FXCM, Leucadia might find itself taking a large future writedown on its quickly-recognized gain.
To see Leucadia’s Q1 earnings release click here.