Investment holding company Leucadia National Corp (NYSE:LUK) has confirmed in its annual 10-K filing that it is holding negotiations with retail forex broker FXCM Inc (NYSE:FXCM) to restructure some of the terms of its $300 million loan made to FXCM last January.
The loan, negotiated in very short order over the weekend of January 17-18, 2015 following the January 15 spike in value of the Swiss Franc, enabled FXCM to remain open and avoid being in non-compliance with regulatory net capital requirements. The loan came with a fairly punitive initial interest rate of 10%, increasing by 1.5% each quarter up to a maximum of 20.5%. As we reported earlier, FXCM still owes Leucadia $192.7 million on the loan, as at year-end 2015.
It looks as though the negotiations between Leucadia and FXCM do not have to do with the principal/interest repayment terms, but rather the other major right Leucadia acquired – the right to a variable proportion of the sale proceeds of FXCM or FXCM assets/businesses, and the ability to require a sale of FXCM beginning in January 2018.
The ‘variable proportion’ Leucadia is slotted to receive is as follows: 100% until amounts due under the loan are repaid; 50% of the next $350 million; 90% of the next $500 million; and 60% of all amounts thereafter.
In other words – once the loan to Leucadia is repaid in full, Leucadia will then get half of any proceeds from the sale of FXCM up to $350 million, and 90% of amounts beyond that. (It is unlikely in our view that FXCM would be sold at more than $850 million). Meaning, that most of the upside in FXCM belongs to Leucadia, not to FXCM shareholders.
The ‘little upside’ fact has, in our view, been the main thing holding back FXCM shares.
FXCM made an announcement in December that it was negotiating these terms with Leucadia, which we speculated would likely be in the form of Leucadia trading in its ‘sale upside rights’, in return for a straight up equity stake in FXCM. There was no official mention however made by Leucadia of any negotiations with FXCM. Until last Friday in its 10-K. Officially, Leucadia had the following to say:
Leucadia and FXCM have 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, but there can be no assurances that an agreement will be reached.
Leucadia’s complete 10-K report for 2015 can be seen on the SEC’s website here.