Biggest US forex broker reports earnings today, what to expect
FXCM had a fall from grace after the Swiss National Bank pulled the rug out from under the 1.20 level in EUR/CHF at this time last year. The broker hadn't hedged its exposure to a crowded trade and gave retail clients negative balance protection.
In moments, the company lost $300 million and it was left scrambling for a loan. The company had mere hours to arrange financing or it would have been in breach of regulatory capital requirements the next day.
The vultures circled and it was Jeffries parent Leucadia that offered a 'helping hand'. They lent the money with a 10% interest rate that rises 1.5 percentage points each quarter.
That alone isn't what's crushed FXCM shares. The company has managed to by back $144.7 million as of Dec 31, according to Leucadia. That still leaves $192.7m outstanding but FXCM said it plans to pay the balance this year, as soon as Q2.
The kicker is that Leucadia has a right to force a sale of FXCM in 2018. In a sale then or at any point earlier, Leucadia gets 100% of the proceeds the loan is repaid. In any sale worth more than the loan, they get 50% of the next $350 million; 90% of the $500 million after that; and 60% of all amounts thereafter.
So even if FXCM completely pays off the loan, shareholders only get half the proceeds of a $350 sale and 10% of the additional money beyond $350 million.
So what's FXCM worth?
At today's $14.46 share price, the company is worth about $77 million. Along with Leucadia there is $172.5 million in convertible debt outstanding (and due in June 2018).
In the last reported quarter, the company earned nearly $60 million. Needless to say, if not for the loan, shares would be trading much higher.
In its results, Leucadia values its stake in FXCM at $625.7 million. They're not clear on how they come up with that number.
Here is what they say:
We determine fair value with the assistance of a nationally recognized third-party valuation firm, and it is based on valuation models that are impacted by various inputs and assumptions, including, most significantly, FXCM's publicly traded stock price and its volatility.
If you assume the full cost of paying back the loan is $400m or even (generously) $450m, that still leaves around $200 million unaccounted for.
So are they assuming a company sale would be worth around $400m? That would be another $200m for Leucadia and $200m for FXCM shareholders? If that's the case, then shares are worth around $38/share.
Is a sale for $400m possible? Consider that Plus500 shares indicate a market cap of $890 million.
What might we learn today?
What turned the shares of FXCM around in December was a press release hinting that the deal with Leucadia could be renegotiated with "a sustainable long-term and value-enhancing strategy."
More recently, Leucadia said they have "had discussions with FXCM about restructuring our profit interest in a manner that is consistent with a sustainable long-term and value-enhancing strategy for both companies."
The question is: What do you do if you're Leucadia? They hold all the chips here. They can continue to bleed FXCM and take the profits and then force a sale, or they can milk the company for the long term? Is it worth it to strip it down and earn $626m on a $300m investment or is it better to earn, say, $30 million per quarter in a long-term deal?
And if they do take that kind of a deal, that would still leave around $30 million quarter for shareholders. Maybe that's why top executives at FXCM were buying shares in mid-December?
The company will also report on trading metrics and profitability, which offers some good insight into the broader retail forex market.
If you're looking for a forex broker, check our listing. We have Dukascopy Europe at the top of the list. If you're looking for someone solid and reputable, they're a broker I recommend.
