Full figures on FXCM’s sale of DailyFX: Company expects $38 million gain during Q4, Leucadia debt is reducing dramatically

At the end of last month, FinanceFeeds reported that North American electronic trading giant FXCM had finalized the sale of its DailyFX portal to IG Group for $40 million.

At that time, FXCM had confirmed that the proceeds from the sale were used to repay debt owed to Leucadia. FXCM has made loan repayments of $154 million to Leucadia with $156 million outstanding. After the additional $4 million is received, FXCM will have repaid more than half the debt.

This week, FXCM has generated its quarterly report, which provides a full commercial statement and detail on the pinnacle deal which saw one of London’s most popular economic calendars sold to a British firm, and North America’s stalwart electronic trading company make yet more progress in settling its debt to Leucadia.

FXCM’s statement today in its quarterly report on the matter details that on September 30, 2016, the company entered into an asset purchase agreement pursuant to which it agreed to sell the DailyFX business to IG Group for cash of $40.0 million, payable in two installments.

The DailyFX Transaction closed on October 28, 2016 and the first installment of $36.0 million was paid to the Company on the Closing Date and the proceeds were used to pay down the term loan. The second installment of $4.0 million will be paid to the Company on the completion of certain migration requirements, which is expected within 60 to 90 days after the Closing Date. The Company expects to recognize a gain of approximately $38.0 million during the fourth quarter of 2016 related to the DailyFX Transaction.

At-the-Market Common Stock Offering

On October 3, 2016, the Company entered into an Equity Distribution Agreement with Jefferies, LLC – itself an investment bank that merged with Leucadia in 2013 – as sales agent.

Under the terms of the Equity Distribution Agreement, the Company may, from time to time, issue and sell shares of its Class A common stock, par value $0.01 per share, having an aggregate offering price of up to $15.0 million , through the Sales Agent. The common stock will be sold pursuant to the Company’s shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on August 2, 2016.

FinanceFeeds has every confidence that FXCM will emerge from the emergency loan that it took from Leucadia following the Swiss National Bank’s decision to remove the 1.20 peg on the EURCHF pair in January 2015 which exposed the firm to negative client balances, thus causing the firm to look for emergency financing, securing $300 million from Leucadia in a very short space of time.

FXCM CEO Drew Niv is one of the most astute and calm leaders in this entire industry, and had made a remarkable effort to keep the company on a completely even keel throughout that period, the structure of the firm being identical post-SNB event to as it was prior.

Drew Niv – the calm and composed leader

Recently, FinanceFeeds met Mr. Niv at his office in New York, where he explained that “As soon as it became apparent that these about 3,000 clients had suffered such significant loses, we notified our regulators and the regulatory authorities arrived at the office.”

“If you look at FXCM today, it is effectively the same company as prior to January 15 2015. Most of our customers stayed, almost all of the staff stayed. We did sell some non-core assets and for a few months we had some losses, however we kept the market share in tact. What many people don’t realize is that we effectively plugged the capital shortfall with Leucadia’s loan.”

In terms of actual impact on the business as a result of attrition, Mr. Niv explained “The customers that we lost were mainly some of the large customers. The total number of our clients that were actually affected by the market volatility that followed the SNB’s decision approximately 3,000 customers which comprised of around 200 here in the United States, and the rest were overseas.”

This is a small amount, especially when bearing in mind that some were inactive customers. There were also some customers which stayed with FXCM but deposited less funds because, for example, they were happy to continue trading but would prefer to hold $50,000 in the company rather than $1 million. The principals who founded the company still own a big stake in the company so the big loss was effectively mine” explained Mr Niv.

“If I looked at life as what I had on Friday and notice that I had less the following Monday, I would commit suicide every day. I have to look back at what I had 20 years ago which was absolutely nothing, and what I have today, which is still a lot. My kids still love me, and I have five of them. My wife didn’t leave! I personally lost approximately $200 million, however  it is not healthy to show a lot of emotion, especially when you are in business.” – Drew Niv, CEO, FXCM

FXCM had 12 hours at first, not a weekend like other firms which have experienced something like this.

From his office which overlooks downtown Manhattan from the 50th floor, Mr. Niv calmly explained “We weren’t given a lot of time from the regulators. We had to act very quickly in the best interests of the customers, employees and shareholders. Although the outcome was actually very positive, had it not been, the absolute worst case is that we would have ceased. Other senior executives within the company explained to FinanceFeeds that Mr. Niv kept completely calm throughout the event.

“I said to myself, this loss I can personally take. In 5 years I will recover it and it will still be more than most people will have anyway. Philosophically I believed at the time that a person or any business that is in financial trouble will always make the wrong decisions as they will be driven by pressure and other factors, so therefore we always make sure that we are not in that position at any time and that we can make decisions that are sensible, regardless of the circumstances” – Drew Niv, CEO, FXCM

The composure with which this was handled is remarkable and in the opinion of FinanceFeeds, very unusual. It is well known that many executives would tend toward ‘meltdown’ in such a circumstance and either close down, or start holding emergency meetings and creating insecurity in the minds of staff by implementing emergency procedures. Mr. Niv did not go down that road at all. Despite the media speculation and rumors that the company had nervous employees and shareholders, the opposite is true, as is quite clearly depicted by the company’s situation today.

In connection with the Restructuring Transaction completed on September 1, 2016, the Letter Agreement was terminated and the parties signed the Group Agreement as described in Note 2. In exchange for the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia.

The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates FXCM’s financial results, the non-controlling interest held by Leucadia is redeemable for cash upon a contingent event that is not solely within the control of the Company and, accordingly, is classified outside of permanent equity on the condensed consolidated statements of financial condition as Redeemable non-controlling interest. As of September 30, 2016 , the non-controlling interest in Group is not redeemable and is not probable of becoming redeemable and, consequently, has not been adjusted to its estimated redemption value.

The Company recorded the following activity related to Redeemable non-controlling interest for the nine months ended September 30, 2016 , with amounts in thousands:

On the date of the Restructuring Transaction, in exchange for the Letter Agreement Leucadia was issued a redeemable non-controlling interest in Group which had a fair value of $235.5 million , which was also the fair value of the derivative liability related to the Letter Agreement.

As a result, the Company derecognized the derivative liability related to the Letter Agreement and recorded the Redeemable non-controlling interest at $93.1 million , which represented the amount that Leucadia would receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall at that date. This change was recorded as an equity transaction within Additional paid-in capital of the Corporation for the impact to the controlling and non-controlling unit holders of Holdings based on Holdings’ 50.1% controlling financial interest in Group.