Jefferies estimates maximum loss exposure due to involvement with FXCM at $129.3m

Maria Nikolova

Jefferies’ maximum exposure to loss as a result of its involvement with FXCM is limited to the carrying value of the term loan ($59.1 million) and the investment in associated company ($70.2 million).

Jefferies Financial Group Inc (NYSE:JEF), formerly known as Leucadia National Corporation, has earlier today posted its 10-K report for the three-month period to November 30, 2019. The report provides an update on the relations between Jefferies and FXCM.

Jefferies’ maximum exposure to loss as a result of its involvement with FXCM is limited to the carrying value of the term loan ($59.1 million) and the investment in associated company ($70.2 million), which totaled $129.3 million at November 30, 2019. This is virtually unchanged from the level of $131.4 million reported at the end of the preceding quarter.

At November 30, 2019, Jefferies has a 50% voting interest in FXCM and a senior secured term loan to FXCM due February 15, 2021. On September 1, 2016, Leucadia gained the ability to significantly influence FXCM through several seats on the board of directors. As a result, it classifies its equity investment in FXCM in the Consolidated Statements of Financial Condition as Loans to and investments in associated companies.

During February 2017, Global Brokerage Holdings and FXCM’s U.S. subsidiary, Forex Capital Markets LLC (FXCM U.S.) settled complaints filed by the National Futures Association and the Commodity Futures Trading Commission (“CFTC”) against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. As part of the settlements, FXCM U.S. withdrew from business and sold FXCM U.S.’s customer accounts. Based on the above actions, Leucadia evaluated in the first quarter of 2017 whether its equity method investment was fully recoverable. The Group engaged an independent valuation firm to assist management in estimating the fair value of FXCM. The estimate of fair value was based on a discounted cash flow and comparable public company analysis. The result of the analysis indicated that the estimated fair value of Leucadia’s equity interest in FXCM was lower than the carrying value by $130.2 million.

The Group concluded based on the regulatory actions, FXCM’s restructuring plan, investor perception and declines in the trading price of Global Brokerage’s common shares and convertible debt, that the decline in fair value of its equity interest was other than temporary. As such, the Group impaired its equity investment in FXCM in the first quarter of 2017 by $130.2 million, which was recorded in Income (loss) related to associated companies.

During the fourth quarter of 2018, the Group recorded an additional impairment charge of $62.1 million related to the equity component of its investment in FXCM, which is based on updated expectations that had been impacted by the then revised regulations of the European Securities Market Authority (ESMA) and dampened operating results. Based on the updated projections, the Group evaluated in the fourth quarter of 2018 whether its equity method investment was fully recoverable. The result of the analysis indicated that the estimated fair value of the equity interest in FXCM was lower than the carrying value by $62.1 million. The Group concluded that based on the decline in projections and the adverse effects of the European regulations, that the decline in fair value of its equity interest was other than temporary. As a result, it impaired its equity investment in FXCM in the fourth quarter of 2018 by $62.1 million, which was recorded in Income (loss) related to associated companies.

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