Leucadia says decline in fair value of its equity interest in FXCM is other than temporary

Maria Nikolova

Leucadia’ maximum loss exposure as a result of its involvement with FXCM is $231.7 million at December 31, 2017.


Further to the publication of its key metrics for the final quarter of 2017, Leucadia National Corp. (NYSE:LUK) has earlier today filed its detailed report with the United States Securities and Exchange Commission (SEC). The document does not elaborate on why FXCM has changed its logo to include Leucadia’s name but sheds some light on how the developments around FXCM over the past year have affected Leucadia’s financials.

In brief, Leucadia puts its maximum exposure to loss as a result of its involvement with FXCM at $231.7 million at December 31, 2017. This exposure is limited to the carrying value of the term loan ($72.8 million) and the investment in associated company ($158.9 million).

Through December 31, 2017, Leucadia has received cumulatively $331.6 million of principal, interest and fees from its initial $279.0 million investment in FXCM. The $279 million figure reflects a combination of a term loan of $300 million and rights to certain future distributions. At December 31, 2017, the remaining principal due under the term loan was $69.9 million and the interest rate is 20.5%.

At the end 2017, Leucadia’s equity method investment is recorded at $158.9 million, and the total amount of both its term loan and equity method investment is $231.7 million.

Interestingly, Leucadia confirms that it also recorded income (losses), before impairment charges, related to its equity method investment in FXCM of $(47.4) million and $1.9 million during 2017 and 2016, respectively.

Based on the February 2017 regulatory actions against FXCM’s US operations, Leucadia evaluated in the first quarter of 2017 whether its equity method investment was fully recoverable. It 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 its carrying value by $130.2 million. That is why, Leucadia concluded based on the above regulatory actions, FXCM’s restructuring plan, investor perception and declines in the trading price of Global Brokerage, Inc.’s common shares and convertible debt, that the decline in fair value of its equity interest was other than temporary.

As such, Leucadia impaired its equity investment in FXCM in the first quarter of 2017 by $130.2 million.

Let’s note that the SEC filing makes no mention of the legal action concerning Leucadia’s deal with FXCM from January 2015. In a Memorandum Opinion issued on September 29, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery, said entire fairness review is appropriate with regard to the Leucadia deal.

The Court is examining a case brought by a stockholder of FXCM Inc, which is now known as Global Brokerage Inc (OTCMKTS:GLBR). The questions before the Court include whether the Leucadia loan represented a waste of assets and whether the terms of the transaction were unfair to the broker. The Court said that the plaintiff played down the urgency with which the FXCM Board had to act when having to decide on the potential deal, but the Court supported a review of the Leucadia transaction.

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