Description
What really happened at FXCM with the Swiss Franc? No idea
Will there be more Skeletons in the closet? Probably
Is it likely that Leucadia got a great deal on FXCM in its moment of distress? Absolutely
Do I care? Not really.
I know this is VIC, but ignore the fundies (yeah, you got that right) this is a trade.
Sell the August 2.5 straddle for 1.90 (been doing it myself).
If FXCM is at any price between 60 cents and 4.40 on August 21, you’re a winner.
Here’s how I’m thinking about the downside, LUK isn’t stupid. They are not going to take over a broker that likely has issues and skeletons for just a 10% coupon and a pre-payment of $10 million. Heck, FXCM cannot even pay off the debt through cash flow. They structured this as a bridge to a sale, where LUK gets most of the upside from the sale, plus their debt paid off. Here’s the cheat sheet.
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Aggregate amount of sale proceeds or dividend/distributions
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Leucadia
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FXCM Holdings
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Amounts due under Leucadia term loan, including fees
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100%
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0%
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Next $350 million
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50%
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50%
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Next amount equal to 2 times the balance outstanding on the term loan and fees as of April 16, 2015, such amount not to be less than $500 million or more than $680 million
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90%
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10%
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All aggregate amounts thereafter
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60%
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40%
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LUK are in it to win it and want to see FXCM sold. Based on this table, they make a bunch based on various scenarios. There are 47.2 million FXCM shares outstanding. At 60 cents, FXCM is worth $28.3 million, meaning that the total proceeds after debt re-payment are under $56.6 million. I don’t think LUK would take on this risk to only make $28 million on their 50% interest. Therefore, you have to assume that the equity proceeds on a sale are more than 60 cents.
On the high end, after $350 million in equity is recouped, or $175 million applied to FXCM shareholders (3.71/shr) the vast majority of the upside goes to LUK. At 4.40 or higher where you lose money, you need this to be sold for nearly ~$650 million. The market cap before the blowup was only $625 million. You have to think that the brand has been impaired and even if it isn’t, it now carries $300 million more in debt.
Sorry this writeup is quick and sloppy. I wanted to get this out there while the opportunity exists before IV collapses. I’ll answer questions and flesh this out in the question section.
Sorry value guys—there are no fundies in this piece!!
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
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