Jefferies Makes Another Wall Street Rescue, Shores Up Currency Broker With $300 Million
One of several brokerage firms that allow retail traders to make sizable currency bets while committing relatively minuscule amounts of capital, FXCM was caught wrong-footed when the Swiss National Bank bagged its currency floor of 1.20 Swiss francs per euro and the franc surged. The result was customers with losses that tore through their thin capital layer owed the brokerage some $225 million, putting the company’s coffers below regulatory capital requirements.
That prompted a violent 88.2% plunge in the company’s shares and a trading halt that lasted Friday’s entire trading session, quickly followed by reports the company was in talks with investment bank Jefferies for rescue financing. After the bell FXCM announced Leucadia National LUK +0.92% — Jefferies’ parent company – will invest $300 million in FXCM in the form of a two-year senior secured loan with a 10% coupon, backed by certain domestic subsidiaries of the broker. Leucadia also receives as-yet-undefined portion of the proceeds from any sale of FXCM, giving the transaction an equity-like component, more common in convertible bonds, that allows the firm to participate in any further upside and would dilute existing shareholders.
The injection fills the brokerage firm’s capital hole and allows it to continue operating, in a move reminiscent of the rescue Jefferies arranged for Knight Capital, after that trading firm blew up thanks to a $440 million trading error.
FXCM CEO Drew Niv expressed gratitude toward Leucadia and the firm’s regulators, and said the financing is “by far the beset alternative for FXCM, our customers, our shareholders, and all other relevant constituencies.
Richard Handler and Brian Frideman, CEO and president of Leucadia respectively, said the funding “is designed to maintain FXCM’s financial strength and allow it to prosper going forward.”
UBS advised FXCM on the transaction alongside law firm Weil Gotshal and Manges, while Leucadia was advised by Jefferies and lawyers from Skadden, Arps , Slate, Meagher and Flom.
Shares of Jefferies parent Leucadia gained nearly 1% Friday morning before being halted shortly before 12:30 p.m. in New York.
