JEF - Jefferies Group

[Guest Schwab711]

Decent coupon and security. Not too much downside unless another 20-standard-deviation event in FX occurs again in the 2 years. Doesn't seem to have much upside either though..  :o

 

Calling action in CHF 20-standard deviation is extremely misleading. Imagine the movement on a freely floated Renminbi.

[VersaillesinNY]

Jefferies Insights - Jan 2015

JefferiesInsights_January2015.pdf

[benhacker]

I'm interested in this FXCM investment a lot.  I think there is some interesting investing opportunities depending on how this works out.  Agree it won't be huge for LUK, but perhaps some other trading opportunities arise.

 

From Pupil's note:

 

It's a $300mm senior secured term loan with a 10% coup. Base case they make 10%. They didn't pay for the % of proceeds option thingamajig. They need to get their money back to breakeven; the article you reference and the breakeven  was based on the original rumor or $250mm loan and $50mm for the 75% proceeds thing.

 

Here's the language:

 

NEW YORK--(BUSINESS WIRE)-- Leucadia National Corporation (NYSE: LUK) and FXCM (NYSE: FXCM) today announced that Leucadia would be providing $300 million in cash to FXCM and its subsidiaries (collectively "FXCM") that will permit FXCM to meet its regulatory-capital requirements and continue normal operations after yesterday's loss of $225 million due to the unprecedented actions of the Swiss National Bank. Under the terms of the agreements, Leucadia is investing $300 million in cash into FXCM in the form of a $300 million senior secured term loan with a two-year maturity and an initial coupon of 10%. The term loan obligations are guaranteed, on a secured basis, by certain of FXCM's domestic subsidiaries. In addition, Leucadia will receive, in the event of a sale of FXCM or its subsidiaries, a certain percentage of the sale proceeds and, in the event FXCM makes other distributions on account of its equity, a corresponding payment for its own account. This transaction is expected to close this afternoon

 

 

At least that's how I read things, but frankly I don't care too much and am not putting a ton of time into it. It's not material. On the margin, I'm glad LUK is deploying the balance sheet, but this isn't game changing either way.

 

So basically, we get that LUK is putting up $300m @ 10%.  They also get some sort of ownership proxy (aka, % of dividends and sale proceeds... not just ownership because that would make the NOL DOA I think).  CNBC rumored the ownership @ 75%.... but that seems *highly* unlikely at this stage, but we can model out a simple way to think about this investment for LUK.

 

#1 - I think $300m for LUK for 10% 2 year debt is probably the going forward market rate as I said before.  So say that's worth face @ 10%.

#2 - Equity for FXCM, pretty easy to see this thing is impaired... but let's just run some #'s to get a range.  3 days ago, you had a company with $250m in TBV, valued at $750m by the market.  So $500m was market value in excess of TBV.

 

FXCM has 47m shares out.

 

If FXCM is valued @ TBV (no premium) post raise, the company should have about $100-125m in TBV (including DTA).  So I think a reasonable conservative value is $100m.

 

If (let's be aggressive here) market says "FXCM is all good, let's assign 60% of valuation premium that we assigned last week" --> So $300m + $100-125m.  I think this is a reasonable bull case, FXCM's rep is tarnished, but no customers lose money (I mean, more than usual... lol), they have received a vote of confidence, so maybe this is legit.

 

Bull case valuation of equity is ~$425m.

 

So $100-425m on Tuesday's open.

 

So with:

 

0% dilution by LUK, that's $2.12 - 9.00 / share

25% dilution, that's $1.59 - 6.75 / share

50% dilution, that's $1.06 - 4.5 / share

75% dilution, that's $0.53 - 2.25 / share

 

So the market seems to be saying two things (FXCM traded After hours in the US Friday @ $4.4, and also traded at an equivalent USD price of $5.75 in Germany) at the last trade price of ~$4.5 - 5.75. (AH trading on Friday was wild with a very wide range)

 

#1 - FXCM is worth *way* more than TBV even after the recent news

AND

#2 - LUK dilution isn't anywhere near the 75% rumored by CNBC

 

--

 

Third option could be that the market is very very very wrong in illiquid AH trade, and FXCM is horrifically overvalued, also reasonable!

 

I was tempted enough that even the non-confirmed rumor of LUK getting a 75% stake in FXCM made me tempted to short FXCM after hours.  I did not though.

 

For those who think FXCM should trade for 1x TBV, the money is right there for the taking with the company overvalued by as much as 100-200% as we stand, without assuming any dilution.

 

Curious if others have some thoughts... this is light analysis, but just hinges off recent market valuation of FXCM.

 

[mcliu]

Seems like a better trade if you knew more details about the Jefferies deal.

 

How much of their losses do you think they can recover from their customers? Say if they recover half of what their customers lost, that's another $125 million addition to their book.

[benhacker]

"Seems like a better trade if you knew more details about the Jefferies deal."

 

Yes, material non-public info would definitely help here. ;-)  but agree, that's why I have no position, hugely reflexive situation depending on the effective financing costs for FXCM.  I just have a gut feeling that the costs to FXCM shareholders will be *huge* and the common will trade too sticky for a few hours / days as the realization of true go forward costs to FXCM are internalized.

 

"How much of their losses do you think they can recover from their customers? Say if they recover half of what their customers lost, that's another $125 million addition to their book."

 

I have asked around about this, but it's still not clear to me.  Margin loans are recourse, and I would imagine that probably 25-50% of the losses could be recovered, but over how long, I'm not sure.  I'm just guessing, I wouldn't bank on that upside, but I think some give back is likely.  As a short I think giving full TBV weight to the deferred tax asset is already a pretty favorable mark, so I don't think this would change my thinking much, but probably does add some upside for investors in FXCM.

[widenthemoat]

FXCM Inc. on Monday provided further details on its $300 million rescue package from Leucadia National Corp. , saying the initial interest rate of 10% increases by 1.5% per annum each quarter as long as the loan is outstanding, but won’t exceed 17%.

 

http://www.wsj.com/articles/fxcm-provides-further-details-on-rescue-package-1421729172

 

Looks like that 10% rate gets a little sweeter each quarter.

[benhacker]

Details here.

 

http://www.sec.gov/Archives/edgar/data/1499912/000114420415002640/v398968_ex99-1.htm

 

Wish I would have shorted... LUK is charging a very steep price for this capital.  Kind of stunning.

[thepupil]

Richard "Corleone" Handler!

[jawn619]

Details here.

 

http://www.sec.gov/Archives/edgar/data/1499912/000114420415002640/v398968_ex99-1.htm

 

Wish I would have shorted... LUK is charging a very steep price for this capital.  Kind of stunning.

 

this looks like LUK got a good deal after all

[benhacker]

FXCM bonds tanked 30% today as the details show that LUK loan *and* LUK "equity" stake in FXCM is senior to existing debt.

 

I predict LUK shareholders on the whole will find a way to criticize this deal as not attractive for LUK...

[mcliu]

This makes more sense. Much better deal now that the terms are clear.

[benhacker]

I find myself sitting back and looking at what LUK just made on this FXCM deal, and just staring in awe.

 

Based on market values of FXCM common, it looks like LUK just netted $1.2B in gains pre-tax.  Even if you assume the common shareholders haven't really digested everything and the stock isn't a good value indicator, it looks like LUK easily netted $700-800m in gains.

 

Kind of makes me a little teary...  I can't think of another deal so immediately lucrative in non-tumultuous times.

 

Ben

[cubsfan]

I find myself sitting back and looking at what LUK just made on this FXCM deal, and just staring in awe.

 

Based on market values of FXCM common, it looks like LUK just netted $1.2B in gains pre-tax.  Even if you assume the common shareholders haven't really digested everything and the stock isn't a good value indicator, it looks like LUK easily netted $700-800m in gains.

 

Kind of makes me a little teary...  I can't think of another deal so immediately lucrative in non-tumultuous times.

 

Ben

 

Almost like Buffett's deal when he bought Constellation Energy. The short term return would have been huge, but his worst case, was he

ended up with a $1.2B break up fee. Nothing like being able to act fast and bail someone out the day they need money.

[gfp]

Hi Ben, Care to share the math that results in gains of $1.2 Billion?  I too am impressed with punitive terms of this rescue loan but couldn't get anywhere near $1.2 Billion in gains in my calculations.  FXCM has a $105 million market cap at the moment, correct?

 

Thanks

 

 

I find myself sitting back and looking at what LUK just made on this FXCM deal, and just staring in awe.

 

Based on market values of FXCM common, it looks like LUK just netted $1.2B in gains pre-tax.  Even if you assume the common shareholders haven't really digested everything and the stock isn't a good value indicator, it looks like LUK easily netted $700-800m in gains.

 

Kind of makes me a little teary...  I can't think of another deal so immediately lucrative in non-tumultuous times.

 

Ben

[adesigar]

Hi Ben, Care to share the math that results in gains of $1.2 Billion?  I too am impressed with punitive terms of this rescue loan but couldn't get anywhere near $1.2 Billion in gains in my calculations.  FXCM has a $105 million market cap at the moment, correct?

 

Thanks

 

 

I find myself sitting back and looking at what LUK just made on this FXCM deal, and just staring in awe.

 

Based on market values of FXCM common, it looks like LUK just netted $1.2B in gains pre-tax.  Even if you assume the common shareholders haven't really digested everything and the stock isn't a good value indicator, it looks like LUK easily netted $700-800m in gains.

 

Kind of makes me a little teary...  I can't think of another deal so immediately lucrative in non-tumultuous times.

 

Ben

 

I don't get anywhere close to 1.2 Billion either. Company was trading around 800 million before the crash. All time high for the company is $1 Billion. Im guessing he looked at the wrong ticker symbol.

[benhacker]

Well, I typed a long response, and the server lost it.

 

I'll just make some quick points so I don't have to type it again:

 

1) FXCM has a structure like IBKR, where minority interests, are effectively common, but they don't show in sharecount.  Basically, if you "common-ize" the minority interests, your sharecount is 82m. (I missed this in my comments upthread as well)

 

2) Because of #1, the EV of FXCM prior to CHF rally, was on the order of $1.5B (175m debt, +1.3B of common @ $16 / share).

 

3) The equity split that the LUK loan received basically allows LUK to earn $550m back from their investment prior to common getting anything.  Next, they take $600m and common (again, 82m shares) get 70m (~$0.80 / share).  In order for the common to be worth another $1.5 / share, LUK would need to get another $200m or so (60/40% split).  Just a high level summary of how LUK's stake can be worth $1.3B+ and common can trade with a "market cap" of $100m.

 

4) There is an article here that misses the minority interest math (he has other articles where he takes EBIDTA from analyst presentations, but it's EBIDTA prior to minority interest, and then applies it to just the 47m shares), but other than that, you can see how the waterfall value really accrues heavily to LUK with some assumptions, and not so much to common. --> http://seekingalpha.com/article/2842146-the-bearish-case-for-fxcm-will-it-collect-on-debit-balances-outstanding-and-what-are-the-consequences

 

I think assuming an EV of FXCM of $1.4B is probably an ok assumption, and that means LUK's stake is worth ~1.1B (again, it depends on if the loan is paid off quicker, etc, but rough numbers).

 

Hope that helps.

[mcliu]

Did you factor in the $150M convertibles?

 

I did a quick back of the envelope and it seems like the company's trading at around $1.5B EV. Maybe common shareholders are too optimistic? I would be surprised if they could fetch this much on a sale..

 

Good deal for LUK, very nice MTM at the moment..

[benhacker]

"Did you factor in the $150M convertibles?"

 

It's $172m (I listed 175)... balance sheet mark is $150, but face is 172 still I think.

[cheerlee]

Had anyone here been to LUK annual meeting and investor day?  What's the schedule and how's it like? Thanks.

[greenwave]

Allan Meacham  ( Arlington Value Capital )  .....Just reported adding about  1,5 million shares of LUK in the 4th Qtr 2014 . He now holds total of 2.4 million LUK shares.

 

greenwave

 

 

[twacowfca]

Decent coupon and security. Not too much downside unless another 20-standard-deviation event in FX occurs again in the 2 years. Doesn't seem to have much upside either though..  :o

 

Calling action in CHF 20-standard deviation is extremely misleading. Imagine the movement on a freely floated Renminbi.

 

Standard deviation is inadequate to describe what happened. It's more like adding weight to a bridge beyond its capacity.  The question should be when it will break, not if.  A simple fix would be not to allow much margin when trading currencies that are pegged or propped up by central banks.

[HJ]

 

Standard deviation is inadequate to describe what happened. It's more like adding weight to a bridge beyond its capacity.  The question should be not if, but when it will break. A simple fix would be not to allow much margin when trading currencies that are pegged or propped up by central banks.

 

Which currency is not heavily influenced by its government / central bank at one point or another?

[twacowfca]

 

Standard deviation is inadequate to describe what happened. It's more like adding weight to a bridge beyond its capacity.  The question should be not if, but when it will break. A simple fix would be not to allow much margin when trading currencies that are pegged or propped up by central banks.

 

Which currency is not heavily influenced by its government / central bank at one point or another?

 

Influence is something markets can handle well.  An intervention to  support peg is a train wreck waiting to happen.

[WhoIsWarren]

Well, I typed a long response, and the server lost it.

 

I'll just make some quick points so I don't have to type it again:

 

1) FXCM has a structure like IBKR, where minority interests, are effectively common, but they don't show in sharecount.  Basically, if you "common-ize" the minority interests, your sharecount is 82m. (I missed this in my comments upthread as well)

 

2) Because of #1, the EV of FXCM prior to CHF rally, was on the order of $1.5B (175m debt, +1.3B of common @ $16 / share).

 

3) The equity split that the LUK loan received basically allows LUK to earn $550m back from their investment prior to common getting anything.  Next, they take $600m and common (again, 82m shares) get 70m (~$0.80 / share).  In order for the common to be worth another $1.5 / share, LUK would need to get another $200m or so (60/40% split).  Just a high level summary of how LUK's stake can be worth $1.3B+ and common can trade with a "market cap" of $100m.

 

4) There is an article here that misses the minority interest math (he has other articles where he takes EBIDTA from analyst presentations, but it's EBIDTA prior to minority interest, and then applies it to just the 47m shares), but other than that, you can see how the waterfall value really accrues heavily to LUK with some assumptions, and not so much to common. --> http://seekingalpha.com/article/2842146-the-bearish-case-for-fxcm-will-it-collect-on-debit-balances-outstanding-and-what-are-the-consequences

 

I think assuming an EV of FXCM of $1.4B is probably an ok assumption, and that means LUK's stake is worth ~1.1B (again, it depends on if the loan is paid off quicker, etc, but rough numbers).

 

Hope that helps.

 

Benhacker, these calculations are interesting, but can I query you on the FXCM shares outstanding aspect?  I've looked up the 2013 10-K and it says "The shares of Class B common stock have no economic rights but entitle the holder......to a number of votes on matters presented to stockholders of the Corporation".

 

It looks to me that the market cap of FXCM is just $2.1 per share times 45m shares outstanding, or $94m.  Unless I've got that wrong (please tell me if I do!!), the implied value of LUK's investment is currently $1bn. 

 

Of course, it doesn't take away from the point you were making - it looks like it could be a very profitable deal for LUK (but of course, this analysis is wholly dependent on the market price of FXCM....and I'm dubious that Mr. Market has got the deal mechanics correctly figured out).

 

Let me know what you think. Thanks.

[Guest roark33]

The market price of our Class A common stock may decline due to the large number of shares of Class A common stock eligible for exchange and future sale.

The Holdings Units can be converted on a one-for-one basis to Class A shares.  In fact, an executive already had a margin loan called that required conversion from holdings units to Class A shares.  The outstanding share count should be around 81m.  The current trading price of FXCM is a complete joke.  Equity is only worth about $1 tops after the LUK deal, even if you use the 52-week high of FXCM enterprise value--which isn't likely in my opinion. 

 

The market price of shares of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock in the market or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell shares of Class A common stock in the future at a time and at a price that we deem appropriate.

 

In addition, we and our pre-IPO owners entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO (subject to the terms of the exchange agreement), to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments. The market price of shares of our Class A common stock could decline as a result of the exchange or the perception that an exchange could occur. These exchanges, or the possibility that these exchanges may occur, also might make it more difficult for holders of our Class A common stock to sell such stock in the future at a time and at a price that they deem appropriate.