Retail foreign exchange broker FXCM Inc. (NYSE:FXCM) reeling after customers lost more than $200 million from the surging Swiss franc, will get a $300 million loan from Leucadia National Corp (NYSE:LUK) to keep operating, the companies said in a statement Friday.
Large global banks and retail brokerages were hit hard by the Swiss National Bank's sudden move Thursday to scrap its three-year-old cap on the value of the Swiss franc against the euro (EUR/CHF).
FXCM said Thursday that client losses may have left the brokerage with too little capital.
Leucadia, the parent of investment bank Jefferies, which advised on the deal, will invest $300 million in a two-year senior secured term loan with an initial coupon of 10 percent. The deal, which was expected to close Friday afternoon, also gives Leucadia an undisclosed percentage of a potential sale of FXCM.
"Leucadia`s support and this financing are by far the best alternative for FXCM, our customers, our shareholders, and all other relevant constituencies," said Drew Niv, FXCM chief executive officer.
Top executives from FXCM went through company books until at least 5 a.m. on Friday, according to a source close to FXCM. Regulators were in FXCM's offices in downtown Manhattan, according to two sources.
FXCM needed to act quickly. In its Thursday statement, the brokerage said client losses would result in a shortfall to the company of about $225 million and that it "may be in breach of some regulatory capital requirements."
"The key factor here is time, as regulators tend to be impatient once capital requirements are breached," analysts at Credit Suisse wrote in a Friday note.
In its statement, Richard Handler, Leucadia's CEO, and Brian Friedman, the firm's president, said they had worked with Jefferies and FXCM over the "past approximately 36 hours" to come to a deal. UBS acted as financial advisor to FXCM.
FXCM shares lost nearly 90 percent in premarket activity on Friday to $1.49 a share, and did not trade during the regular New York Stock Exchange trading session. The shares resumed trading in the after-hours session, recovering a bit from the premarket losses, but the stock (FXCM.K) was still down 70 percent to $3.81 a share from Thursday's close of $12.63.
Those who sold the stock in premarket action Friday morning will take big losses.
"The fact is if you sold at $1.49 in premarket that’s a decision you made and you’re out of it," said Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York.
Shares of Leucadia were halted during the trading day at $21.84 a share. They lost 0.8 percent to fall to $21.04 after resuming trading in after-hours action.
In Washington, a spokeswoman for the U.S. Commodity Futures Trading Commission said earlier that the agency was reviewing the company's situation but declined to give details.
FXCM and other brokerages were hit hard after the Swiss National Bank surprised markets by abandoning its cap against the euro. That caused the euro to suffer its biggest-ever one-day fall against the franc, dropping 18 percent for the session and losing some 30 percent on an intraday basis.
'BLACK SWAN' EVENT
Retail currency trade makes up nearly 4 percent of global daily spot turnover of nearly $2 trillion, the latest survey from the Bank of International Settlements shows, having grown from almost nothing in the 1990s.
In a note to clients, Sandler O'Neill analyst Richard Repetto wrote "we've been informed that FXCM offered clients leverage of 50x (often the standard in the U.K.) for EUR/CHF (euro-Swiss franc) trades."
"We believe this high leverage combined with the unique (black swan-like) event of the floating of the Swiss franc contributed to the steep customer losses at FXCM," he wrote.
Black swans are events seen as improbable and come as a major surprise to the market. Such events happen much more often than most market participants expect.
Shares of other brokers with retail foreign exchange businesses were mixed on Friday.
Interactive Brokers Group Inc (NASDAQ:IBKR) lost 0.6 percent to close at $28.09 a share. The company said customers lost $120 million beyond their collateral, equal to less than 2.5 percent of the company's net worth.
GAIN Capital Holding Inc (NYSE:GCAP) dropped as low as $7.75 in early trading but closed up 2.9 percent to $8.52, after the company said it generated a profit on Thursday from trading.