11/13/2013

FX Concepts Founder On Hook for Firmís Debt

Less than a year before his currency-trading shop filed for bankruptcy, FX Concepts founder John Taylor personally guaranteed a chunk of the debt his firm owes to its largest creditor.

Asset Management Finance, a Credit Suisse unit that has invested in a number of prominent hedge fund-management firms in the past decade, provided $40 million of debt financing to FX Concepts via two revenue-sharing agreements in 2006 and 2010. But in December 2012, as opportunities in the currency market continued to fade and redemptions mounted, Taylor was forced to renegotiate the financing package. The Credit Suisse unit agreed to defer eight quarterly revenue-sharing payments in exchange for Taylorís personal guarantee for those obligations. As of Oct. 17, when the firm filed for Chapter 11, FX Concepts owed Asset Management Finance $34.4 million, with Taylor on the hook for $5 million of the total.

ďAMF is going to clearly try to get money out of John,Ē a source said. ďBy any

stretch of the imagination, itís not there.Ē

The terms of the refinancing deal with Asset Management Finance, spelled out in recent court documents, suggest FX Concepts was in even worse shape than previously understood. The fact that Taylor had to personally guarantee his firmís obligations underscores a dramatic decline for a business that for years was the worldís largest currency-fund operator, with more than $12 billion of assets. As recently as the first quarter, FX Concepts had $1 billion under management.

The court documents also suggest that a planned liquidation of FX Conceptís assets will fall far short of meeting the firmís obligation to Credit Suisse ó raising the prospect that Taylor will have to come up with the $5 million. In September, he listed his Manhattan condominium for $25 million after renovating it and living in it for only six months. A $3.5 million lien was placed on the property in April.

One source said that because of Taylorís long-standing relationship with Asset Management Finance, Credit Suisse might forgive some of the debt he owes. When FX Concepts filed for bankruptcy protection, Asset Management Finance agreed to originate $1.4 million of debtor-in-possession financing to help the firm maintain its assets in a ďsaleable state.Ē

But another source noted that Taylorís ties to Asset Management Finance predate its purchase by Credit Suisse in 2008. Whatís more, the bank began unwinding the business last year, and most of the unitís executives have since left. Thus thereís every reason to believe the bank will want to recover as much of the FX Concepts investment as possible.

The liquidation of FX Conceptsí assets is being handled by restructuring specialist CDG Group, which has begun reaching out to some 40 other currency managers, as well as to current and former FX Concepts executives. On the block are four assets: trading technology encompassing 148 distinct programs; a database covering 30-plus years of currency prices and other historical data; a daily newsletter that Taylor has published since 1981; and the FX Concepts trademark. Among the trading programs is the firmís flagship Global Currency Program, which was down 13.9% this year through August. Other programs have been more profitable ó with one automated-trading model generating a 50% gain through September.

As a whole, however, the trading programs probably are worth little, one source said. ďIf their models worked, they would have produced returns,Ē he said. ďTheir brand has no value, unless you want to advertise negative returns.Ē

On Nov. 1, FX Concepts disclosed a stalking-horse bid from Aktis Capital of Hong Kong. The firm offered $1 million for the trading programs and related hardware; $200,000 for the historical data; and $250,000 for the trademark. It didnít bid on the newsletter, whose annual revenues have sunk to $600,000 from about $2 million four years ago ó and $7 million before the advent of the internet. An auction is tentatively scheduled for Nov. 25.

FX Concepts threw in the towel after the San Francisco Employees pension system in September withdrew $660 million ó representing two-thirds of the firmís remaining assets. Disabled fund operators usually unwind their businesses without recourse to a bankruptcy filing, for the simple reason that the management entities donít typically borrow significant sums to fund their operations. Leverage at the fund level invariably takes the form of secured debt.

Itís unclear what drove Taylor to pile so much debt on FX Concepts, especially after the firm posted double-digit investment gains during the financial crisis. Taylor earned a reported $250 million in 2008, and the firmís performance during that period ó when most other hedge funds were down sharply ó also earned him the good will of Asset Management Finance.

Whatís known is that the proceeds of the 2010 financing package were paid out to Taylor as an advance on his equity in the business. He used the money to buy his condo, reportedly paying $22 million ó or $4.5 million more than the asking price. At the same time, Taylor has spent significant amounts of his own money funding research into hemophilia, which afflicts one of his children.

Like other currency traders, FX Concepts struggled to make money in the aftermath of the financial crisis, when central banks around the world tightened their grip on interest rates. The firm earned little if any performance-fee revenue in recent years, a source said. And its average management fee was only about 75 bp. As more and more investors withdrew their money over performance concerns, the firm saw its revenue stream quickly evaporate.

Asset Management Finance, with proprietary capital from Credit Suisse, has invested in 21 hedge fund operators and other asset managers since 2003. Those operations once managed a total of about $80 billion, though last year the bank decided to stop making new investments and wind down the unit. In addition to FX Concepts, Asset Management Finance has invested in Brigade Capital, Lucidous Capital, Reservoir Capital and Tricadia Holdings.

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