As the FX industry enjoys opulent trading conditions, Alpha FX needs an emergency £20 million capital raise to stay solvent.
Rumours are swirling surrounding the capital adequacy of AIM-listed company Alpha FX (LON: AFX) after several reports stated the broker was suffering financial difficulties in response to increased trading activity, as a result of the COVID-19 pandemic.
According to Reuters, Alpha FX is anticipating a “reduction in FX activity” with forward contracts expected to be particularly badly hit. In late-March, Alpha FX’s board put out a statement saying that it’s “preliminary view” was that underlying earnings would be “broadly close to financial year 2019 results”. The statement came as a shock considering the broad-based improvement for all brokers in recent months as a result of a spike in market volatility following worldwide lockdown and quarantine measures.
More bad news followed with Alpha FX admitting that it was negotiating a payment plan given the temporary shortfall in the company’s cash base and raised further concerns that the broker may fail to meet obligatory collateral requirements under FCA rules.
Market commentators and market participants alike are collectively wondering where things went so wrong.
As things stand, both retail and institutional brokers are enjoying the best operating conditions since the sub-prime mortgage market crisis in 2008. The vast majority of brokers have reported record performance in March, with the likes of GMO Click experiencing a doubling of trading volume amongst its clients.
However, some firms including Alpha FX have not been as prudent, or as effective, operating in such rich trading conditions.
Trouble in paradise
On 18 March, Alpha published its annual results and stated that recent market volatility had a “limited impact” on its business and that it was on course to meet analyst expectations.
The broker’s fortunes took a turn for the worse following revelations that over 200 clients had seen a “significant deviation” in the fair value of the forward contracts, which meant issuing margin calls that some clients couldn’t satisfy in amidst tumbling markets.
Alpha FX stated that one client in particular – a Norway-based global exporter of food produce and Alpha’s largest client – cancelled its contract after running into working capital difficulties.
According to financial services firm Morningstar, Alpha FX’s largest client owes the broker £30.2 million, which amounts to around 15% of the group’s forward book, “though an agreement to repay the loan by June 2022 provides some encouragement”, the financial services company said.
The evolving story, buttressed by the board’s reaction, spooked investors into dumping Alpha FX stock, with prices now hovering just above £7.80 per share, down from £12.80 in early March – a decline of almost 40%.
More sour news broadsided investors in the form of a dividend cut and the company’s employee share scheme being suspended.
In an attempt to stem the haemorrhage, Alpha FX has moved to raise £20 million in emergency funding via a placement the company claimed was a means of “acquiring new clients and investing in new markets including Canada and the Netherlands”.
According to Morningstar, Alpha FX issued 2.7 million shares at £6.80 per share, through an accelerated bookbuild organised by Liberum Capital as the sole bookrunner. The placement was done at a significant discount to Thursday’s closing price of £7.80 with investor anxiety remaining high that despite the capital raise, the company’s downward spiral may not be reversed.
During the financial crisis in 2008, counterparty and liquidity risk put solvent firms on the brink of collapse, simply because clients and partners were fearful that their counterparty could not repay the capital they had on deposit.
The same concerns are now being raised with respect to Alpha FX as clients ponder whether to maintain faith in the broker’s solvency, or, to empty their accounts over fears the company will be unable to maintain capital requirements – an essential aspect to being able to operate.
“It’s fantastic to see the support from new and existing shareholders as well as employees and directors who have participated in this raise,” said Alpha’s CEO Morgan Tillbrook.
Mr Tillbrook went on to add: “These are difficult times for everyone, however, it is pleasing to see our own confidence in this business reflected through so many others. Moving forward, we have bolstered our cash position, and having invested for many years in diversifying our product offering, technology and markets.”
With market participants now skittish due to COVID-19 pandemic, Alpha FX’s future performance is likely to reflect the financial market as a whole. In other words: prone to elevated volatility with uncertainty undermining activities for the foreseeable future.