Bank and online brokerage firm E*TRADE Financial Corp. (ETFC) announced Wednesday a $1.2 billion capital raising plan in order to strengthen its capital structure. As part of the plan, the company launched a registered public offering of $400 million of its common stock, and also intends to launch significant debt swap transactions for more than $1 billion of existing outstanding notes, upon pricing of the common stock offering.
The proceeds from the common stock offering would provide additional equity capital to E*TRADE Bank as well as for working capital and general corporate purposes. The consummation of the debt swap is subject to certain conditions, including the closing of the common stock offering and shareholder approval.
The company noted that affiliates of hedge fund Citadel Investment Group LLC, E*TRADE's largest share and bond holder, have agreed to participate in both the stock offering and the debt swap. Depending on the public offering pricing, Citadel intends to purchase either $50 million or $100 million of stock in the common stock offering.
E*TRADE has granted the underwriters of the common stock offering, an option for a period of 30 days from the date of this prospectus supplement, to purchase up to an additional $60 million of common stock at the public offering price, less applicable underwriting discounts and commissions, to cover over-allotments, if any.
Citadel also agreed to participate in the debt swap for an aggregate principal amount of at least $800 million face value of E*TRADE's long-term debt. Apart from shareholder approval for Citadel's participation in the debt swap program, the extent of Citadel's participation is subject to approval from E*TRADE's primary federal banking regulator, the Office of Thrift Supervision.
Citadel holds about 15% of E*TRADE's common stock owning about 89.1 million shares. E*TRADE also believes that Citadel owns more than 70% of its outstanding high-yield debt securities, including more than 81% of 2017 notes and a majority of each of the 2011 notes, 2013 notes and 2015 notes. Additionally, Kenneth Griffin, President and CEO of Citadel, joined the Board of Directors of E*TRADE on June 8, 2009.
On completion of the stock offering, E*TRADE will launch the debt swap program to exchange more than $1 billion of its outstanding debt due in 2011 and 2017 for newly-issued zero coupon convertible notes. As part of the debt swap program, the company would exchange all of its 8% Senior Notes due 2011 and a portion of its 12.5% Springing Lien Notes due 2017, for newly-issued zero coupon convertible notes due 2019, and convertible into common stock based on the common stock offering price. However, the conversion price should be in a range of $1.00 to $1.20 per share.
As of June 12, 2009, there were $435.5 million aggregate principal amount of 2011 Notes and $2,185.6 million aggregate principal amount of 2017 Notes outstanding.
Citadel has agreed to swap at least $800 million face value of long-term debt. This includes $200 million face value of the 2011 Notes and at least $600 million face value of the 2017 Notes. The company also intends to exchange all of its 2011 Notes and up to $310 million face value of its 2017 Notes not held by Citadel on the same terms.
The company intends to call a special meeting of its shareholders for authorization for the debt swap program, the issuance of up to 365 million shares of common stock for debt swap, and an increase in the number of authorized shares of the company.
For the Common Stock offering, J.P. Morgan Securities, Inc. and Sandler O'Neill & Partners, L.P. are joint book-running managers and E*TRADE Securities LLC is the co-manager. J.P. Morgan has also been retained as the exclusive financial adviser in connection with the debt swap program.
Meanwhile, E*TRADE has suspended its $150 million open market purchase program that started in early May. As of date, the company has issued about 40.7 million shares of common stock under the program, and raised net proceeds of about $63.2 million, after deducting estimated expenses and an aggregate commission to J.P. Morgan of about $1.6 million. On May 8, E*TRADE entered into a distribution agreement with J.P. Morgan Securities Inc. to sell up to $150 million of E*TRADE's common stock from time to time through J.P. Morgan as the distribution agent.
E*TRADE has been working to bolster its financial position, which has been hit hard by investment losses during the recession. For the second quarter, the company estimates provision for loan losses of $375 million to $450 million and net charge-offs of $375 million to $400 million. For the first quarter, loan losses were $454 million, and net charge-offs were $334 million.
Separately, E*Trade said delinquencies of 30 to 89 days in its home-equity portfolio, its greatest exposure to loan losses, declined 10% from March 31 to May 31. Delinquencies of 30 to 179 days fell 14% in the same period.
E*Trade also said average daily revenue trades for the month of May jumped 34% from last year to more than 239 thousand, and increased 3.9% from April. Total customer assets dropped 27% from a year ago amid the stock market's slide, but rose 5.8% from April. The company also added 23,106 net new accounts in May, to total a record 4.5 million at the end of the month.
Since the second half of 2008, the global financial markets are in turmoil and the equity and credit markets experienced extreme volatility, which caused already weak economic conditions to worsen. In October 2008, E*TRADE applied to participate in the U.S. government's Troubled Asset Relief Program or TARP Capital Purchase Program established under the Emergency Economic Stabilization Act of 2008. To date, the company's application for a $800 million funding has not been approved or rejected. Approval for the TARP funding would help the company to offset mortgage woes in its banking unit.
In Wednesday's regular trading session, ETFC is currently trading at $1.47, down $0.18 or 10.91% on a volume of 9.54 million shares. In the past 52-week period, the stock has been trading in a range of $0.59 to $4.05.
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