DBRS Comments on the Common Stock Offering and Exchange Transactions Announced by E*TRADE

DBRS has today commented on the announcement by ETRADE Financial Corporation (ETRADE or the Company) of a public common stock offering and debt exchange transactions. DBRS rates ETRADE’s Issuer & Senior Debt at B (high) and Short-Term Instruments at R-4. DBRS also rates ETRADE Bank (the Bank) at BB. All ratings, except the Short-Term Instruments of the Bank, have a Negative trend. These ratings are unchanged after the announcement.

The Company today announced the launch of a registered public offering of $400 million of its common stock, with an agreement from Citadel to purchase either $50 million or $100 million of common stock in this offering. A significant portion of the proceeds from the offering are intended to provide additional equity capital to the Bank, as well as for corporate purposes. Simultaneously, E*TRADE is also launching debt exchange offers for certain of its outstanding notes, with a large participation anticipated from Citadel. The Company will offer to exchange at par over $1 billion of newly-issued convertible debt for all of its 8% Senior Notes due 2011 and a portion of its 12.5% Springing Lien Notes due 2017. The convertible debt will have a zero coupon, which will significantly reduce the Company’s corporate interest expense.

Under the conditions of the announced debt exchanges, DBRS has taken no rating action based on DBRS’s policy for default. Since the exchanges are voluntary and at par, leaving bondholders no worse off, DBRS does not view these exchanges as crossing the threshold for default under which bondholders are coerced into exchanges that are to their disadvantage.

Given the stress that the Company faces from its legacy loan portfolios and ongoing quarterly losses, DBRS views these transactions as beneficial for the Company by boosting its capital and reducing corporate interest expense. While E*TRADE’s online brokerage franchise continues to demonstrate its strength, the Company’s ability to build capital has been constrained by the parent’s current annual interest payments of approximately $350 million, which would be significantly reduced under the announced exchanges.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, Rating Securities Firms Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.