E*Trade Raising $1.2B to Fill Capital Hole

Updated from 11:22 a.m. EDT

E*Trade Financial (ETFC Quote) is raising $1.2 billion through the sale of common stock and a "significant" debt exchange as part of the online brokerage's plans to raise capital.

The company said on Wednesday that it launched a stock offering in which it plans to raise $400 million through the sale of common shares. Additionally, once the offering is priced, E*Trade will launch a "significant debt exchange" for certain outstanding senior notes, it said.

The proceeds will primarily go to the company's bank subsidiary, which had been told by the Office of Thrift Supervision, its primary regulator, that it needed to raise capital in April. Hedge fund Citadel Investment Group, E*Trade's largest equity and bond investor, has agreed to participate in both the common stock offering and debt exchange.

E*Trade also will exchange more than $1 billion of newly-issued zero coupon convertible debt for all of its 8% senior notes due in 2011 and a portion of its 12.5% springing lien notes due in 2017.

The convertible debt will have a maturity of 10 years and will be convertible into shares of common stock based on the public offering price in the common stock offering provided that the conversion price will be no less than $1 per share and no more than $1.20 per share.

The initiative will "significantly reduce the company's debt service burden by eliminating interest costs relating to those debt securities," it said.

Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone is concerned that E*Trade won't be able to complete the capital restructuring plan, given the shareholder dilution that will occur and the company's continued credit woes.