E*Trade Stock Offering May Be Red Flag
NEW YORK (
) --
E*Trade Financial's
(ETFC) - Get Report
plans for another common stock offering could be a red flag, given that the troubled company just recently recapitalized its balance sheet through a $1.7 billion debt-for-equity exchange and raised more than $600 million in common equity this summer.
E*Trade on Monday terminated its stockholder rights plan and said it planned to issue up to $150 million in common stock, according to a release. The decision to terminate the plan was decided at the company's special shareholder meeting in August, where stockholders also approved the debt exchange offer.
Under the terms of the at-the-market stock offering agreement, approved by E*Trade's board of directors, the company would sell up to $150 million of common stock. It plans to use the proceeds from the sale to "enhance liquidity for the parent company as well as for working capital and general corporate purposes," it said.
As part of the program, the company also entered into an agreement with Sandler O'Neill & Partners to sell the shares. These shares will be offered at market prices prevailing at the time of sale, E*Trade said. It may also sell shares of its common stock to Sandler O'Neill, as principal for its own account, at a price agreed upon at the time of sale, it said.
But David Trone, an analyst at Fox Pitt Kelton Cochran Caronia Waller, questioned why E*Trade needs to raise capital so soon after completing both an equity raise and much-talked about debt-for-equity exchange.
The company could "simply
want to create a little wider buffer," boosting the Tier-1 capital up by about 5%, Trone writes. Or management "intends to engage in problem loan sales, which would accelerate and concentrate losses in the near term, stressing capital more than would normally occur. ... Any loan sales, however, would serve to fast forward some losses into near-term quarters."
Matt Snowling, an analyst at FBR Capital Markets, noted that the
Office of Thrift Supervision
asked the company to downstream an additional $100 million of capital to E*Trade Bank, citing the company's prospectus, "which we suspect is the primary reason for the
at-the-market transaction," he writes in a note.
Snowling believes the additional capital requirement is a "move to build capital cushions," rather than a sign of further loan deterioration.
E*Trade said in a statement emailed to
TheStreet.com
that the goal with the offering is to "continue to build on the parent company's liquidity while market conditions are favorable to the company."
E*Trade's capital and financial position has been precarious since the credit crisis unfolded. Its banking subsidiary has been slammed by troubled home equity and mortgage loans and from significantly devalued mortgage-backed securities bought earlier in the decade. Regulators told the company this spring to raise capital quickly amid its improved -- yet still struggling -- loan portfolio and low levels of capital in its banking subsidiary, as compared to other financial firms.
Citadel Investment Group
, the company's largest shareholder, took an even bigger stake in the company after being the primary stock participant in E*Trade's debt-for equity exchange. Citadel's founder and chairman Ken Griffin took a seat on E*Trade's board in June and his influence already has been clear. Less than two weeks after Griffin became a director, the company announced a plan to shore up its capital by raising common equity.
E*Trade last week announced CEO Don Layton would depart by the end of the year as part of an employment agreement made two years earlier, since the company has completed the recapitalization. But some critics questioned whether the CEO really should be leaving when the firm is still on shaky ground.
Nevertheless, E*Trade's brokerage unit is performing well. The company is also making headway reducing its troubled loan portfolio. Since the beginning of the year, so-called early delinquencies, particularly in its troubled home equity portfolio, have cooled, E*Trade has said.
E*Trade will be disclosing monthly loan portfolio delinquency trends for the month of August on Tuesday.
"
Continued evidence of improved early-stage delinquencies and progress in running off the loan portfolios will play an important role in getting investors more comfortable with the turnaround at
E*Trade, even after any near-term dilution caused by the announced offering," Snowling writes.
E*Trade's announced it would issue shares at nearly the same time Citigroup boosted the stock by by upgrading it to a buy. Shares jumped as much as 7.8% after the rating upgrade. More recently, the stock was up 5.7% to $1.75.
Citi analyst Keith Walsh, in a research note, expressed confidence in the stock because the company's recent capital actions have "allayed concerns" about the company. The positive outlook is a reversal from Walsh's pessimism on E*Trade earlier this year. Walsh had expressed doubts in March about the
of the company in a note in which he initiated coverage on E*Trade. Walsh also raised his 12-month price target to $2.30 from $1.50.
Walsh wrote in a note dated Sept. 13 that "the recent capital changes coupled with normal earnings from the core underlying business show the company can withstand losses even under our most conservative loan loss scenario."
He is also increasingly optimistic about E*Trade being acquired, possibly by one of its two rivals,
TD Ameritrade
(AMTD) - Get Report
or
Charles Schwab
(SCHW) - Get Report
-- particularly as the loan portfolio stabilizes.
Still Trone, who rates the company in-line, says he is waiting to see how successful the equity sale is before changing any earnings estimates, "as some financial companies have had difficulty in executing
at-the-market offerings."
"
We see no compelling reason to own
E*Trade unless evidence emerges that the 'bank wind down' economics will be better than our analysis suggested," Trone adds. "This could happen if the mortgage loan portfolios perform better than our base case scenario."
--Written by Laurie Kulikowski in New York.
