TD Ameritrade's Debt Draws Eager Buyers

TD Ameritrade's new debt offering drew heavy investor interest, a vote of confidence that could embolden it to pull the trigger on an acquisition.
Publish date:

Updated to include company's confirmation of the terms of the debt sale, latest share price.



) --

TD Ameritrade's

(AMTD) - Get Report

new debt offering drew a strong response from institutional investors on Friday.

The company filed the prospectus to sell the debt with the

Securities and Exchange Commission

on Thursday, saying it plans to use the proceeds to pay down its existing senior debt, which totaled about $1.4 billion as of Sept. 30. Today it confirmed reports that it had sold $1.25 billion worth of bonds. The deal broke down to $250 million worth of 2.95% senior unsecured notes due 2012; $500 million worth of 4.15% senior unsecured notes due 2014; and $500 million worth of 5.6% senior unsecured notes due 2019.

TD Ameritrade CEO Fred Tomczyk said in a press release he believes the notes offering will result in "a more flexible capital structure" for the company.

In its coverage earlier in the day,

Dow Jones

cited a syndicate person working on the deal as saying orders for the paper surpassed $3 billion.

While the refinancing in and of itself doesn't remove any hurdles that stood in the way of a deal in the past, the eager institutional interest to the debt sale could embolden TD Ameritrade to make a much-discussed play for

E*Trade Financial

(ETFC) - Get Report


The offering's success removes really the only concern about TD Ameritrade's balance sheet expressed by

Moody's Investors Service

when it boosted its issuer and senior secured ratings for the company's debt on Nov. 16. The agency cited better operating performance and credit metrics for the move, and said then that it expected Omaha, Neb.-based TD Ameritrade to address its "concentrated debt maturity profile" in due course, referring to the fact that most of the company's long-term debt was carried on a term loan maturing in December 2012.

Fitch Ratings also lifted its ratings on the company's debt this week, and said it anticipated a refinancing was in the offing as well. In its press release accompanying the upgrade, Fitch made reference to a potential acquisition, saying it expects the company's leverage would trend higher if it made a deal, but that it believes TD Ameritrade would keep this in mind when structuring the transaction. The agency said the company's debt-to-EBITDA

earnings before interest, amortization, depreciation and amortization ratio stood at 1.16X as of Sept. 30.

"Fitch expects that leverage may trend somewhat higher, and interest coverage somewhat lower, if management uses debt to make a significant acquisition," the statement reads. "However, Fitch expects AMTD to limit the amount of leverage in any such future acquisition, and therefore maintain an appropriate degree of financial flexibility for this rating category."

So now that the expected refinancing has come to pass, and institutional investors are apparently eager to buy up the company's debt, the path would seem clear for TD Ameritrade to

make its move

if E*Trade is truly on its wish list for the holiday season.

This week has seen heavy volume and seesaw trading in E*Trade's stock, mainly because of general comments made Wednesday by TD Ameritrade CEO Tomczyk at a


conference, where he stated an acquisition would likely be the "best use" of the company's cash, and that an E*Trade deal would be of interest "under the right circumstances."

Tomczyk's comments were consistent with what the company has said many times in relation to E*Trade, always tempering its view of the possibility of a deal with the caveat that the terms of any transaction would have to make sense for TD Ameritrade.

And factoring in Friday's trading, E*Trade's stock hasn't really done much besides churn in response to the latest round of whispers. While most analysts expect the company to present an attractive target for one of its bigger online broker brethren at some point, they also tend to agree that its pesky $8.3 billion home equity loan portfolio is a sticking point in the near term.

The signs that E*Trade is making progress with de-emphasizing its banking operations, and winding down the home equity loan assets have started to appear, but are still in the early stages at best.

Also, there remains considerable uncertainty about the pace of economic recovery with unemployment still just above 10 percent, despite the relative strength of the broad stock market (the S&P 500 index is up about 45% in the past year) and a resurgence in deal-making in other sectors. What will be interesting to see is where the inflection point is if E*Trade's stock makes a meaningful move higher based on the company's performance, rather than the latest round of takeover speculation.

At that point, any of the bigger players that may be laying in the weeds -- TD Ameritrade, which has a very acquisitive past, and its largest rival

Charles Schwab Corp.

(SCHW) - Get Report

come to mind -- could decide to make a move before the shares get too rich.

E*Trade shares closed a penny higher at $1.64, putting the stock more than 5% above where it ended last week and just ahead of its 50-day moving average. The issue's 200-day moving average is $1.52. Volume totaled nearly 270 million for the past two sessions, and reached 67.1 million for Friday's session. Based on Thursday's close, the shares were up 73% for the past 52 weeks, but were still sitting at a little more than half their high for the year of $2.90 set in late April.

Meanwhile, TD Ameritrade's stock closed down 10 cents at $20.91, leaving it roughly flat for the week, despite the deal talk. The shares, however, reached their 52-week high of $21.30 on Tuesday, despite being up more than 100% for the past year, and the gradual appreciation from both the 50-day and 200-day moving averages ($20.08 and $18.67 respectively) suggests that if performance holds up, they may have more room to run.

In that scenario, armed with a strong currency in the form of its stock, a fresh slug of debt and more than $6 billion in cash, TD Ameritrade could go shopping. Asked about strategy in general and E*Trade in particular during the company's conference call in late October to discuss its fiscal 2009 results, Tomczyk said TD Ameritrade was still thinking through its strategic options for the coming year.

"Whatever has value to our shareholders is what we'll do," he said. Considering how well TD Ameritrade shares have held up despite the deal talk, shareholders may be telling Tomczyk where they think the value is.

Written by Michael Baron in New York.