NEW YORK ( TheStreet) -- E*Trade Financial ( ETFC) shares surged more than 7% on Tuesday, rebounding a day after selling off following the announcement of a new CEO and plans for a reverse stock split.

E*Trade's stock reversal on Tuesday was helped by Standard & Poor's upgrade of its debt ratings in the afternoon, even though the ratings were still considered speculative grade. S&P raised the long-term rating on E*Trade's holding company to CCC+ from CCC and on E*Trade's bank subsidiary to B from B-. S&P affirmed a stable outlook for the online brokerage firm.

"The ratings upgrade reflects E*Trade's improved financial condition and holding company cash flows, as well as the prospect for lower operating losses in 2010," S&P credit analyst Charles Rauch said in a note.

"E*Trade's debt to equity exchange last year improved the holding company's cash flow by lowering interest costs by $200 million on an annual basis and essentially eliminating debt maturities until 2013, when $415 million of notes are due," Rauch noted. "The holding company now has enough liquid cash on its balance sheet to cover the next two years' debt service."

E*Trade shares gained more than 7.3% to $1.62 on volume of more than 52 million, once again surpassing average trading volume in the stock of 33 million.

The rating change comes one day after E*Trade named Steven Freiberg, a former Citigroup ( C) executive, to become its new chief executive and announced plans for a reverse stock split.

S&P expects the brokerage firm to post a loss in 2010 as E*Trade continues to address asset quality problems escalated by the credit crisis.

E*Trade still holds approximately $2.6 billion of long-term debt on its balance sheet, "an amount we consider quite large in relation to the current cash flow generating ability of its operating subsidiaries," S&P said.

S&P said it could upgrade E*Trade from a stable outlook if the company "makes significant progress reducing the risk exposures within its residential real estate portfolios in 2010 so that it is positioned to return to profitability in 2011" and keeps the bank subsidiary's regulatory capital ratios in excess of the "well capitalized" level.

-- Written by Laurie Kulikowski in New York.

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