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Rating Action:

Moody's confirms E*TRADE at B3 following results of debt exchange

06 Jul 2009

Approximately $1.1 billion of rated debt affected

New York, July 06, 2009 -- Moody's Investors Service confirmed the B3 long-term issuer rating of E*TRADE Financial Corporation ("E*TRADE"), and the Ba3 deposit rating of E*TRADE Bank, the company's thrift subsidiary. Moody's also raised to B3 from Caa3 the ratings on E*TRADE's outstanding senior unsecured bonds. The outlook on all the ratings is negative. This concludes the ratings review originally commenced on April 29, 2009.

The ratings confirmation follows E*TRADE's announcement of the results of the early round of its debt exchange tender offer: $1.7 billion of its interest-bearing senior unsecured bonds will be exchanged for zero-coupon 10-year senior unsecured convertibles. The exchange transaction requires the approval of the Office of Thrift Supervision, E*TRADE's primary regulator; it also needs to be approved at the shareholders meeting in August. Today's rating action is predicated on our expectation that the exchange will be approved and completed.

The rating confirmation recognizes that the debt exchange would result in significantly lower interest expenses and a longer debt maturity profile. In conjunction with E*TRADE's previously completed equity issuance, this should improve E*TRADE's ability to service its debt, and bolster its capital base to absorb future losses in the thrift's mortgage portfolio.

"E*TRADE has taken a big step in strengthening its financial profile by raising new equity capital and cutting interest expenses," said Moody's Vice President, Alexander Yavorsky. "Nonetheless, the mortgage portfolio remains a source of concern, as does the still large amount of holding company debt. "

The realignment of E*TRADE's bond ratings with its issuer rating at B3 reflects Moody's current expectation that, following the completion of the announced debt exchange, future exchanges of bonds, if any, would not be performed as a means of default avoidance. Therefore, unlike the current exchange, they would not be "distressed exchanges."

E*TRADE's annual debt service costs will decline by more than 60% to $160 million from $360 million. This should alleviate, to some extent, the extreme pressure on the company to service a large amount of holding company debt while making regular capital contributions into E*TRADE Bank to keep it well-capitalized. Additionally, because the exchanged bonds include virtually the entire outstanding amount of E*TRADE's 2011 bonds, this pushes out the nearest debt maturity to 2013, eliminating near-term refinancing risk.

E*TRADE financial profile, and especially that of E*TRADE Bank, was also helped by its recently completed equity issuance ($586 million in net proceeds). In order to avoid regulatory intervention from the OTS, E*TRADE Bank's leverage ratio (tangible equity relative to tangible assets) must remain above the 5% "well-capitalized" level. Moody's recent scenario testing of E*TRADE Bank's mortgage portfolio suggests that pre-tax lifetime credit losses could be as high as $2.5 billion, net of existing allowance. Because these projected losses would far exceed the bank's pre-provision earnings, remaining well-capitalized could require ongoing capital contributions from the parent into the bank, as has been the case in the last several quarters. E*TRADE's newly raised capital and lower interest expenses make this easier to accomplish.

The negative rating outlook reflects the still tenuous financial condition of the company. Ongoing mortgage loss provisions are unlikely to permit a return to profitability in the foreseeable near-term future, while greater than anticipated losses would materially increase creditor risks.

E*TRADE's very high double leverage, and the consolidation of the company's operating entities under the thrift, leave holding company creditors not only structurally subordinated to those of the thrift, but also make them vulnerable to any potential intervention by the thrift's regulator. Though less likely now, following the company's capital restructuring, this possibility will remain until E*TRADE's thrift portfolio's shows signs of sustainable stabilization. These factors explain the three-notch differential between the Ba3 deposit rating of the thrift and the B3 senior debt rating of the holding company.

The last rating action on E*TRADE was on June 17, 2009 when Moody's maintained E*TRADE's ratings on review for a possible downgrade (originally commenced on April 29, 2009) following the company's announcement of a capital restructuring plan.

The principal methodology used in rating E*TRADE was the Global Securities Industry Methodology, which can be found at moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

For additional information about Moody's approach to evaluating distressed exchanges, please see March 2009 special comments "Moody's Approach to Evaluating Distressed Exchanges" and "Distressed Exchanges: Implications for Probability of Default Ratings, Corporate Family Ratings and Debt Instrument Ratings."

E*TRADE is a major online retail brokerage firm that reported a pre-tax loss from continuing operations of $470 million on $1.9 billion in net revenue in 2008.

The following rating actions were taken:

Issuer: E*TRADE Financial Corp.

..Upgrades:

....Senior Unsecured Regular Bond/Debenture Due 2011, Upgraded to B3 from Caa3

....Senior Unsecured Regular Bond/Debenture Due 2013, Upgraded to B3 from Caa3

....Senior Unsecured Regular Bond/Debenture Due 2015, Upgraded to B3 from Caa3

....Multiple Seniority Shelf, Upgraded to (P)Caa1 from (P)Ca

....Multiple Seniority Shelf, Upgraded to (P)Caa2 from (P)Ca

..Confirmations:

.... Issuer Rating, Confirmed at B3

....Multiple Seniority Shelf, Confirmed at (P)B3

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: E*TRADE Bank

..Confirmations:

.... Bank Financial Strength Rating, Confirmed at D-

....Senior Unsecured Deposit Rating, Confirmed at Ba3

.... Issuer Rating, Confirmed at B1

.... Deposit Rating, Confirmed at NP

....OSO Senior Unsecured OSO Rating, Confirmed at B1

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

New York
Alexander Yavorsky
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's confirms E*TRADE at B3 following results of debt exchange
No Related Data.
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