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NEW YORK — E-Trade Financial Corp. said Wednesday it is raising capital and exchanging debt in an effort to get out from under mortgage-related loan losses. The news sent shares of the struggling online brokerage and bank skidding.
E-Trade's plan comes with the blessing of its largest shareholder, Citadel Investment Group LLC., which will participate in the capital-raising effort.
The New York-based financial firm plans to raise $400 million through a common stock offer and then exchange more than $1 billion in outstanding debt to help strengthen its capital position, especially at its banking subsidiary that has accounted for the bulk of the losses.
Shares of E-Trade tumbled 19 cents, or 11.5 percent, to $1.46 in Wednesday trading. E-Trade shares have traded as high as $4.05 over the past year and were valued at more than $20 in 2007 before the housing market collapsed and mortgage-related investments started to tank.
E-Trade said Citadel will purchase either $50 million or $100 million in common stock as part of the offer.
Once the stock offer is complete, E-Trade said it will offer to exchange more than $1 billion in outstanding debt. Citadel will exchange at least $800 million in debt as part of the program.
As part of the exchange offer, E-Trade will swap all outstanding 8 percent senior notes due in 2011 and a portion of 12.5 percent notes due in 2017 for new convertible debt. The new debt securities will have a maturity of 10 years and be convertible into shares of common stock based on the price of the $400 million stock offer. However, the conversion price will be no less than $1 per share and no more than $1.20 per share.
By exchanging the outstanding debt, E-Trade will be able to reduce its debt burden by eliminating interest payments tied debt.
E-Trade was hit especially hard by the downturn in the economy and collapse of the real-estate market as the value of investments, especially those tied to residential real-estate loans, plummeted. New York-based E-Trade said it plans to use the money from the stock offer to add capital to its banking subsidiary where many of the losses have occurred.
During the first quarter, E-Trade lost $232.7 million primarily due to an increase in provision for loan losses. The company's provision for loan losses nearly doubled during the quarter to $454 million.
Net charge-offs, or loans written off as unpaid, totaled $333.8 million during the quarter.
E-Trade said loans delinquent less than six months moderated somewhat in May. Total loans delinquent less than 180 days fell 5 percent to $1.62 billion at the end of May, from $1.7 billion a month earlier. The decline was the result of fewer delinquencies among outstanding mortgages and home equity loans.
Delinquent loans more than 180 days past due, however, increased 15 percent during May to $681 million, from $594 million at the end of April. That increase was tied to a 17 percent jump in mortgages that are now more than six months past due.
