E-Trade Plans Stock Offer, Debt Exchange

FILE - In this Jan. 9, 2009 file photo, pedestrians pass by an E-Trade Financial office in Palo...

FILE - In this Jan. 9, 2009 file photo, pedestrians pass by an E-Trade Financial office in Palo Alto, Calif. Struggling online brokerage and bank E-Trade Financial Corp. is raising capital and exchanging debt as it tries to climb out from under mounting loan losses tied to souring mortgage investments. (AP Photo/Jeff Chiu, file)

(AP)

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.