DBRS Places E*TRADE Financial Corp’s BB (low) Ratings Under Review with Positive Implications

DBRS, Inc. (DBRS) has today placed the long-term ratings of ETRADE Financial Corporation (ETRADE, the Company or the Parent) Under Review with Positive Implications, including its Issuer & Senior Debt rating of BB (low) and Subordinated Debt rating of B (high). The Short-Term Instruments rating remains unchanged at R-4 with a Stable trend. Additionally, the ratings of E*TRADE Bank (the Bank) remain unchanged at BB (high) for its Deposits & Senior Debt rating and R-3 for its Short-Term Instruments rating, also with Stable trends.

In placing E*TRADE’s long-term ratings Under Review with Positive Implications, DBRS recognizes the significant improvements that the Company has made in reducing the burden of debt at the Parent, while also increasing the Company’s financial flexibility. There is currently a two-notch differential between the Parent and the Bank that was introduced when the Parent’s position was highly stressed with limited financial flexibility, combined with the reality of regulatory restrictions on the upstreaming of dividends from its subsidiaries. With corporate debt at the Parent having been meaningfully reduced and the ability to upstream dividends having been enhanced over the past two years, DBRS views this two notch differential as having the potential to be reduced.

The review will focus on E*TRADE’s progress with its reorganization and additional strengthening of the Parent’s position that would facilitate further debt reduction. DBRS anticipates that the review would be concluded within 90 days.

ETRADE continues to make progress in strengthening the Parent’s position by reducing its corporate debt outstanding, lowering the cost of this debt and extending the debt’s maturity profile. In November 2014, ETRADE engaged in a debt refinancing transaction that lowered corporate interest expense, reduced leverage at the Parent and increased financial flexibility. Corporate debt outstanding has been reduced to $1.4 billion at end-2014, down from an elevated $2.8 billion in 2008. Over this same time period, E*TRADE has drastically cut its interest expense from $362 million in 2008 to an estimated $80 million in 2015, while its earliest corporate debt maturity is now 2019 (pushed out from 2017 pre-transaction).

Along with its 4Q14 results release, ETRADE announced that it received regulatory approval to realign its organizational structure and move its broker-dealers out from under the Bank. This allows ETRADE to move a large portion of its earnings generation capacity outside the scope of the Bank, which has much higher regulatory capital requirements and where distributions to the Parent can be more restricted by the regulator. Additional dividends to the Parent of approximately $505 million are planned during 1Q15, increasing pro-forma corporate cash to an estimated $738 million. With a sizable buffer of corporate cash over medium-term debt servicing requirements, DBRS expects that ETRADE will have the opportunity to further reduce leverage at the Parent. DBRS views this organizational realignment, combined with ETRADE’s November actions, as significantly improving the Company’s financial flexibility.

Other recent positive developments that add to ETRADE’s financial flexibility include the establishment of a three-year $200 million senior secured revolving credit facility at the Parent, which indicates ETRADE’s progress given the participating banks’ willingness to grant the facility. In addition, regulatory approval was received for the Bank to operate with a minimum Tier 1 leverage ratio of 9.0%, down from previous levels, indicating a further vote of confidence from the Bank regulator.

Notes:
All figures are in U.S. Dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: John van Boxmeer
Initial Rating Date: January 27, 2005
Most Recent Rating: April 30, 2014

For additional information on this rating, please refer to the linking document under Related Research.