DBRS Upgrades E*TRADE Financial Corp’s Long-Term Ratings, Senior now at BB, Stable Trend

DBRS, Inc. (DBRS) has today upgraded the long-term ratings of ETRADE Financial Corporation (ETRADE, the Company or the Parent), including its Issuer & Senior Debt to BB from BB (low), concluding the ratings review. The trend is now Stable. These ratings have been removed from Under Review with Positive Implications, where they were placed on February 10, 2015. DBRS notes that the Company’s Short-Term Instruments rating of R-4, as well as the ratings of E*TRADE Bank (the Bank), including the Bank’s Deposits & Senior Debt rating of BB (high) and Short-Term Instruments rating of R-3, remain unchanged. The trend for all ratings is Stable.

In concluding the review, DBRS recognizes the progress that E*TRADE has made with its organizational realignment and additional strengthening of the Parent’s position that is facilitating further debt reduction. The Company continues to reduce the burden of debt at the Parent, while also increasing its financial flexibility. This rating action reduces the two-notch differential to the standard one-notch differential between the Parent and the Bank, indicating the continued strengthening of the Parent’s position.

ETRADE has today announced plans to reduce its corporate debt by an additional $340 million along with the refinancing of higher coupon outstanding senior notes. This transaction was facilitated by the movement of ETRADE Securities out from under the Bank in early February 2015, allowing E*TRADE Securities to dividend excess capital to the Parent, significantly improving the Company’s financial flexibility.

The Company plans to issue $460 million in new Senior Notes due 2023 and utilize the net proceeds from this offering, along with $432 million of corporate cash, to redeem its outstanding $800 million 6.375% Senior Notes due 2019. While the terms of the new issuance have not been finalized, DBRS expects that the interest rate will be comparable to that of the November issuance, when the Company issued $540 million of similar duration senior notes at 5.375%. Accordingly, DBRS anticipates that corporate interest expense will be reduced to approximately $50 million annually, down from $113 million in 2014 and significantly reduced from the very elevated $362 million in 2008. Furthermore, E*TRADE has extended its debt maturity profile by an average of 2.2 years.

The Stable trend indicates DBRS’s view that the ratings are well-placed at the current level. E*TRADE continues to demonstrate momentum in its core retail brokerage franchise, while delivering generally stable revenues and growing earnings. The Company risk profile continues to improve and it is maintaining low levels of loan loss provisions, while continuing to strengthen its funding profile and capitalization. Given these improving trends, further positive rating action is possible. Conversely, any reversal in these positive franchise, earnings, or risk profile trends could add negative pressure to the ratings, especially if combined with significant weakening of the Company’s funding or capital position.

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: February 10, 2015

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