E*Trade continues to look to pay down debt; says profit unlikely in 4Q

By Jennifer Lanning Drey

Portland, Ore., Oct. 21 - E*Trade Financial Corp. will continue to consider debt reduction alternatives in the fourth quarter after not carrying out any debt-for-equity exchanges during the third quarter due to unattractive pricing, E*Trade's chief executive officer Donald Layton said Tuesday.

"We have a multi-faceted plan to reduce the debt at the parent [company] and thus reduce our interest burden on our earnings and liquidity," Layton said during the company's third-quarter earnings conference call.

E*Trade continues to aggressively implement its five-pillar capital plan, which looks to develop a capital cushion to help the company deal with the uncertain times in the market and higher loan loss provisions at the bank level, he said.

During the third quarter, E*Trade reduced its total gross loans by $1.2 billion or 4%, as well as reduced its exposure to undrawn home equity lines by another $700 million in an effort to lower risk and free up capital, he said.

Additionally, the company received net proceeds of $660 million during the third quarter from the sale of E*Trade Canada and IL&FS Investsmart in India.

At Sept. 30, E*Trade had consolidated cash and cash equivalents of $3.02 billion.

"With the asset sales and our other capital-plan activities, we have built up a substantial cushion to absorb our expected peak losses but also to deal with potential additional credit costs, which is clearly prudent in this year's environment," Layton said.

As previously reported, the company has reduced debt by $156 million at the parent company since the start of the year and has a mandatory convertible in November that will bring the total debt reduction total to more than $600 million.

Building cash at bank

Also under its capital-building plan, E*Trade down-streamed $250 million to the bank level through a redeemable preferred investment during the quarter.

Layton said E*Trade increased its investment in the bank during the period because the bank took a $154 million loss, net of hedges, on Fannie Mae and Freddie Mac preferred stock and had an extra large loan loss provision of $518 million.

The loan loss provision represents a $199 million increase over the prior quarter and was more than expected, Layton said.

Liquidity at the bank level remains strong with cash on the balance sheet totaling more than $2.3 billion, he said.

"Our capital program is working well. We have built a much more substantial cushion than I think people thought was possible on more shareholder friendly terms during this year, so we could absorb those extra charge-offs and still have a very substantial cushion," Layton said.

Looking to government program

Layton also said during the call that E*Trade is looking to raise up to $800 million under the government's recently announced Capital Purchase Program.

When later asked how the company would use the additional capital if allowed to participate in the program, Layton said a portion would be placed in the bank but other components could be kept at the parent company to enhance its liquidity cushion.

Eventually using it to pay down debt is would also be a possibility, he said.

"We would be looking to see that the provisions really did come down over several quarters to be sure that the cash that provides a cushion for us would not be needed for credit and therefore could be used for other purposes, including debt repayment," he said.

No profit expected in Q4

E*Trade reported a net loss of $50.5 million in the third quarter, compared with a net loss of $58.5 million in the comparable period in 2007.

Layton said E*Trade does not foresee returning to profitability in the fourth quarter, although the company does believe that provision expense peaked in the third quarter and that charge-offs will begin to improve in 2009.

New York-based E*Trade Financial provides financial services, including trading, investing and banking for retail and institutional customers.

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