E*Trade looking to further reduce debt under balance sheet repair program

By Jennifer Lanning Drey

Portland, Ore., July 22 - E*Trade Financial Corp. will continue to pursue debt-for-equity exchanges as a method of reducing debt at the parent company level under its balance sheet repair program, Donald Layton, chief executive officer of E*Trade, said Tuesday during the company's second-quarter earnings call.

"Beyond such exchanges, we will be opportunistic about methods of reducing debt that are shareholder friendly," he said.

E*Trade's balance sheet repair plan also includes using non-core asset sales to build a cushion against potential excess credit losses and an additional source of funding for reducing debt at the parent company level, he said.

The company expects to generate more than $700 million in net proceeds through previously announced non-core asset sales.

"Our execution in which we employ this excess cash will be highlighted by nimbleness, keeping our options open and being flexible, because the environment around us is difficult and uncertain," Layton said.

Additionally, E*Trade's plans for improving its balance sheet include maintaining a healthy retail franchise, building strong capital levels at the E*Trade bank and aggressively managing loan portfolios for value, he said.

"We continue to execute aggressively on our balance sheet repair plan. The overall environment in which that plan is being executed has deteriorated as credit losses in our portfolio are somewhat higher than predicted," Layton said.

"The plan is providing robust enough and the execution strong enough that our balance sheet exposures are still manageable and our capital base solid."

During the quarter E*Trade exchanged $96 million in debt, bringing the total to $121 million since the beginning of the year. These exchanges will bring $9 million in annualized coupon savings.

$94.6 million net loss

E*Trade reported a second-quarter net loss of $94.6 million, compared to a net loss of $91.2 million in the prior quarter and net income of $159.1 million in the year-ago second quarter.

During the 2008 second quarter, E*Trade also continued to execute on its turnaround plan with the goal of returning to profitability from continuing operations, Layton said.

Additionally, the company's retail franchise remained strong despite the market environment, he said.

Fannie, Freddie positions liquidated

Subsequent to the close of the quarter, E*Trade liquidated the majority of its positions held under a long-standing investment in preferred equity of Fannie Mae and Freddie Mac. The liquidation resulted in a pre-tax loss of $83 million net of hedges, which will be reflected in the company's third quarter results.

The company's remaining position was $150 million at July 21, which E*Trade also hopes to reduce.

"Our strong bias is to continue to reduce our remaining balance sheet exposure opportunistically as ownership of such securities is no longer in line with the company's strategic objective," Layton said.

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

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