Citadel Invests $2.55 B in E*Trade

123jump.com Staff
29 Nov, 2007
New York City

E*Trade Financial Corp, widely known for its discount online trading service agreed to sell its portfolio of mortgage loans and securities to Citiadel Investment for $800 million. The bank and online broker will also sell 10-year notes of $1.75 billion to investment group yielding junk interest rate of 12.5%. The deal also removes the current chief executive in the company and grants a board seat to Citadel.

[R]4:30AM New York – E*Trade receives investment from private equity group. Mitch Caplan, its chief executive will step down as a part of the deal.[/R]

E*Trade Financial Corp ((ETFC)) for months have been battered on the ongoing housing market correction and falling values of mortgage securities. Suitors have been circling the company for weeks now.

E*Trade Financial has agreed to sell its portfolio of mortgage and loan securities to Citadel Investment Group at approximately $800 million. The private equity investment group will also purchase 10-year note for $1.75 billion yielding 12.5% annually. The deal supervised by the federal regulatory agency Office of Thrift Supervision, is an attempt by the regulator to prevent E*Trade from becoming the victim of the current credit market malaise.

The news first reported in the Wall Street Journal web site indicated that Citadel as a part of the deal will have a board seat and will also hold 20% of the company.

E*Trade in the last three months had received nearly 25 bids for the company as the news of its weak sub-prime lending portfolio emerged. The stock has been battered in the last four months from a high of $25 to a low of $3.46.

E*Trade at the end of the last quarter had a portfolio of home equity loans, asset backed securities, and risky loans to home buyers. The company said in the 10-Q statement filed at the end of the third quarter that the loan losses are likely to rise in the coming months.

Subsequent to September 30, 2007, E*Trade observed a significant decline in the fair value of our asset-backed securities portfolio, specifically asset backed CDO and second-lien securities. Total exposure to asset-backed CDO and second-lien securities at September 30, 2007 was approximately $450 million in amortized cost.

The declines in fair value followed a series of rating agency downgrades of securities in this sector and occurred after the end of the third quarter. At the time of filing E*Trade said that there will likely be additional downgrades by the rating agencies of securities in this sector. Overall, approximately $208 million of E*Trade asset-backed securities were downgraded during the month of October and through November 7, 2007, including approximately $50 million of “AAA” rated asset-backed CDOs that were downgraded to below investment grade.

E*Trade said in its filing, “We expect these declines will result in significant write downs to these securities during the fourth quarter; however, we cannot predict the amount for the fourth quarter as the write downs will depend on future market developments, including potential additional downgrades, and the estimated fair values of these securities on December 31, 2007.

In addition to our asset-backed CDO and second lien portfolio, we hold approximately $2.6 billion in amortized cost in other asset-backed securities, mainly securities backed by prime residential first-lien mortgages. These securities have also declined in fair value subsequent to September 30, 2007; however, the decline has not been as significant.”

In the last five years the E*Trade revenue has jumped from $1.8 billion to $3.8 billion and net earnings have jumped as well. The company lost $186 million in 2002 and increased its earnings steadily to $629 million. The earnings growth was supported by a fee income issued for high risk loans for homes, boats, and other recreational vehicles purchases.

At the end of September 30th for nine months revenue in 2007 declined 9% 1.62 billion and earnings fell to $270 million from $452 million.

[R]3:30AM New York, 5:30PM Tokyo – Stocks in Japan rallied reflecting Asia-wide rally in stocks after a U.S. rate cut hope. October industrial production rose 1.6% in Japan.[/R]

Stocks rallied in Japan as investors’ expectations rose for a rate cut in the U.S. at its policy meeting on December 11. The comments from the Fed Vice Chairman suggested that the Fed has to be ‘flexible and pragmatic’ at its next meeting while reviewing interest rate policy.

In Tokyo trading Nikkei 225 rose 2.38% or 359.96 to 15,513.74, while the broader Topix Index climbed 38.83 to 1,514.47.

In the first section of the Tokyo Stock Exchange 9.1 billion shares worth 1.1 trillion yen were traded and in the second section 445 million shares valued at 8.4 billion yen changed hands.

Of the Nikkei 225 shares, 206 gained, 15 declined, and 4 were unchanged. Meiji Dairies led advancers with a surge of 14.26%, largest jump in seven years after it suggested retail price increase of 58 types of dairy products between 3% and 10% in March 2008 The company blamed higher import cost.

Japan''s Ministry of Economy, Trade and Industry said today industrial production increased a seasonally adjusted 1.6% in October from a 1.4% decline in September, buoyed by rising production of semiconductor-making equipment and automobiles.

According to METI the index of output at mines and factories stood at 112.1.

The Federal Reserve Vice Chairman Donald Kohn comments suggested that recent financial markets volatility and economic conditions should be taken into consideration while reviewing interest rate policy. The comments reinforced investors expectations that interest rates are likely to be lowered between 25 and 50 basis points at the next meeting on Dec 11th.

Of the Nikkei 225 index shares, Meiji Dairies led the advancers with a rise of 14.26% followed by rises in Asahi Glass Co of 8.38%, in Tokai Carbon Company of 8.29%, in Nippon Sheet Glass of 7.86%, and in Fujitsu Limited of 7.66%.

Asahi Glass Company and Nippon Sheet Glass surged after the European Union charged the two glassmakers a smaller-than-projected 205 million euros fine for the price fixing.

Nippon Sheet Glass in particular had made a provision of 350 million pounds for the fines.

Exporters and financials climbed as the yen weakened to 110.31 from 108.41 yesterday against the dollar and stocks rallied and expectations that the U.S. rates may be lowered. Canon rose 3.17%, Komatsu climbed 3.93% and Toyota Motor Corporation firmed 3.17%.

Mitsubishi UFJ Financial group rose 6.11%, Mizuho Financial Group gained 4.67% and Mitsui Sumitomo Financial Group firmed 2.30%.

West Japan Railway Co. led decliners, falling 3.04%, followed by declines of 2.06% in Secom Company Limited, 1.77% in Inpex Holdings, 1.07% in East Japan Railway and 0.96% in Shionogi &Company.