E*Trade’s Debt Reduction Plans Suggest That It Has Turned The Corner

by Trefis Team
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E*Trade Financial (NASDAQ:ETFC) announced last week that regulators have allowed its banking subsidiary, E*Trade Bank, to issue a capital dividend of $100 million to the parent company. (E*TRADE Financial Corporation Obtains Regulatory Approval to Dividend Bank Capital to Its Parent Company, Company Press Release, September 2013)) The company’s management mentioned during a conference call on September 10 that they intend to use this money to pay off corporate debt.

E*Trade has been in the process of de-risking and deleveraging its balance sheet for some time in order to make such a dividend possible. This regulatory approval has come earlier than we expected and highlights the progress made by the financial services firm in executing its capital plan.

Going forward, E*Trade’s management intends to further reduce its corporate debt by distributing a similar amount of money to the parent company every quarter, subject to regulatory approval. This should result in a sharp decline in E*Trade’s corporate interest expense over the next few quarters. We are making adjustments to our forecasts to reflect this, and as a result we are revising our price estimate for the company’s stock to just over $14, up from around $11 previously.

See our full analysis for E*Trade Financial

Debt Load High But Likely To Decline Sharply

According to the firm’s latest quarterly filings, E*Trade had around $1.7 billion of interest bearing debt at the end of Q2, all of which costs at least 6% per year.

E*Trade’s Interest-bearing notes (in million $): Face Value Discount Net
6.75% Notes, due 2016 435 (4.9) 430.1
6% Notes, due 2017 505 (4.2) 500.8
6.375% Notes, due 2019 800 (6.8) 793.2
Total interest-bearing notes 1,740 (15.9) 1,724.1

The company’s management suggested during the September 10 conference call that it will continue to distribute capital dividends from its bank to the parent company until the end of 2014, at a run rate of $100 million per quarter. The first payment in scheduled to be made in September, meaning that another round is likely sometime in Q4 2013. [1]

Since this money is being released with the intention of lowering the parent company’s debt, the brokerage’s debt burden is likely to be lighter by at least $600 million when it enters 2015.

Sharp Decline In Interest Expense

E*Trade’s interest expense remained in the $180 million range in 2011 (debt ~1.50 billion) and 2012 (debt ~1.76 billion). However, the company refinanced a significant amount of its debt last year, resulting in a drastic decline in interest expense. The figure was around $57 million during the first six months of 2013, implying a run rate of $114 million for the whole year. We believe that this figure will decline even further with the ongoing reduction in debt, and boost the brokerage’s net income going forward. In our model, corporate interest expense is combined with other overhead expenses in the “Corporate Expenses” driver.

After incorporating the impact of debt reduction and other cost reduction measures, our price estimate for the firm is around $14.30.

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  1. E*TRADE Financial’s Management Presents at 2013 Barclays Global Financial Services Conference, SeekingAlpha, September 10, 2013 []
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