As opportunistic funds scour the distressed market for value, Citadel Investment Group has decided to pump a $2.55 billion cash infusion into E*Trade Financial Corp. that will come in a two-part investment. Citadel will first purchase E*Trade's complete $3 billion portfolio of asset-backed securities for approximately $800 million. The firm will also purchase $1.75 billion worth of 10-year notes, paying an annual interest rate of about 12.5%. The cash investment will give Citadel a 17% stake in E*Trade.
Earlier this month, E*Trade had its debt ratings cut two notches to single-B from double-B-minus by Standard & Poor's. E*Trade Bank had its rating also cut by two notches to double-B-minus from double-B-plus. The rating agency currently has the company on CreditWatch with negative implications based on its expectations for further write downs in its investment securities in the fourth quarter, noting that 87% of the loans are purchased from third parties, 51% of the home equity loans have LTV ratios greater than 80%, of which 20% have LTVs greater than 90%; and approximately 40% of the loans are from the 2006 vintage. Moody's Investors Service affirmed E*Trade's 'Ba2' rating but revised its outlook to stable from positive.
In conjunction with the investment will be a senior management reshuffle. Don Layton, who was previously with JPMorgan Chase for 29 years most recently as vice chairman, will become non-executive chairman of E*Trade. He has served as special advisor to the E*Trade board. The company has said goodbye to Chief Executive Mitch Caplan, who has been CEO since 2003. Jarrett Lilien will step in as intermin CEO. Among other departures from E*Trade has been Dennis E. Webb, former division president of E*Trade Capital Markets, who left the firm on Nov. 9, 2007.