NEW YORK (Dow Jones)--While E*Trade Financial Corp.'s (ETFC) stock offering and debt exchange should provide sufficient capital for now, the company's future is still uncertain.

On Monday, the troubled online broker began to exchange more than $1 billion in debt, nearly a week after it raised $478.5 million in a common stock offering. E*Trade also plans to seek approval from shareholders to issue additional shares.

Analysts say the moves, though damaging for equity holders, ensure E*Trade's survival in its current state, in the near term. However, lingering credit concerns could pose a future threat, with some projecting an increasing possibility of a future sale of the prized brokerage franchise.

"I'm not sure the situation will be any different two quarters from now," said Michael Hecht, an analyst with JMP Securities.

Hecht estimates that E*Trade's loan loss provision - the amount that it sets aside to offset losses from bad loans - will decline by $50 million a quarter, but adds that its unclear how long mortgage-related problems for the company will persist.

An E*Trade spokeswoman reiterated that the company is further advanced in the credit cycle than many of its peers and the broader industry.

Last week, E*Trade estimated second-quarter loan-loss provisions of $375 million to $450 million and projected net charge-offs of $375 million to $400 million. In the first quarter, the company reported $454 million and $334 million, respectively.

E*Trade also said in its May activity report that delinquencies of 30 to 89 days in its home-equity portfolio - its greatest exposure to loan losses - fell 10% from March 31 to May 31. Delinquencies of 30 to 179 days fell 14% in the same period.

Not all company watchers agree that E*Trade faces significant future losses. Earlier Tuesday, FBR Capital Markets analyst Matt Snowling said he believes "the worst is now behind E*Trade."

Snowling raised his rating on E*Trade to outperform from underperform, adding that nearly $2 billion of capital from the offering and exchange should "alleviate regulators' concerns and take the worst-case scenario (for E*Trade) off the table."

Shares of E*Trade rose as much as 7.6% on the report, but closed up 2 cents, or 1.7%, at $1.21. The company's stock is down over 25% since announcing the capital-raising initiatives last Wednesday.

Citadel Investment Group, E*Trade's largest shareholder and bondholder, played a major role in that plan. Citadel bought 90.9 million shares through the stock offering, boosting its E*Trade stake to about 17% from 15%. Citadel has also agreed to tender at least $800 million in E*Trade's long-term debt. The hedge fund giant's founder and Chief Executive, Kenneth Griffin, recently agreed to join the finance and risk-oversight committee of E*Trade's board.

Snowling's upgrade of E*Trade on Tuesday followed that of Fox-Pitt analyst David Trone, who said "the company's chances of survival have increased, while the stock is materially cheaper."

However, Trone said a sale of the company by the middle of next year is a possibility. He identified rival TD Ameritrade Holding Corp. (AMTD) as a potential suitor.

A TD Ameritrade spokeswoman said "its our policy not to comment on other companies - industry peers or otherwise." Previously, TD Ameritrade had said it would be interested in E*Trade's brokerage business.

Not everyone agrees that the capital-raising plan will mean a future deal involving the brokerage franchise.

"I don't see how this puts them in a better position for a sale," Hecht said.

E*Trade was hurt badly by mortgage woes, setting aside more than $1 billion last year to offset losses from bad loans. The company also applied for an $800 million investment from the U.S. Treasury Department's Troubled Asset Relief Program, but has yet to receive approval.



source : http://online.wsj.com