E TRADE Financial Corp (ETFC)

[TheWeen]

WHAT DOES THIS ALL MEAN? Opinions and facts please...

E*Trade's Debt Swap Triggers Ownership Change

E*TRADE Financial Corporation disclosed on Nov. 4, that during the third quarter it exchanged about $1.76 billion in principal amount of "interest-bearing debt" for an equal principal amount of non-interest bearing convertible debentures.

Subsequent to the completion of this exchange offer, some $592 million of new debentures were promptly converted into 572 million shares of E*Trade's common stock. As a result, the company reports, "we believe we experienced an ownership change."

As of Sept. 30, 2009, E*Trade had net operating losses (NOLs) totaling approximately $1.6 billion. Not surprisingly, the company observes that "the ownership change will extend the period of time it will take to fully utilize our NOL but will not limit the total amount of NOL we can utilize." As a result, E*Trade calculates that the "Sec. 382 limitation" precipitated by the ownership change is approximately $111 million.1

Accordingly, since the statutory carryforward period is 20 years, the company believes it will be able to fully use these NOLs. This claim seems valid: if the $1.6 billion in NOLs is "absorbed" at the rate of $111 million per year, the NOL balance will be fully exhausted in just over 14 years.

It is possible that the amount of NOLs subject to this limitation may increase. That will be the case if E*Trade has, at the time of the ownership change, "net unrealized built-in losses" (NUBILs), and those losses are recognized during the five-year period beginning on the date of the ownership change. These recognized built-in losses (RBILs) are treated as if they were pre-change losses with the result that the amount to be absorbed, at the rate of $111 million per year, will be increased.