Ahead of the Bell: E-Trade Financial

Shares of E-Trade Financial Corp. continued to slip Monday in the aftermath of its $1 billion proposed debt swap and common stock offering, part of its plan to free itself of debt and raise more capital.

While its actions are designed to provide a financial cushion it also dilutes the value of existing shares for stockholders.

Shares of the broker, which has been hit hard by soured real-estate loans, fell 3.2 percent, or 4 cents, to $1.22 in premarket trading Monday. Shares have fallen nearly 24 percent since E-Trade announced its stock offering of 435 million shares and the debt exchange, but is still up sharply from its March lows.

The exchange is for $1 billion in outstanding debt for new 10-year notes that could be converted for common stock. The swap includes debt due in 2011.

E-Trade on Friday said it priced a public offering of 435 million common shares at a 23 percent discount to its previous day's closing price. Citadel Investment Group LLC, E-Trade's largest shareholder, bought an additional 90.9 million additional shares.

Fox-Pitt Kelton analyst David Trone on Monday upgraded the broker to "In Line" from "Underperform," saying the capital raise will be a "sufficient cushion" to get the company through the first quarter of 2010.

"We continue to firmly believe that E-Trade will likely be bankrupt or sold by mid-year 2010, with the latter now looking more likely," Trone wrote in a note to investors. He thinks the brokerage could be sold for $3.51 a share, with the bulk of proceeds used to repay debt and $1.68 in cash left for shareholders _ a 33 percent gain from the current price.

Credit ratings agency Standard & Poor's Ratings Services on Friday also cut a key debt rating for E-Trade Financial deeper into junk territory, calling the company's capital-raising moves "a short-term fix to a long-term problem."