E*TRADE's Shiny New Convertible

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Owners of convertibles love it when the weather is nice. It affords them the luxury of going topless, enjoying unobstructed views of their scenic surroundings.

The same can be said for owners of convertible debt. These bonds also shine when it's sunny outside, given the ability of bondholders to convert their corporate debt into common stock when equity prices are rolling higher.

You can assume, then, that convertible cars and convertible bonds are hard sells when the weather is crummy. So here's the question of the day: Why is E*TRADE (Nasdaq: ETFC) moving convertible debentures in the middle of its rainstorm? With troubled assets, stiff capital requirements, and analysts expecting losses to continue until 2011, should a company that saw its stock close at $1.26 a share last week really be tethering itself to convertible debt?

The online discount broker announced the terms of its new convertible debt offering this morning. It plans to issue more than $1 billion in convertible bonds, exchangeable into E*TRADE stock at a mere $1.034 a share for the Class A debentures, and $1.551 for the Class B debentures.

Companies offer convertibles as a way to raise money at lower interest rates than conventional debt, even if it means diluting existing shareholders. E*TRADE's new debt is a zero coupon bond, so it actually won't have come with interest expense.

The new debentures are being offered to creditors owning high-yielding E*TRADE debt. It helps that Citadel Investment Group -- the broker's largest creditor -- is willing to convert at least $800 million of its existing E*TRADE for the new convertibles that mature in 2019.

You can't really blame Citadel. It's already in pretty deep with E*TRADE. Beyond being its largest investor and creditor, Citadel's CEO joined the broker's board this month. Anything that helps E*TRADE avoid going under -- and this move, though dilutive, will clearly improve the company's interest expense exposure -- is also good for Citadel.

Extending debt maturities will help keep the buzzards away. Swapping interest-bearing debt for zero coupon debt is a good step toward profitability.

E*TRADE stands out as one of the few money-losing players in the discount brokerage space. Larger rivals TD AMERITRADE (Nasdaq: AMTD) and Charles Schwab (Nasdaq: SCHW) are consistently in the black. Diversified trading enablers like Interactive Brokers (Nasdaq: IBKR), optionsXpress (Nasdaq: OXPS), and TradeStation (Nasdaq: TRAD) are all in the black.

E*TRADE stands out in a crowd. Hopefully it will stand out -- in a good way -- once it pops the top on its shiny new convertible.