E*Trade Financial, LLC -- Moody's continues to review for upgrade E*TRADE's ratings
Announcement: Moody's continues to review for upgrade E*TRADE's ratings
Global Credit Research - 27 Aug 2020
New York, August 27, 2020 -- Moody's Investors Service (Moody's) continues to review for upgrade all of E*TRADE Financial Corp.'s (E*TRADE) ratings, including its Baa2 long-term issuer and senior unsecured ratings. Moody's also continues to review for upgrade E*TRADE Bank's ratings except its baa1 baseline credit assessment (BCA) and P-1 short term bank deposit ratings.
Moody's said its review for upgrade was initiated on 21 February 2020 following E*TRADE's announcement that it had entered into a definitive agreement to be acquired by Morgan Stanley (A3 senior, review for upgrade) in an all-stock transaction valued at around $13 billion.
RATINGS RATIONALE
Moody's said the reviews for upgrade of E*TRADE and E*TRADE Bank will consider the credit profile of their combination with higher-rated Morgan Stanley. The reviews for upgrade will focus on the likely closing of the transaction, which the parties expect to occur in the fourth quarter of 2020, following regulatory approvals.
E*TRADE Bank's baa1 BCA is not on review for upgrade because it is already a notch higher than Morgan Stanley's lead bank's (Morgan Stanley Bank, N.A.) baa2 BCA.
FACTORS THAT COULD LEAD TO AN UPGRADE
-The consummation of the announced acquisition.
-The development of profitable new revenue streams to complement E*TRADE's existing transaction and spread-based activities and diversifying its cash generating capabilities without adding significant credit risk
-Improved earnings generation derived from strong organic growth and disciplined cost management
FACTORS THAT COULD LEAD TO A DOWNGRADE
-Failure to maintain a financial profile in line with the current rating as a result of the elimination of its trading commissions
-Shift in strategy to tolerate a significant increase in debt leverage driven by debt-funded shareholder distributions or M&A activity, especially if debt/EBITDA worsened to about 2.0x, and absent a clear and cohesive plan to return leverage to its pre-existing level in the near-term
-Increased tolerance for asset risk at E*TRADE Bank because it could lead to greater risk of unexpected losses and capital depletion
-Significant deterioration in franchise value, via a security breach of client accounts, a sustained service outage, or a significant legal or compliance issue resulting in reputational damage, loss of customers and litigation costs pressuring profit margins.
The methodology used in rating E*TRADE Financial Corp. was Securities Industry Service Providers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187116. The methodology used in rating E*TRADE Bank was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
Fadi Abdel Massih Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Ana Arsov MD - Financial Institutions Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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