Citadel's E*Trade Stake: The Selling Continues

We haven't covered the activity from Ken Griffin's hedge fund firm Citadel Investment Group for a bit because it's been a tornado of SEC 13D and Form 4 filings on Citadel's stake in ETrade Financial (ETFC) and we didn't want to bombard you with posts on it every other day. After the dust settled (for the moment at least), we thought we'd survey the damage in total to provide an overall look after the fact. This comes after our previous post that disclosed some of Citadel's sales. This time around was no different as the selling continued.

In late September, Citadel engaged in a debt-for-equity swap where it converted $87.9 million worth of Class A debentures. This yielded Citadel 84.9 million shares with an exercise price of $1.03 per share. The fund then also sold around 85 million shares ranging from prices of $1.70 to $2.08 and netted over $160 million from the transactions. After it was all said and done, Citadel was left holding 166.2 million shares of ETFC, or around $941 million worth at the time.

The hedge fund made the sales in order to manage its exposure levels in its portfolio. Citadel had previously planned to sell a bunch of shares under a pre-arranged trading schedule but then abandoned that plan. Its equity stake in ETrade was down to a 9.9% ownership stake, having previously been as high as 14.9%. We fully expect more SEC filings to come down the line if the past is any indication. To see the rest of Citadel's holdings, head to our post on its portfolio.

Ken Griffin started his career trading options from his dorm room at Harvard his freshman year. He then launched a convertible bond arbitrage fund his sophomore year and by his senior year, he had $1 million from investors. Since then, Citadel has seen average annual returns of around 20%. The year of 2008, however, was a difficult one for the fund as its flagship Wellington and Kensington funds were down big. In fact, it was among the top 10 hedge fund asset losers. The fund has bounced back this year though as its funds are up by quite a healthy margin. For some of Citadel's positions in UK markets, head to our post here.

Taken from Google Finance, ETrade is

a financial services company, that provides online brokerage and related products and services primarily to individual retail investors, under the brand E*TRADE Financial. The Company’s products and services include investor-focused banking primarily sweep deposits and savings products and asset gathering. The Company’s subsidiaries include, E*TRADE Bank, which provides investor-focused banking services to retail customers nationwide and deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC); E*TRADE Capital Markets, LLC (ETCM), which is a registered broker-dealer and market-maker; E*TRADE Clearing LLC, which is the clearing firm for the Company’s brokerage subsidiaries and is a wholly-owned operating subsidiary of E*TRADE Bank, and E*TRADE Securities LLC, which is a registered broker-dealer and the primary provider of brokerage services to the customers.

Comments

[lucky lenny:]

And your point is....

Oct 15 05:02 AM

[jackyl:]

You are really just reporting on this...like its new? This was all over the other news sites well over a week ago. Now you make it look like Citadel is STILL selling...unreal.

Oct 15 07:34 AM

[waf76:]

I'm waiting for the point too...

Oct 15 09:09 AM

[mr.Bigstuff:]

Okkkkkkkkkk? what's your point?

Oct 15 09:39 AM

[Mr. Stupid:]

I hope you didn't get paid for this article.

I do see this as a prime opportune time to rack up on some ETFC shares.

Mr. Stupid

Oct 15 11:22 AM

[User 488509:]

Not only is this article pointless and vapid , even worse, it's incomplete and misleading.

Focusing on Griffin's conversion and sale of less than $200m in stock and completely ignoring his mid-September sale for cash of approx. $850m in interest bearing ETFC notes makes for a very incomplete picture.

This is the somewhat misleading bit:

"In late September, Citadel engaged in a debt-for-equity swap where it converted $87.9 million worth of Class A debentures. This yielded Citadel 84.9 million shares with an exercise price of $1.03 per share. The fund then also sold around 85 million shares ranging from prices of $1.70 to $2.08 and netted over $160 million from the transactions."

In fairness to the author , I've seen these transactions described like this easily over a hundred times.
The problem is the casual reader sees the $1.03 conversion price and the subsequent sale from $1.70-$2.08 and quickly calculates Citadel is raking in anywhere from $.67 to $1.05 in profit.
That's not really the case.
What's forgotten is the cost of the underlying interest paying note that was "exchanged" for the debenture that Griffin gave back to ETFC along with $1.03 to get the share of stock he immediately sold.
Griffin's exact profit is difficult to exactly pinpoint due to interest paid to him on some of the bonds and other bonds he may have bought on the open market at a substantial discount.

We do know he paid $1 for $1.7 B of 2017's.
He collected 12.5% on them in cash and PIK for almost two years.
That yields a "ballpark" cost basis of approx. $.75.

So,you can make a pretty good case that Griffin's cost basis on much of that debt is $.75 plus the $1.034 conversion price. When he sells at below $1.78 , he may actually be selling at loss.

It's important in terms of perception and Citadel's motivation.

Knowing a hedge fund is selling ETFC to lock in a fat 67-105 cents profit is understandable to investors. Quick profits are what hedge funds are about.
But knowing Griffin may actually be eating a loss to get out of ETFC , sends an entirely different message.

Oct 15 04:55 PM

[driftwood2:]

What is with you guys? The author's point is obvious. ETFC sucks and Citadel is selling. Are you paid spammers or something?

Oct 17 04:55 PM

[connorport:]

Personally i have racked up shares myself recently after dumping them over a year ago before the bottom fell out. E*Trade does have the best trading platform and tools in the market and a great marketing strategy that doesn't let up. My plan has worked to this point on many equities and that is to get in but keep cash to the side. If earnings come in good then take the ride but if earnings run the stock down then margin down with the spare cash for a quicker rebound.

E*Trade will rebound. If you are looking to get rich quick then you might be dissapointed but if you are good with a 2-400% gain over the next 2-4 years then you're patience will pay off.

Oct 18 05:04 PM

[redbeard20000:]

User488509, I think it is you who are greatly mistaken here. Citadel is not paying 1.03 to buy shares when they convert. They are exchanging the debt for the shares at a rate of one share for 1.034 dollars of debt.

They "paid" 1$ for each dollar of debt back when the notes were first issued in 2007. They're not paying twice, and etrade certainly isn't receiving additional funds when Citadel converts. Any sale of stock by Citadel above 1.034 is profit for them. Does this make it clear, or do you need a LINK for proof?


On Oct 15 04:55 PM User 488509 wrote:

> Not only is this article pointless and vapid , even worse, it's incomplete
> and misleading.
>
> Focusing on Griffin's conversion and sale of less than $200m in stock
> and completely ignoring his mid-September sale for cash of approx.
> $850m in interest bearing ETFC notes makes for a very incomplete
> picture.
>
> This is the somewhat misleading bit:
>
> "In late September, Citadel engaged in a debt-for-equity swap where
> it converted $87.9 million worth of Class A debentures. This yielded
> Citadel 84.9 million shares with an exercise price of $1.03 per share.
> The fund then also sold around 85 million shares ranging from prices
> of $1.70 to $2.08 and netted over $160 million from the transactions."
>
>
> In fairness to the author , I've seen these transactions described
> like this easily over a hundred times.
> The problem is the casual reader sees the $1.03 conversion price
> and the subsequent sale from $1.70-$2.08 and quickly calculates Citadel
> is raking in anywhere from $.67 to $1.05 in profit.
> That's not really the case.
> What's forgotten is the cost of the underlying interest paying note
> that was "exchanged" for the debenture that Griffin gave back to
> ETFC along with $1.03 to get the share of stock he immediately sold.
>
> Griffin's exact profit is difficult to exactly pinpoint due to interest
> paid to him on some of the bonds and other bonds he may have bought
> on the open market at a substantial discount.
>
> We do know he paid $1 for $1.7 B of 2017's.
> He collected 12.5% on them in cash and PIK for almost two years.
>
> That yields a "ballpark" cost basis of approx. $.75.
>
> So,you can make a pretty good case that Griffin's cost basis on much
> of that debt is $.75 plus the $1.034 conversion price. When he sells
> at below $1.78 , he may actually be selling at loss.
>
> It's important in terms of perception and Citadel's motivation.
>
>
> Knowing a hedge fund is selling ETFC to lock in a fat 67-105 cents
> profit is understandable to investors. Quick profits are what hedge
> funds are about.
> But knowing Griffin may actually be eating a loss to get out of ETFC
> , sends an entirely different message.

Oct 20 03:17 PM

[Ricard:]

Substantiate this point.

My understanding is that they once held, let's say $1.7bn of debt. They then exchanged this interest bearing debt, the interest of which they got in cash, for $1.7bn in convertible debt, convertible at $1 per share.

Then, they convert the debt (still valued at $1.7bn, as long as ETFC trades over $1), get shares for $1, and then immediately sell the shares for market price (which today is still around $1.70).

This sounds wildly profitable to me. I don't know how you can be so far off the mark regarding convertibles. Where in the world are you getting your 'ballpark' cost?


On Oct 15 04:55 PM User 488509 wrote:

"We do know he paid $1 for $1.7 B of 2017's.
He collected 12.5% on them in cash and PIK for almost two years.
That yields a "ballpark" cost basis of approx. $.75."

Oct 20 10:17 PM