eTrade 2009 Annual Report Download - page 127

Property valuations are based on the most recent property value data available, which may include
appraisals, prices for identical or similar properties, broker price opinions or home price indices. These fair value
measurements were classified as Level 3 of the fair value hierarchy as the majority of the valuations included
Level 3 inputs that were significant to the estimate of fair value.
Debt Exchange
In the third quarter of 2009, the Company exchanged $1.7 billion aggregate principal amount of its 12
1
⁄ 2 %
Notes and 8% Notes for an equal principal amount of newly-issued non-interest-bearing convertible
debentures(1).The Debt Exchange was accounted for as a debt extinguishment at fair value with the resulting loss
recognized in the consolidated statement of loss(2). The Company’s methodology for determining the fair value of
the non-interest-bearing convertible debentures was based on the following three factors: 1) intrinsic value of the
underlying stock; 2) value of the 10-year put option; and 3) liquidity discount.
The most significant factor in the valuation of the non-interest-bearing convertible debentures was the
intrinsic value of the underlying stock, which represented the value of the underlying shares of the Company’s
stock at the date of exchange. The fair value of the non-interest-bearing convertible debentures was greater than
the face amount of the corporate debt that was exchanged primarily due to the significant increase in the
Company’s stock price from June 22, 2009, the date on which the conversion price was established, to
August 25, 2009, the date on which the Debt Exchange was consummated. The other inputs to the valuation of
the non-interest-bearing convertible debentures included the value of the 10-year put option and a liquidity
discount. The value of the 10-year put option represented the value associated with creditors’ option to receive
cash equal to the face value of the non-interest-bearing convertible debentures at the end of 10 years in lieu of
converting the non-interest-bearing convertible debentures into common stock. The liquidity discount
represented the Company’s consideration that the non-interest-bearing convertible debentures are not as liquid as
the Company’s stock or might not be readily tradable once issued and that future conversions would be subject to
certain limitations.
The following table outlines the Company’s fair value measurement of the non-interest-bearing convertible
debentures, including the fair value of each individual component, using the $1.35 closing stock price on
August 25, 2009, the date of consummation of the Debt Exchange (dollars in thousands):
August 25, 2009
Fair Value
Fair Value as a
% of Principal
Amount
Intrinsic value of the underlying stock $2,273,222 131%
Value of 10-year put option 467,699 27%
Liquidity discount (274,092) (16)%
Fair value of convertible debentures(1) $2,466,829 142%
(1) The Company classified this fair value measurement as Level 3 of the fair value hierarchy as the liquidity discount represented an
unobservable input significant to the fair value measurement.
(1) For further details on the newly-issued non-interest-bearing convertible debentures see Note 14—Corporate Debt.
(2) For further details on the accounting for the Debt Exchange see Note 1—Organization, Basis of Presentation and Summary of Significant
Accounting Policies.
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