KeyCorp to sell $1.5 billion stock, convertible preferreds; convertibles talked 7.25%-7.75%, up 20%-25%

By Rebecca Melvin

New York, June 12 - KeyCorp plans to raise about $1.5 billion of newly issued common shares and non-cumulative perpetual convertible preferred stock to shore up its capital and strengthen its balance sheet following accounting changes, the Cleveland-based regional bank said.

The registered offerings were expected to price after the close of markets on Thursday, with the convertible non-cumulative preferreds talked with a dividend of 7.25% to 7.75% and with an initial conversion premium of 20% to 25%, a market source said.

The convertibles will have a par price of $100 per preferred. They will be non-callable for five years, with forced conversion thereafter at a price hurdle of 130%.

There will be no investor puts, and dividend protection is via a conversion rate adjustment off $0.1875 per quarter dividend threshold amount.

Takeover protection will be via a standard make-whole table. There is no net share settlement, with settlement via stock only.

Citigroup is the bookrunner for the offerings, with KeyBanc Capital Markets Inc., UBS Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Inc. and Morgan Stanley & Co. Inc. the joint lead managers.

Proceeds from the two offerings are intended to restore capital to strengthen KeyCorp's balance sheet following the accounting charges and will be used for general corporate purposes.

The company also intends to cut its dividend on KeyCorp common shares by 50%, starting with the third quarter to an annualized dividend of $0.75 per common share.

The dividend reduction will result in Key retaining about $200 million of capital annually (pro forma, after giving effect to the anticipated capital raise).

These steps are being taken to preserve and enhance capital strength in response to a previously announced ruling by a federal court in a dispute over tax treatment of a segment of KeyCorp's leveraged lease portfolio, according to a company release.

Although the announced steps are being taken primarily to offset the accounting effects of the adverse court ruling, they will also help maintain the company's strong capital ratios and position it to better address current economic conditions and future growth opportunities.

In the second quarter, KeyCorp will take an after-tax accounting charge to earnings and capital in the range of $1.1 billion to $1.2 billion for the leveraged lease tax litigation and all of KeyCorp's other contested leveraged lease transactions.

KeyCorp is considering appealing the court decision rendered on the leveraged lease transaction. The bank continues to believe that the tax treatment it applied to its leveraged lease transactions complied with applicable tax laws, regulations and judicial authorities in effect at the time and was consistent with industry practice.

Regardless of whether KeyCorp decides to appeal the trial court tax decision, management believes that the applicable accounting guidance requires KeyCorp to recalculate lease income recognized on its entire portfolio of contested leveraged leases, and not just for the single leveraged lease subject to the court decision.

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