KeyCorp (KEY) announced that it would fully redeem about $361 million of Trust Preferred Securities (TRUPs) issued by KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VIII and Union State Capital Trust I. These include 5.875% TRUPs, 6.125% TRUPs, 7% Enhanced TRUPs and 9.580% Capital Securities.
KeyCorp stated that the redemption of these securities, scheduled for September 1, would be funded from the company’s existing cash available. The company further announced that the holders of TRUPs for Union State Capital Trust I would receive 102.874% of the principal amount.
According to KeyCorp, these redemptions are consistent with the new capital plan submitted by the company on June 10 to the Federal Reserve. So, finally on Monday, the Fed signaled the company to go ahead with the redemption plan.
KeyCorp was one of the 19 banks that were subjected to stress tests conducted by the Fed. The company had submitted its capital plans to the Fed in January. In March, following the approval from the Fed, the company repaid $2.5 billion of the Troubled Asset Relief Program (TARP) money.
Additionally, KeyCorp had also received the Fed approval to hike dividend from 1 cent per share to 3 cents in the second quarter, which the company paid on June 15.
Similarly, in May, Fifth Third Bancorp (FITB) had issued a notice to the trustee of Fifth Third Capital Trust VII to redeem the 8.875% TRUPs. The company stated that each Trust Preferred Security would be redeemed at a cash redemption price of $25.18.
We believe that KeyCorp's strong Tier 1 common capital, along with the changing treatment of TRUPs as qualifying Tier 1 capital under the Basel III requirements, make the company’s redemption decision apt.
Though KeyCorp’s results are likely to be affected by the volatile operating environment and added costs of maintaining Basel III norms, we expect that the company’s business restructuring actions will continue to fuel its credit quality, capital position and liquidity.
KeyCorp currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the stock.
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