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Capital Securities Issued by Unconsolidated Subsidiaries

12 Months Ended

Dec. 31, 2011

Capital Securities Issued by Unconsolidated Subsidiaries [Abstract]

Capital Securities Issued by Unconsolidated Subsidiaries [Text Block]

17. Capital Securities Issued by Unconsolidated Subsidiaries

We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable preferred capital securities. The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the mandatorily redeemable preferred capital securities.

We unconditionally guarantee the following payments or distributions on behalf of the trusts:

¿ required distributions on the capital securities;

¿ the redemption price when a capital security is redeemed; and

¿ the amounts due if a trust is liquidated or terminated.

Our mandatorily redeemable preferred capital securities currently constitute Tier 1 capital for regulatory reporting purposes, and have the same federal tax advantages as debt.

Beginning March 31, 2011, a new rule adopted by the Federal Reserve allows BHCs to continue to treat capital securities as Tier 1 capital but imposes stricter quantitative limits. This rule did not have a material effect on our financial condition.

The Dodd-Frank Act changes the regulatory capital standards that apply to BHCs by requiring the phase-out of the treatment of capital securities and cumulative preferred securities as Tier 1 eligible capital. This three-year phase-out period, which commences January 1, 2013, ultimately will require us to treat our mandatorily redeemable preferred capital securities as Tier 2 capital. Generally speaking, these changes take the leverage and risk-based capital requirements that apply to depository institutions and apply them to BHCs, savings and loan companies, and nonbank financial companies identified as systemically important. In January 2012 as part of a related notice of proposed rulemaking, the Federal Reserve indicated that it is in the process of developing a rulemaking with other agencies to implement Basel III (which will also implement the referenced provisions of the Dodd-Frank Act as well). Accordingly, a notice of proposed rulemaking is expected in the first half of 2012. We anticipate that the rulemaking will provide additional clarity to the regulatory capital guidelines applicable to BHCs, such as Key.

As of December 31, 2011, the capital securities issued by the KeyCorp capital trusts represent $1 billion or 10.40% of our total qualifying Tier 1 capital, net of goodwill.

The capital securities, common stock and related debentures are summarized as follows:

dollars in millions

Capital
Securities,
Net of Discount        ^(a)

Common
Stock

Principal
Amount of
Debentures,
Net of Discount     ^(b)

Interest Rate
of Capital
Securities and
Debentures     ^(c)

Maturity

of Capital
Securities and
Debentures

December 31, 2011

KeyCorp Capital I

156

162

1.112

2028

KeyCorp Capital II

114

118

6.875

2029

KeyCorp Capital III

148

152

7.750

2029

KeyCorp Capital VII

190

195

5.700

2035

KeyCorp Capital X ^(d)

598

—

598

8.000

2068

Total

1,206

1,225

6.610

—

December 31, 2010

1,797

1,948

6.546

—

(a)

The capital securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of capital securities carries an interest rate identical to that of the related debenture. Certain capital securities include basis adjustments related to fair value hedges totaling $160 million at December 31, 2011, and $6 million at December 31, 2010. See Note 8 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.

(b)

We have the right to redeem our debentures: (i) in whole or in part, on or after July 1, 2008 (for debentures owned by KeyCorp Capital I); March 18, 1999 (for debentures owned by KeyCorp Capital II); July 16, 1999 (for debentures owned by KeyCorp Capital III); March 15, 2013 (for debentures owned by KeyCorp Capital X); and (ii) in whole at any time within 90 days after and during the continuation of: a “tax event,” a “capital treatment event”, and an “investment company event,” with respect to KeyCorp Capital VII and X only; and with respect to KeyCorp Capital X only a “rating agency event” (as each is defined in the applicable indenture). If the debentures purchased by KeyCorp Capital I, KeyCorp Capital VII and KeyCorp Capital X are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. However, in the event KeyCorp Capital X is redeemed prior to March 15, 2013 and within 90 days of a “rating agency event” (as defined in the applicable indenture), a “make whole redemption price” is applied upon such redemption to KeyCorp Capital X securities. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points (25 basis points or 50 basis points in the case of redemption upon either a tax event or a capital treatment event for KeyCorp Capital III), plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price for KeyCorp Capital II and KeyCorp Capital III generally is slightly more favorable to us. The principal amount of debentures shown above includes adjustments related to hedging with financial instruments totaling $160 million at December 31, 2011, and $131 million at December 31, 2010.

(c)	The interest rates for KeyCorp Capital II, KeyCorp Capital III, KeyCorp Capital VII, and KeyCorp Capital X are fixed. KeyCorp Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points that reprices quarterly. The total interest rates are weighted-average rates.

(d)

In connection with each of these issuances of capital securities, KeyCorp entered into a replacement capital covenant (“RCC”). Should KeyCorp redeem or purchase these securities or related subordinated debentures, absent receipt of consent from the holders of the “Covered Debt” or certain limited exceptions, KeyCorp would need to comply with the applicable RCC.

In August 2011, KeyCorp repurchased $23 million of capital securities issued by KeyCorp Capital VII. KeyCorp redeemed the following capital securities in full on the respective dates noted:


Issuer		Repurchase or redemption date
KeyCorp Capital V		September 1, 2011
KeyCorp Capital VI		September 1, 2011
KeyCorp Capital VIII		September 1, 2011
Union State Capital I		September 1, 2011
Union State Statutory Trust IV		October 7, 2011
Union State Statutory Trust II		October 31, 2011
KeyCorp Capital IX		December 15, 2011