Capital Securities Issued by Unconsolidated Subsidiaries

3 Months Ended

Mar. 31, 2012

Capital Securities Issued by Unconsolidated Subsidiaries [Abstract]

Capital Securities Issued by Unconsolidated Subsidiaries

13. 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 allowed BHCs to continue to treat capital securities as Tier 1 capital but imposed 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. These changes in effect apply the same leverage and risk-based capital requirements that apply to depository institutions and BHCs, savings and loan companies, and nonbank financial companies identified as systemically important. In January 2012 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). 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 March 31, 2012, the capital securities issued by the KeyCorp capital trusts represent $1.0 billion or 10.23% 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
March 31, 2012
KeyCorp Capital I	$	156		$	6	$	162		1.321	%	2028
KeyCorp Capital II		109			4		113		6.875		2029
KeyCorp Capital III		141			4		145		7.750		2029
KeyCorp Capital VII		190			5		195		5.700		2035
KeyCorp Capital X (d)		594			—		594		8.000		2068
Total	$	1,190		$	19	$	1,209		6.625	%	—
December 31, 2011	$	1,206		$	19	$	1,225		6.610	%	—
March 31, 2011	$	1,890		$	26	$	1,916		6.548	%	—

(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 $144 million at March 31, 2012, $160 million at December 31, 2011, and $99 million at March 31, 2011. See Note 7 (“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. 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 $144 million at March 31, 2012, $160 million at December 31, 2011, and $99 million at March 31, 2011.

(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 the issuances of these capital securities, KeyCorp entered into a replacement capital covenant. On April 16, 2012, KeyCorp commenced a consent solicitation from the holders of record as of April 10, 2012, of the outstanding trust preferred securities of KeyCorp Capital VII to terminate the Replacement Capital Covenant, dated as of February 27, 2008, as amended (the “RCC”) by KeyCorp in favor of and for the benefit of each Covered Debt holder (as defined in such RCC). On April 27, 2012, KeyCorp announced that, effective as of April 26, 2012, a majority of the holders of record of the trust preferred securities in liquidation amount of KeyCorp Capital VII consented to terminate the RCC. Pursuant to the terms of the consent solicitation, the termination of the RCC therefore became effective on April 26, 2012. Should KeyCorp elect to redeem KeyCorp Capital X, it may now do so without complying with the RCC.