Trust Preferred Securities Issued by Unconsolidated Subsidiaries

6 Months Ended

Jun. 30, 2012

Trust Preferred Securities Issued by Unconsolidated Subsidiaries [Abstract]

Trust Preferred Securities Issued by Unconsolidated Subsidiaries

13.  Trust Preferred Securities Issued by Unconsolidated Subsidiaries

We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable trust preferred securities. The trusts used the proceeds from the issuance of their trust preferred 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 trust preferred securities.

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

¿ required distributions on the trust preferred securities;

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

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

The Dodd-Frank Act changes the regulatory capital standards that apply to BHCs by requiring the phase-out of the treatment of trust preferred 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 trust preferred securities as Tier 2 capital. On June 12, 2012, the Federal Reserve, the FDIC, and the OCC jointly announced three notices of proposed rulemaking (each an “NPR”) that would revise and replace the agencies’ current capital rules in a manner consistent with implementing the final framework for strengthening international capital and liquidity regulation (“Basel III”) adopted by the Basel Committee on Banking Supervision (the “Basel Committee”). One NPR proposes rules implementing the phase-out of trust preferred securities as Tier 1 capital, consistent with the Dodd-Frank Act, as part of the implementation of Basel III. A more thorough discussion of current rulemaking underway in the U.S. to implement Basel III is in the “Supervision and Regulation” portion of this report.

As of June 30, 2012, the trust preferred securities issued by the KeyCorp capital trusts represent $339 billion or 3.5% of our total qualifying Tier 1 capital, net of goodwill. During the quarter, the announcement of the redemptions of the trust preferred securities issued by KeyCorp Capital VII and KeyCorp Capital X resulted in such securities no longer qualifying as Tier 1 capital. On July 12, 2012, we completed the redemption in full of the securities issued by KeyCorp Capital VII and X, with an aggregate liquidation preference of $707 million.

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

dollars in millions	Trust Preferred Securities, Net of Discount		(a)	Common Stock		Principal Amount of Debentures, Net of Discount		(b)	Interest Rate         of Trust Preferred Securities and Debentures			(c)	Maturity         of Trust Preferred Securities and Debentures
June 30, 2012
KeyCorp Capital I	$	156		$	6	$	162			1.208	%			2028
KeyCorp Capital II		116			4		120			6.875				2029
KeyCorp Capital III		151			4		155			7.750				2029
KeyCorp Capital VII(e)		189			5		194			5.700				2035
KeyCorp Capital X (d), (e)		589			—		589			8.000				2068
Total	$	1,201		$	19	$	1,220			6.616	%			—
December 31, 2011	$	1,206		$	19	$	1,225			6.610	%			—
June 30, 2011	$	1,912		$	26	$	1,935			6.570	%			—

(a) The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include basis adjustments related to fair value hedges totaling $155 million at June 30, 2012, $160 million at December 31, 2011, and $121 million at June 30, 2011. See Note 7 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.

(b) We have the right to redeem these 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); and July 16, 1999 (for debentures owned by KeyCorp Capital III). If the debentures purchased by KeyCorp Capital I are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. 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 $155 million at June 30, 2012, $160 million at December 31, 2011, and $118 million at June 30, 2011.

(c) The interest rates for the trust preferred securities issued by 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 trust preferred 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 5.70% 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 became effective on April 26, 2012.

(e) On June 12, 2012, KeyCorp announced the redemption, in full, of 5.70% trust preferred securities of KeyCorp Capital VII and 8.000% enhanced trust preferred securities of KeyCorp Capital X. On July 12, 2012, KeyCorp completed such redemptions.