KeyBank 2006 Annual Report Download - page 88

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88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Principal Interest Rate Maturity
Capital Amount of of Capital of Capital
Securities, Common Debentures, Securities and Securities and
dollars in millions Net of Discount
a
Stock Net of Discount
b
Debentures
c
Debentures
DECEMBER 31, 2006
KeyCorp Capital I $ 197 $ 8 $ 205 6.112% 2028
KeyCorp Capital II 174 8 165 6.875 2029
KeyCorp Capital III 221 8 197 7.750 2029
KeyCorp Capital V 163 5 180 5.875 2033
KeyCorp Capital VI 73 2 77 6.125 2033
KeyCorp Capital VII 228 8 258 5.700 2035
KeyCorp Capital VIII 254 — 250 7.000 2066
KeyCorp Capital IX 494 — 500 6.750 2066
Total $1,804 $39 $1,832 6.613% —
DECEMBER 31, 2005 $1,617 $54 $1,597 6.794% —
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. Included in certain capital securities at December 31, 2006 and 2005, are basis adjustments of $11 million and $74 million, respectively, related to fair value
hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 100, for an explanation of fair value hedges.
b
KeyCorp has the right to redeem its debentures: (i) in whole or in part, on or after July 1, 2008 (for debentures owned by Capital I), March 18, 1999 (for debentures owned by Capital II), July 16,
1999 (for debentures owned by Capital III), July 21, 2008 (for debentures owned by Capital V), December 15, 2008 (for debentures owned by Capital VI), June 15, 2011 (for debentures owned
by Capital VIII), and December 15, 2011 (for debentures owned by Capital IX); and, (ii) in whole at any time within 90 days after and during the continuation of a “tax event,” an “investment
company event” or a “capital treatment event” (as defined in the applicable indenture). If the debentures purchased by Capital I, Capital V, Capital VI, Capital VII, Capital VIII or Capital IX are
redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Capital II or Capital III are redeemed
beforethey 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 for Capital III), plus any accrued but unpaid interest. When debentures
areredeemed in response to tax or capital treatment events, the redemption price generally is slightly more favorable to KeyCorp.
c
The interest rates for Capital II, Capital III, Capital V, Capital VI, Capital VII, Capital VIII and Capital IX are fixed. Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis
points; it reprices quarterly. The rates shown as the total at December 31, 2006 and 2005, are weighted-average rates.
14. SHAREHOLDERS’ EQUITY
KeyCorp owns the outstanding common stock of business trusts 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 capital securities.
The capital securities provide an attractive source of funds; they constitute
Tier 1 capital for regulatory reporting purposes, but have the same tax
advantages as debt for federal income tax purposes. During the first
quarter of 2005, the Federal Reserve Board adopted a rule that allows
bank holding companies to continue to treat capital securities as Tier 1
capital, but imposed stricter quantitative limits that take effect after a five-
year transition period ending March 31, 2009. Management believes the
new rule will not have any material effect on Key’s financial condition.
KeyCorp unconditionally guarantees 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
• amounts due if a trust is liquidated or terminated.
In 2006, the KeyCorp Capital VIII trust issued $250 million of securities,
and the KeyCorp Capital IX trust issued $500 million of securities. In
2005, the KeyCorp Capital VII trust issued $250 million of securities.
On December 1, 2006, KeyCorp redeemed the KeyCorp Institutional
Capital A debentures with a face value of $350 million, and on
December 15, 2006, KeyCorp redeemed the KeyCorp Institutional
Capital B debentures with a face value of $150 million. These debentures
were redeemable at the option of KeyCorp, at a premium, on or after
December 1, 2006, and December 15, 2006, respectively. KeyCorp
recorded a $24 million charge to noninterest income in connection
with the redemptions. The capital securities were subject to mandatory
redemption upon repayment of the debentures.
The capital securities, common stock and related debentures are
summarized as follows:
13. CAPITAL SECURITIES ISSUED BY UNCONSOLIDATED SUBSIDIARIES
SHAREHOLDER RIGHTS PLAN
KeyCorp has a shareholder rights plan which was adopted in 1989 and
subsequently amended. Under the plan, each shareholder received one
Right — initially representing the right to purchase a common share for
$82.50 — for each KeyCorp common share owned. All of the Rights
expire on May 14, 2007, but KeyCorp may redeem Rights earlier for
$.005 apiece, subject to certain limitations.
Rights will become exercisable if a person or group acquires 15% or
more of KeyCorp’s outstanding shares. Until that time, the Rights will
trade with the common shares; any transfer of a common share also will
transfer the associated Right. If the Rights become exercisable, they will
begin to trade apart from the common shares. If one of a number of “flip-
in events” occurs, each Right will entitle the holder to purchase a
KeyCorp common share for $1.00 (the par value per share), and the
Rights held by a 15% or more shareholder will become void.
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