KeyBank 2007 Annual Report Download - page 101

99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
outstanding at December 31, 2007. If KeyBank is required to make a
payment it would have an interest in the collateral underlying the
commercial mortgage loan on which the loss occurred.
Return guarantee agreement with LIHTC investors. KAHC, a subsidiary
of KeyBank, offered limited partnership interests to qualified investors.
Partnerships formed by KAHC invested in low-income residential rental
properties that qualify for federal LIHTCs under Section 42 of the
Internal Revenue Code. In certain partnerships, investors pay a fee to
KAHC for a guaranteed return that is based on the financial performance
of the property and the property’s confirmed LIHTC status throughout
a fifteen-year compliance period. If KAHC defaults on its obligation to
provide the guaranteed return, Key is obligated to make any necessary
payments to investors. In October 2003, management elected to
discontinue new partnerships under this program. Additional information
regarding these partnerships is included in Note 8 (“Loan Securitizations,
Servicing and Variable Interest Entities”), which begins on page 81.
No recourse or collateral is available to offset Key’s guarantee obligation
other than the underlying income stream from the properties. These
guarantees have expiration dates that extend through 2018. Key meets its
obligations pertaining to the guaranteed returns generally by distributing
tax credits and deductions associated with the specific properties.
As shown in the table on page 98, KAHC maintained a reserve in the
amount of $51 million at December 31, 2007, which management
believes will be sufficient to cover estimated future obligations under the
guarantees. The maximum exposure to loss reflected in the table represents
undiscounted future payments due to investors for the return on and of
their investments. In accordance with FASB Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others,” the amount of
all fees received in consideration for any return guarantee agreements
entered into or modified with LIHTC investors on or after January 1, 2003,
has been recognized as a component of the recorded liability.
Written interest rate caps. In the ordinary course of business, Key
“writes” interest rate caps for commercial loan clients that have variable
rate loans with Key and wish to limit their exposure to interest rate
increases. At December 31, 2007, these caps had a weighted-average life
of approximately 2.1 years.
Key is obligated to pay the client if the applicable benchmark interest rate
exceeds a specified level (known as the “strike rate”). These instruments
are accounted for as derivatives. Key mitigates its potential future
payments by entering into offsetting positions with third parties.
Default guarantees. Some lines of business provide or participate in
guarantees that obligate Key to perform if the debtor fails to satisfy all
of its payment obligations to third parties. Key generally undertakes these
guarantees to support or protect its underlying investment or where the
risk profile of the debtor should provide an investment return. The terms
of these default guarantees range from less than one year to as many as
fifteen years. Although no collateral is held, Key would have recourse
against the debtor for any payments made under a default guarantee.
Obligation under Visa Inc. By-Laws. On October 3, 2007, Visa Inc.
(“Visa”) announced it had completed restructuring transactions in
preparation for its initial public offering (“IPO”), which management
understands Visa expects to occur during the first half of 2008. As part
of this restructuring, KeyBank, as a Visa member bank, received
approximately 6.5 million Class USA shares of Visa common stock.
Management anticipates that some of these shares will be redeemed as
part of the IPO, with the remaining shares converted to Class A shares
on the third anniversary of the IPO or upon Visa’s settlement of certain
litigation matters, whichever is later. Visa is expected to use a portion
of the proceeds from the IPO to fund an escrow account to cover the
resolution of the following litigation matters that are considered
“Covered Litigation” by Visa.
• American Express Travel Related Services Co. v. Visa U.S.A. Inc., et
al. (American Express);
• Discover Financial Services Inc. v. Visa U.S.A. Inc., et al. (Discover);
• In re Payment Card Interchange Fee and Merchant Discount Antitrust
Litigation (and cases consolidated into MDL 1720);
• Attridge v. Visa U.S.A. Inc. et al.; and
• Kendall v. Visa U.S.A. Inc. et al. (Interchange Litigation)
During the fourth quarter of 2007, Visa announced it had reached a $2.1
billion settlement with American Express and recorded a $650 million
reserve related to the Discover litigation.
KeyBank was not a named defendant in this Covered Litigation and,
therefore, will not be directly liable for any amount of the settlement.
However, in accordance with Visa Bylaws, each Visa member is obligated
to indemnify Visa for a broad range of costs, damages, liabilities and other
expenses incurred by Visa. As a result, during the fourth quarter of 2007,
KeyBank recorded a charge of $64 million, representing the fair value of
its potential liability to Visa based on available information and KeyBank’s
Visa membership share. In the event the IPO occurs, it is management’s
understanding that Visa expects to use the escrow account discussed above
to settle these litigation judgments and settlements, and the liability
recorded on KeyBank’s books would no longer be required. KeyBank
expects that its proceeds from the anticipated share redemption would
be sufficient to offset the recorded liability.
OTHER OFF-BALANCE SHEET RISK
Other off-balance sheet risk stems from financial instruments that do not
meet the definition of a guarantee as specified in Interpretation No. 45
and from other relationships.
Significant liquidity facilities that support asset-backed commercial
paper conduits. Key provides liquidity facilities to several unconsolidated
third-party commercial paper conduits. These facilities obligate Key to
provide funding if there is a disruption in credit markets or other
factors exist that preclude the issuance of commercial paper by the
conduits. The liquidity facilities, all of which expire by November 10,
2010, obligate Key to provide aggregate funding of up to $873 million,
with individual facilities ranging from $10 million to $116 million. The
aggregate amount available to be drawn is based on the amount of
current commitments to borrowers and totaled $626 million at December
31, 2007. At that date, $12 million had been drawn under these committed
facilities. Key’s commitments to provide liquidity are periodically evaluated
by management.