On Friday, KeyCorp (KEY) stated that it had received approval from the Federal Reserve to repay $2.5 billion of the Troubled Asset Relief Program (TARP) money. The company had submitted its capital plan to Fed for approval in January. Following the approval, the company announced the pricing of its public offerings of 70,621,470 shares of its common stock at a price of $8.85 per share.
Apart from this, KeyCorp also got the consent to commence separate public offerings of senior notes at the earliest. The company will use the proceeds from both the offerings, along with the available funds, to buyback $2.5 billion of the Series B Fixed-Rate Cumulative Perpetual Preferred Stock from the U.S. Treasury. The company had issued these to the U.S. Treasury under the TARP program in late 2008. Until now, the company has paid approximately $282 million as dividends to the U.S. Treasury.
J.P. Morgan Securities LLC, a division of JPMorgan Chase & Co. (JPM), and Morgan Stanley & Co. Incorporated, a part of Morgan Stanley (MS) are acting as joint book-running managers. KeyCorp has also allowed these underwriters a 30-day option to cover over-allotments, if any. The option includes purchase of an additional 7,062,147 shares of common stock at the same price.
Also, KeyCorp’s plan to hike its quarterly dividend to 3 cents per share from the present 1 cent starting the second quarter of 2011 has received a green light from the Fed.
Additionally, KeyCorp announced that it aims to enter on to negotiations to repurchase the warrant held by the U.S. Treasury. The company aims to enter into the negotiations once the buyback of the TARP preferred stock is completed. However, if the company is unable to buyback these warrants, it might issue sufficient number of common stock in order to mitigate any share dilution that would occur if these warrants are exercised.
Similar to KeyCorp, SunTrust Banks Inc (STI) also announced on Friday that it had received the authorization from the Fed to repay its $4.9 billion in bailout aid.
Though KeyCorp’s results are likely to be affected by the volatile operating environment and added costs of maintaining Basel III norms, we expect that the business restructuring actions undertaken by the company will continue to fuel its credit quality, capital position and liquidity. Moreover, KeyCorp is expected to benefit from its focus on community banking expansion. Even the company’s recently announced capital plans would boost the investors’ confidence in the shares.
KeyCorp currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain our long-term Neutral recommendation on the stock.
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