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KeyCorp, a large U.S. Midwest regional bank, said it plans to raise $1.5 billion in equity capital and cut its dividend in half, following an adverse federal court ruling over the tax treatment of leveraged leases.
The Cleveland-based bank said the ruling will result in a $1.1 billion to $1.2 billion second-quarter charge, covering all leveraged lease transactions it is contesting.
It also plans to cut its quarterly dividend per share to 18.75 cents from 37.5 cents, saving $200 million a year, reflecting what Chief Executive Henry Meyer called "current economic realities." KeyCorp had raised its dividend for 43 straight years.
Shares of KeyCorp [KEY
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] fell $2.21, or 14 percent, to $13.50 in morning trading, and touched their lowest level since 1995.
KeyCorp also announced plans to boost loan reserves by about $600 million in the second quarter, and said full-year net charge-offs should be $750 million to $1 billion.
The bank joins a growing number of rivals to raise equity capital and lower their dividends this year as loan losses mount.
"KeyCorp stubbed its toe," said Terry McEvoy, an analyst at Oppenheimer & Co in Portland, Maine, who has a "perform" rating on the bank. "To have to cut the dividend after raising it for multiple decades reflects poorly on management, especially coming just two weeks after boosting the charge-off outlook."
A KeyCorp spokesman declined further immediate comment.
Forced Hand
The bank said the projected charge follows a May 28 ruling by Judge James Gwin of the U.S. District Court in the Northern District of Ohio in the so-called AWG Leasing Litigation.
KeyCorp said it may appeal this ruling, which concerned taxes owed from 1999 to 2003.
Had the court ruling been favorable, "we probably would not have considered the capital-raising actions," Meyer said in a statement. "The ruling forced our hand."
Another large bank, Wachovia [WB.S
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] , in April said it might take a $1 billion charge because of another federal court decision over taxation of leveraged leases.
KeyCorp plans to raise capital by offering common shares and convertible preferred stock. It said the preferred securities may carry a 7.25 percent to 7.75 percent dividend yield and a 20 percent to 25 percent premium, and be priced later Thursday.
Citigroup Global Markets is arranging the offerings, with KeyBanc Capital Markets Inc, Merrill Lynch [MER
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], Morgan Stanley [MS
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] and UBS Securities [UBS
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] serving as joint lead managers.
KeyCorp's market value was about $6.8 billion on Wednesday, Reuters data shows. It had long been considered a possible buyer of other banks, but Oppenheimer's McEvoy said the stock decline may put that on hold. He also said KeyCorp may be a less attractive target.
"This could delay Key being a buyer of other banks, especially if its stock falls below tangible book value," which may be $12.63 per share at the end of June, McEvoy said. "It's (also) very difficult for any buyer doing due diligence on any bank's loan portfolio to pay a premium."
Shares of KeyCorp closed Wednesday about 58 percent below their 52-week high set last July, Reuters data show.
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