Doug:
Several of the Key preferred stocks are now subject to potential exchange for Key common stock. The price for conversion depends on the particular issue. Do you have any comment or suggestions on whether Key preferred owners should accept this offer? The Key prospectus notes that Key "currently" plans to continue dividend payment on its preferred shares if they are not tendered for exchange.
Rich J.
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1 - Click To Post Comments:
Hello Rich-
Thank you for your post.
Subscribers to the CDx3 Notification Service received a detailed CDx3 Flash alert on Monday, July 13 regarding the KEY preferred stock conversion. Please check that message for more details regarding the KEY preferred stock conversion.
Since I am not familiar with your personal financial resources, goals or risk tolerance, I am not in a position to make suggestions regarding whether or not converting your KEY preferred stock shares is in your best interest. Consistent with the Posting Guidelines for this blog and to preserve the value of CDx3 Notification Service subscriptions, CDx3 Preferred Stock trading symbols are not provided here.
But for the benefit of non-subscribers who are reading this blog, here are some of the points to consider.
KEY has already raised the $1.8 billion in capital necessary to satisfy the regulatory requirements that came out of the bank stress tests. Their July 1 offer to convert, on a voluntary basis, shares of their five Retail Trust Preferred Stocks is not part of KEY’s regulatory capital generation program.
KEY made the comment in their July 1 announcement that only a portion of these five Retail Trust Preferreds would be expected to be converted in the exchange offer. This is very different from the Citigroup preferred stock conversion where Citi is intending on converting as many preferred stock shares as needed which may leave the market for some issues “illiquid” (not enough buyers and sellers left to trade).
KEY will continue to pay the dividends on the Retail Trust Preferreds to shareholders who choose not to convert their shares.
On July 8, 2009 KEY announced the exchange ratio formula for these five Retail Trust Preferreds. The exchange ratio is a bit complex in that KEY offers a better ratio to shareholders who choose to convert their preferred stock shares prior to July 21. With one exception, KEY will exchange your Retail Trust Preferred shares at a ratio calculated by $22.00/$x prior to July 21 and $20.75/$x after July 21. The exceptional Retail Trust Preferred offers a higher dividend rate than the others so KEY is using a different exchange ratio calculation - $22.50/$x prior to July 21 and $21.25/$x after July 21. The value of $x is the average market price of KEY’s common stock for the five days prior to (but including) July 31, 2009.
Since KEY is going to continue paying the dividend on unconverted shares and they have declared that they are not concerned about your preferred stock shares become “illiquid,” the decision regarding whether or not to convert really comes down to whether or not you are satisfied with the continuing fixed quarterly dividend income generated by your Retail Trust Preferreds. KEY’s common stock pays next-to-no dividend at the moment but will realize a substantial capital gain should it return to its pre-credit crisis value.
Do you want to give up the continuing fixed quarterly dividend income generated by your preferred stock shares for a shot at realizing the potential capital gain of KEY’s common stock?
By converting your preferred shares to common, the risk is higher, but the return may be greater. This, of course, is a decision that only you can make.
Thanks again Rich.
Many Happy Returns.
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