Key Takes a Charge, Raises Capital

KeyCorp(KEY) is ending 43 years of increasing dividends as it is forced to raise capital after a U.S. district court ruled against the bank in a federal tax case.

Cleveland-based KeyCorp will issue common and noncumulative perpetual convertible preferred stock to raise about $1.5 billion. Key is expected to record a charge of up to $1.2 billion due to the adverse ruling. The case was related to tax treatment of a lease transaction. Key said it believes it complied with tax law and is considering an appeal.

In the meantime, however, the bank decided to reduce its dividend to 75 cents annually. The most recent quarterly dividend declared had been 37.5 cents per share, up from 36.5 cents a share last February. The cut is expected to save the bank $200 million annually.

"The decision to reduce our dividend after 43 consecutive years of annual increases was made after great deliberation," said CEO Henry Meyer in a company statement. "It was a record we were extremely proud of, but we must recognize the current economic realities as we manage our business for the future."

KeyCorp said the projected second-quarter charge stems from about $475 million in after-tax interest costs on the taxes claimed on the contested leveraged leases, and roughly $625 million to $725 million in noncash accounting adjustments based on the revised cash flows of the leases.

"If it had not been for the adverse court ruling on our tax treatment of a leveraged lease transaction, we probably would not have considered the capital raising actions," Meyer said.