Wednesday, October 8, 2008


Maybe I am going a little nuts in my advanced age. I placed an order to buy a preferred stock issue of Key Bank (KEY common stock symbol) at 7.11 (KEYPRA) and it just filled at 7. It goes ex interest tomorrow and has a $25 par value. It is a trust preferred issue so it is not really a preferred stock but a junior subordinated debenture. That does not matter much if the FDIC seizes a bank because of the change in the preference law around 1993. Uninsured depositors have preference rights over this security when the FDIC takes over a bank which means zip for the holder of this security. I have my eyes open on this one, know about its risks and will take them for what I am being paid to take the risk. This one is Capital trust V. It is cumulative and pays interest on any missed payment which has bad tax consequences according to the prospectus, in that income tax has to be paid on interest not received. No one has any faith in banks which creates the risk and the opportunity in these issues. It has a 5.875% coupon which gives me a 21% yield at a $7 cost. It matures on 7/23/2033. If Key Bank survives and this is held to maturity, the amortization of the spread between cost and par would add to that 21% yield by about 10% per year for 100 shares ($1800 spread differential between cost and par for 100 shares divided by 25 years=$72 per year amoritized divided by $700 cost =10.2%)

In full disclosure, I own shares of KEY AND KEYPRA and MAY continue to buy additional shares at or below the current price, or even slightly above BUT ONLY FOR THE PREFERRED ISSUE NOT THE COMMON. This is not a recommendation to buy or to sell. Trade at your own risk, and perform research about this security by reading the prospectus at and further studying the financial health of KEY BANK (symbol key at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase. This security may not be suitable for others based on their unique financial position and risk profile. THE PROSPECTUS ON THE KEYPRA ISSUE CAN BE FOUND AT SEC.GOV USING KEYWORD KEYCORP CAPITAL TRUST V OR SOME VARIANT THEREOF. I AM OLD AND CAN NOT REMEMBER LIKE I USE TO.

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