01—Abstract
Summary
Summary of the 8-K filed August 12, 2024. Cited figures are marked; the original filing is the authoritative source.
On August 12, 2024, KeyCorp (NYSE: KEY) announced a definitive agreement under which The Bank of Nova Scotia (Scotiabank) will make a strategic minority investment of approximately $2.8 billiona, purchasing common shares at a fixed price of $17.17 per share.
On a post-transaction basis, Scotiabank would own approximately 14.9% of KeyCorp's then-outstanding common shares. The investment is structured in two tranches: an initial $0.8 billionb purchase, taking Scotiabank to 4.9% ownership, expected to close at the end of August 2024 upon expiration of the HSR waiting period, and an additional $2.0 billion purchase, taking it to approximately 14.9%, subject to Federal Reserve approval and expected in the first quarter of 2025. KeyCorp states the investment is estimated to increase its June 30, 2024 CET1 capital ratio by 195 basis points to 12.4% and increase tangible book value per share by more than 10%.
Management also outlined a contemplated repositioning of the available-for-sale securities portfolio, which, together with the capital raise, is estimated to result in a net CET1 ratio of 11.3% to 11.6%, with low single-digit accretion to 2025 EPS and slight accretion to 2026 EPS. The presentation notes a one-time after-tax loss of approximately half of the capital raised from selling low-yielding securities, with reinvestment expected to pull forward approximately $400 millionc of additional net interest income. The filing states that Scotiabank would have the right to designate two board members once its ownership exceeds 10%, operate under a five-year customary standstill, and hold customary preemptive rights.
The companies also plan to explore future commercial partnerships. Financial advisors were J.P. Morgan Securities LLC and KeyBanc Capital Markets, with Sullivan & Cromwell LLP as legal counsel.
02—Key points
Key Highlights
- Scotiabank to invest approximately $2.8 billion in KeyCorp common stock at a fixed price of $17.17 per share, for approximately 14.9% pro forma ownership.
- Investment is structured in two tranches: $0.8 billion initially (4.9% stake, expected end of August 2024 after HSR waiting period) and $2.0 billion later (to approximately 14.9%, subject to Federal Reserve approval, expected 1Q 2025).
- Estimated to increase June 30, 2024 CET1 capital ratio by 195 basis points to 12.4% and increase tangible book value per share by more than 10%.
- Pro forma for the capital raise and contemplated securities repositioning, CET1 is estimated at 11.3% to 11.6%, and AOCI-inclusive CET1 at 9.1% to 9.4%.
- Contemplated AFS securities repositioning is expected to cause a one-time after-tax loss of approximately half of the capital raised, with about $400 million of additional net interest income pulled forward.
- Expected to be low single-digit accretive to 2025 EPS and slightly accretive to 2026 EPS, per the investor presentation.
- Scotiabank would have board designation rights for two individuals once ownership exceeds 10%, a five-year customary standstill, and customary preemptive rights.
03—Questions
Frequently Asked Questions
How much is Scotiabank investing in KeyCorp and at what price?
Scotiabank will make a strategic minority investment of approximately $2.8 billion by acquiring KeyCorp common shares at a fixed price of $17.17 per share, resulting in approximately 14.9% pro forma common stock ownership.
When will the investment close?
The initial $0.8 billion purchase, which takes Scotiabank to 4.9% ownership, is expected to close at the end of August 2024 after the HSR antitrust waiting period expires. The additional $2.0 billion purchase, bringing ownership to approximately 14.9%, requires Federal Reserve approval and is expected in the first quarter of 2025.
What is the expected impact on KeyCorp's capital position?
The investment is estimated to increase the June 30, 2024 CET1 ratio by 195 basis points to 12.4%. With the contemplated securities repositioning, the net CET1 ratio is estimated at 11.3% to 11.6%, and the AOCI-inclusive CET1 ratio at 9.1% to 9.4%.
Will the transaction affect earnings?
KeyCorp expects the capital raise and contemplated repositioning to be low single-digit accretive to 2025 EPS and slightly accretive to 2026 EPS. The repositioning would involve a one-time after-tax loss of approximately half of the capital raised, offset by reinvestment expected to pull forward approximately $400 million of additional net interest income.
What governance rights will Scotiabank receive?
Once its ownership exceeds 10%, Scotiabank will have the right to designate two individuals to KeyCorp's board: one Scotiabank senior officer and one third party designated by Scotiabank and reasonably acceptable to KeyCorp. The investment also includes a customary five-year standstill, customary preemptive rights, and an agreement for Scotiabank to vote in line with the Board's recommendations with limited exceptions.
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