New Issue: BNS FixedReset 3.85%+100

The Bank of Nova Scotia has announced:

a domestic public offering of 10 million non-cumulative 3.85% 5-year rate reset preferred shares Series 30 (the “Preferred Shares Series 30”) at a price of $25.00 per share, for gross proceeds of $250 million.

Holders of Preferred Shares Series 30 will be entitled to receive a non-cumulative quarterly fixed dividend for the initial period ending April 25, 2015 yielding 3.85% per annum, as and when declared by the Board of Directors of Scotiabank. Thereafter, the dividend rate will reset every five years at a rate equal to 1.00% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series 30 will, subject to certain conditions, have the right to convert all or any part of their shares to non-cumulative floating rate preferred shares Series 31 (the “Preferred Shares Series 31”) of Scotiabank on April 26, 2015 and on April 26 every five years thereafter.

Holders of the Preferred Shares Series 31 will be entitled to receive a non-cumulative quarterly floating dividend at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 1.00%, as and when declared by the Board of Directors of Scotiabank. Holders of Preferred Shares Series 31 will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series 30 on April 26, 2020 and on April 26 every five years thereafter.

The Bank has agreed to sell the Preferred Shares Series 30 to a syndicate of underwriters led by Scotia Capital Inc. on a bought deal basis. The Bank has granted to the underwriters an option to purchase up to an additional 2 million Preferred Shares Series 30 at closing, which option is exercisable by the underwriters any time up to 48 hours before closing.

Closing is expected to occur on or after April 12, 2010. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure.

Plus-100 is an awfully skinny spread against five-year Canadas and I suspect – basically for the first time, when it comes to bank FixedResets – that this really is intended to be perpetual money.

It is somewhat amusing that BNS is the first bank in a long while to be offering FixedResets – their brokerage arm has been insisting that no such issuance is likely due to proposed Tier 1 rules – an assertion I never understood.

Update: Using the Break-Even Rate Shock Calculator with values of 5.91% yield on BNS Straights and a 5-year term to reset, the Break-Even Rate Shock for this issue is a stunning 318bp.

10 Responses to “New Issue: BNS FixedReset 3.85%+100”

  1. GAndreone says:

    If one agrees with your argument that in fact this is just a Perpetual Pref does it not mean that the probability of the extant 4.5% Perpetuals in the market being called has just increased significantly?

    What is the lowest rate at which a Perpetual Pref share has been issued during the last 60 years?

    In my opinion the 3.85% looks like a very low return for the risk of holding a Pref.

  2. blue says:

    The 4.45% RY was possibly the lowest perp

  3. pugwash says:

    In an attempt to replicate the risk/return over the long haul and improve a portfolio, what if an investor were to sell a GWO fixed reset he purchased at issue and used 50% of the proceeds to buy a PWF perpetual and 50% to buy the PWF floater – it feels like a good thing to do in today’s market – the math is beyond me though!

  4. jiHymas says:

    If one agrees with your argument that in fact this is just a Perpetual Pref

    Note that all FixedResets are perpetual – that is a matter of fact. Some are more likely to be called than others, but estimating that probability is a matter of opinion.

    In my opinion, most extant FixedResets were issued with the expectation of a five-year call; in my opinion, this particular FixedReset has been issued with the expectation that it will not be called. We will see!

    does it not mean that the probability of the extant 4.5% Perpetuals in the market being called has just increased significantly?

    I wouldn’t think so. If it’s cheap money, they’ll leave it outstanding; if it’s rich money, they’ll redeem.

  5. jiHymas says:

    what if an investor were to sell a GWO fixed reset he purchased at issue and used 50% of the proceeds to buy a PWF perpetual and 50% to buy the PWF floater

    I don’t think you can justify such an action as an arbitrage.

    If this is to be justified, it must be done on the basis of relative value analysis and the consideration of various scenarios for the various yields involved in pricing the instruments.

  6. Louis says:

    I know that you replied to me about a year ago on the following point related to this discussion (unfortunately, the search engine of your blog apparently does not search comments such that I cannot find our earlier exchange) but it might be a good place here to insist on what seems to me a general misconception as to the nature of fixed resets.

    Regarding this new issue of BNS, my friend who should know about Prefs due to his functions with a reputable financial institution wrote to me today about this new issue from BNS (I am first quoting him in French before translating it just to make sure he will not accuse me of having misquoted him): “Elle sera rachetée à coup sûr dans 5 ans, sinon, l’émetteur devra amortir 20% par année de 6 à 10 ans”, that is: “This new issue will for sure be redeemed in five years. Otherwise, its issuer will have to amortize it 20% per year from its 6th to 10th year”. I argued with him he was wrong on the basis that he was confusing Tier 2 amortization rules with Tier 1 one capital (the new issue). He replied that this new issue of BNS fixed reset is in fact Tier 2b capital and then (probably and wisely fearing that I would not leave this at that) qualified that answer saying that this might change in the near futures under Bale III rules.

    So, who is right and wrong (and I am inviting him to register to this blog to debate his point like a man but I fear he will not be up to the challenge)???

  7. jiHymas says:

    Definitive documents are not yet available on SEDAR, so all I can do is refer you to the last quoted paragraph in the news release, above:

    This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure.

    There is no reason that I have ever been able to see that would have this issue not qualify for Tier 1 under new or proposed Basel Capital Rules. The distributions on the securities are dividends, fully discretionary.

    It is possible – possible! – that this situation may change once the Basel 3 rules are finalized, but we’re so far away from that point that it’s not even funny. While I think that Contingent Capital will, in one form or another, become mandatory for all levels of bank capital, it is not so clear what will happen to issues that are extant at the time of the change. When retractibles were disallowed, extant issues were all grandfathered.

    Also, the amortization of capital benefits generally starts five years prior to the stated maturity of the capital instrument – for instance, the 99-year bonds that now count as Tier 1 will have their capital benefits amortized down to zero starting in year 94. But there is no stated maturity for these BNS 385+100 FixedResets. They are perpetuals.

    Your friend is making his claim based on:
    (i) a view that under new rules, securities with this structure will not qualify as Tier 1
    (ii) a view that extant securities will not be grandfathered
    (iii) a view that amortization of the capital benefit will commence in year 6.

    He could be right! I will certainly not claim to know that I know for sure what the regulatory landscape will look like in 2015! But I see no reason to place a high probability that his scenario will occur.

  8. Louis says:

    Sorry for the confusion but my debate is not about the future but the present. I take it from your answer that my friend is wrong. The BNS new fixed resets are not Tier 2b) capital but truly Tier I instruments and they are NOT subject to the 20% amortization per year rule from the moment they become redeemable in 5 years. Obviously, we don’t know what the future may bring as possible changes. Thks

  9. […] trigger for his column was (besides the obligation to bang out another 750 words, I mean!) the BNS 3.85%+100 new issue. Mr. Critchley believes that such skimpy yields will have the effect of pushing income investors […]

  10. […] This issue is a 3.85%+100 FixedReset announced March 25. […]

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