BNS.PR.Q, FixedReset, To Be Extended at +170bp

The Bank of Nova Scotia has announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 20 of Scotiabank (the “Preferred Shares Series 20”) on October 26, 2013 and, as a result, subject to certain conditions, the holders of Preferred Shares Series 20 have the right to convert all or part of their Preferred Shares Series 20 on a one-for-one basis into Non-cumulative Floating Rate Preferred Shares Series 21 of Scotiabank (the “Preferred Shares Series 21”) on October 26, 2013. Holders who do not exercise their right to convert their Preferred Shares Series 20 into Preferred Shares Series 21 on such date will retain their Preferred Shares Series 20.

The foregoing conversions are subject to the conditions that: (i) if Scotiabank determines that there would be less than one million Preferred Shares Series 20 outstanding after October 26, 2013, then all remaining Preferred Shares Series 20 will automatically be converted into Preferred Shares Series 21 on a one-for-one basis on October 26, 2013, and (ii) alternatively, if Scotiabank determines that there would be less than one million Preferred Share Series 21 outstanding after October 26, 2013, no Preferred Shares Series 20 will be converted into Preferred Shares Series 21. In either case, Scotiabank shall give a written notice to that effect to holders of Series 20 Preferred Shares no later than October 19, 2013.

The dividend rate applicable to the Preferred Shares Series 20 for the five-year period commencing on October 26, 2013 and ending on October 25, 2018, and the dividend rate applicable to the Preferred Shares Series 21for the three-month period commencing on October 26, 2013, and ending on January 25, 2014, will be determined and announced by way of a press release on September 27, 2013.

Beneficial owners of Preferred Shares Series 20 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (Toronto time) on October 11, 2013.

The current GOC5 rate is 2.02%, so pending the official announcement September 27, we may assume the new rate will be 3.72%, or $0.93 p.a. This represents a steep decline from the original rate of 5.00% (or $1.25 p.a.), so my mailbox will be filling up shortly with outraged queries from casual investors.

We can examine the comparables with the help of the Pairs Equivalency Calculator:

FixedReset / FloatingReset Strong Pairs
FixedReset FloatingReset Next
Exchange
Date
Implied
3-Month
Bill Rate
BNS.PR.P BNS.PR.A 2018-4-26 2.46%
TD.PR.S TD.PR.T 2018-7-31 2.13%
BMO.PR.M BMO.PR.R 2018-8-25 2.27%

The closing bid for BNS.PR.Q today was 25.18; assuming this holds after the conversion privilege is no longer available then the average implied three-month bill rate of 2.29% calculated above in turn implies a bid on the new issue of 25.47.

So, as of right now, it looks like conversion is recommended. Naturally, investors will want to wait until the last moment before making a decision.

Additionally, it will be noted that although the deadline for notifying the company is October 11, intermediary brokers will almost always have earlier internal deadlines. Also, it is normal that trades must be settled before notice can be given … so for most brokers, I suggest that the last day for trading the issue in the hopes of reaping enormous profits on conversion will be Monday October 7. This strategy didn’t work very well for the BMO.PR.M / BMO.PR.R conversion, when the price of BMO.PR.M was supported by the conversion privilege and promptly sank after the last trading day to settle prior to the notification date. But there will be some who try!

2 Responses to “BNS.PR.Q, FixedReset, To Be Extended at +170bp”

  1. adrian2 says:

    So, as of right now, it looks like conversion is recommended.

    James is too diplomatic. As I’ve bluntly commented earlier in http://www.prefblog.com/?p=22882&cpage=1#comment-286045
    if you are holding BNS.PR.Q and you are not going to convert, you’ll be a patsy‚Ķ

  2. […] The announcement that BNS.PR.Q would be extended previously reported on PrefBlog. […]

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