New Issue: BNS Perp – Reset Rate

Nice to see some high quality issuance of this kind of note. I have no idea whether it’s any good though! Press Release:

Scotiabank today announced a domestic public offering of 12 million, non-cumulative 5-year rate reset preferred shares Series 18 (the “Preferred Shares Series 18”) at a price of $25.00 per share, for an aggregate amount of $300 million.
    Holders of Preferred Shares Series 18 will be entitled to receive a non-cumulative quarterly fixed dividend for the initial five-year period ending April 25, 2013 of 5.00% per annum, as and when declared by the Board of Directors of Scotiabank. Thereafter, the dividend rate will reset every five years at a level of 205 basis points over the 5-year Canada bond yield.
Shareholders will, subject to certain conditions, have the option to convert all or any part of their shares to non-cumulative floating rate preferred shares Series 19 (the “Preferred Shares Series 19”) of Scotiabank. Holders of the Preferred Shares Series 19 will be entitled to receive a non-cumulative quarterly floating dividend equal to the 3-month Government of Canada Treasury Bill yield plus 205 basis points, as and when declared by the Board of Directors of Scotiabank.
    The Bank has agreed to sell the Preferred Shares Series 18 to a syndicate of underwriters led by Scotia Capital Inc. on a bought deal basis. The Bank has granted to the underwriters an over allotment option to purchase up to an additional $45 million of the Preferred Shares Series 18 at any time up to 30 days after closing.
    Closing is expected to occur on or after March 25, 2008. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure.

Update: I have some more details on this issue, including one provision that I consider critical: it’s redeemable at par on April 26, 2013 and every five years thereafter. I need to think about this a bit more, but my preliminary thoughts are:

  • The reset provisions are very high compared to historical spreads
  • The initial fixed-rate is also high when taken as a spread to Canadas, when comparing to historical spreads to Canadas
  • The initial fixed-rate is low compared to extant issues
  • The redemption provisions on this issue are tilted very highly in the issuer’s favour

These considerations lead me to the following preliminary conclusions:

  • BNS [Update 2008-3-14: Desjardins! See here for details] has invented this structure to take advantage of current extreme spreads in the selling process
  • The issue will be of great interest to the “Look mummy, I got a spreadsheet” class of investors (who will look at historical spreads without much thought)
  • Investors should assume that this the terms of this issue are sufficiently extravagant that the issue will be called in five years on the first reset date
  • Therefore, investors are probably being asked to put up 5-year money for a 5% dividend … which ain’t all that bad, mind you, but I’d rather have 5.6% for ten years!
  • BNS is attempting to pull a fast one … they need capital, but don’t want to pay 5.6% for ten years. They’d rather pay 5% for five years and refinance once there is a functional credit market.

If these preliminary thoughts survive further thought, discussion, and vicious personal attacks in the comments section, I will recommend investors not buy this issue … although if it ever trades at much of a discount, I’ll snap some up!

I’m going to have to think about whether the issue will be added to the HIMIPref™ Universe. It’s hard to analyze, because it’s hard to determine the “worst rate” on the reset date … with most fixed-floaters, I make the assumption that the issuer will set the fixed rate so low investors are forced to take the floater … and I have lots of floating rate comparables. On this issue:

  • I can’t assume a “worst-case” reset
  • I have no comparables since
    • all floaters in the universe so far key off Prime – and even Prime / 3-month-bills is a little chancy
    • Nothing I have keys off 5-years at a fixed rate

Update 2008-3-26: This issue has commenced trading 3/26 as BNS.PR.P. It traded 197,776 shares in a range of 25.01-15; closing quote 25.05-10, 8×16.

17 Responses to “New Issue: BNS Perp – Reset Rate”

  1. kaspu says:

    for what it’s worth…I’m not taking any of this. In this interest rate enviroment a plain fixed is best. better a bird in the hand than one in the bush. If rates do rise down the road, the waterfall structure of a good pref/bond portfolio will provide more than enough capital to buy at higher rates…..this has always worked for me over the past 20 years

  2. prefhound says:

    me too, it’s a dog. This will be a test of market efficiency.

  3. scomac says:

    For me, the more interesting question is at what price does this issue need to trade at in the secondary market for it to be appealing? Something less than $24 would begin to put you into the range of compareable quality bank perpetual prefs on a current yield basis while giving you advantageous reset features with a greater than 50% probability of being called in 5 years. That doesn’t necessarily strike me as being a bad combination of features provided that the price is right.

  4. prefhound says:

    I agree, the dog becomes a phoenix when the price declines to the right level.

    At $24.47, YTW hits 5.6% (assuming $25 redemption). At $24, it is 6.14% — very nice for BNS rating.

    However, if the price declines, it could go down quite a bit — perhaps we can hope for as much as 11% until the CURRENT yield hits 5.6% (at $22.32), even though all good readers of prefblog realize that (like BNA.PR.B) it has a probable maturity value of $25 (in 5 years), so would have a YTW around 8.24%.

    Perhaps there could be an arbitrage opportunity develop here for Mr Hymas to conjure up for us….

  5. jiHymas says:

    I agree with the above … I would be looking for a price decline of at least fifty cents before putting this on a buy list. I’ve thought about this a little more … if the first call was ten years hence (giving at least one reset) or if the call in five years was somewhere above 25.50, then the issue would become a lot more interesting.

    I guess we can all hope that after the initial sales pressure, the relative complexity of the structure starts pushing it down to prefhound‘s suggestion of 22.32!

  6. […] The market fell today, led by SplitShares as all eyes were on the carnage in the equity markets. Volume was on the light side; the market had very little time to react to the BNS New Issue before closing; it will be most interesting to see what the upshot is tomorrow morning. […]

  7. madequota says:

    The redeeming item for me on this one is that for the first time since the pref slide of ’07, a bank is issuing something that makes sense based on current market conditions, as well as the mid to long term outlook for interest rates.

    This issue, although unique, is still a pref, and going out at the initial 5% rate takes no wind out of the existing market (unlike TD’s 5.6% deal that has, at the very least, taken away the rally that was pretty firmly underway).

    The other item, although not really related to this, is RBC’s massive debenture offering. Again, different capital, but by going this route, they stay away from a further trashing of the pref market. Obviously, that was the least of their concerns with this issue, but it’s nice to see RBC do something that doesn’t get under my skin!


  8. jiHymas says:

    This issue, although unique, is still a pref, and going out at the initial 5% rate takes no wind out of the existing market (unlike TD’s 5.6% deal that has, at the very least, taken away the rally that was pretty firmly underway).

    Me, I just love new issue concessions! ‘I need a bigger concession before I can buy your issue’, is what I say, ‘Money’s very tight right now and I need a bigger coupon!’

  9. madequota says:

    OK, I’m not going to go back to my previous points on this issue [because I’ve been re-born to never again be confused as to be “whining”!], but take a look at the pref market today as an example: we have slippage right across the board; the bid has for the most part, evaporated, and portfolio values for those heavily long in prefs is, almost certainly without exception . . . down.

    The bank trauma is part of this, although with all the bank’s common being up today, the bigger culprit is probably the TD issue, and the 5.6% standard that it represents. Other than creating buying opportunities for the “longer-term” investor, I really can’t understand why you (and most everyone else here apparently) see this as a good thing.

    I keep scratching my head, wondering why losing money annoys me, but delights everyone else, and I just don’t get it. I’ve always believed that making money was the ultimate goal . . . but I’m not whining!


  10. jiHymas says:

    There was a wonderful essay once asking investors whether they were chicken farmers or egg farmers. It’s referred to here.

    When TD issues 5.6% paper, the market gets 0.6% more eggs than it would get if they had issued 5.0% paper. Eggs are good.

    Issuers are going to pay a price that meets their business needs. If the market gets knocked down by repricing on this, it only represents a quick adjustment to reality, rather than the alternative of a slow adjustment that would occur if there was no issuance. And if TD were to attempt to issue 5.0% paper and the deal failed, I will bet a nickel that a TD deal’s failure would have considerably more effect than a mere repricing. If the paper was all taken up by the underwriters and remained there, there would be a big overhang until they were finally able to unload it – I feel quite certain that this was a factor in 2007 … perhaps especially in the run-up to the bank’s year-end on October 31, as they attempted to straighten out their balance sheet.

    And ultimately and in the great scheme of things, it doesn’t matter a bluejay’s fart whether I like the issue or not. The market will do what it wants to do regardless of my delight or annoyance. Therefore, I endeavor to waste as little time as possible on emotion and concentrate on things I can do that will actually put money in my pocket – like, f’rinstance, decide whether BNA.PR.C is rich or cheap to BAM.PR.N.

  11. […] So much for my disdain for this issue! It’s an ill wind, however … Desjardins will be happy at the […]

  12. […] Fortis new issue and the Scotia new issue have both been previously […]

  13. […] been noted previously. Should the asset class become important, the fixed-resets from Fortis and from Scotia will be added on a back-dated […]

  14. […] BNS has announced another issue, similar in structure to their March issuance. […]

  15. […] first one came in March at +205bp. Then Fortis at +213. Today BNS came again at +170. If this keeps up much longer, […]

  16. […] second issue paid 5.00%+170; their first issue paid 5.00%+205. Well … if I do add them to HIMIPref™, at least I’ll have a […]

  17. […] initial rate on this issue (BNS.PR.P) was 5.00%, so the reset will come as quite a shock to those who haven’t been paying […]

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