PrefBlog

The Bank of Nova Scotia has announced:

the applicable dividend rates for its Non-cumulative 5-Year Rate Reset Preferred Shares Series 20 of Scotiabank (the “Preferred Shares Series 20”) and Non-cumulative Floating Rate Preferred Shares Series 21 of Scotiabank (the “Preferred Shares Series 21”).

With respect to any Preferred Shares Series 20 that remain outstanding after October 26, 2013, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada). The dividend rate for the five-year period commencing on October 26, 2013 and ending on October 25, 2018 will be 3.610%, being equal to the 5-Year Government of Canada bond yield determined as at September 26, 2013 plus 1.70%, as determined in accordance with the terms of the Preferred Shares Series 20.

With respect to any Preferred Shares Series 21 that may be issued on October 26, 2013, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada), based on a dividend rate equal the 90-day Canadian Treasury Bill plus 1.70%, on an actual/365 day count basis, subject to certain adjustments in accordance with the terms of the Preferred Shares Series 21. The dividend rate for the period commencing on October 26, 2013 and ending on January 25, 2014 will be equal to 2.686%, as determined in accordance with the terms of the Preferred Shares Series 21.

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 announcement that BNS.PR.Q would be extended previously reported on PrefBlog.

At 3.61%, the new dividend is $0.9025 p.a., a steep decline from the original rate of 5.00% (or $1.25 p.a.). 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:

The contemporary bid for BNS.PR.Q was 24.89; assuming this holds after the conversion privilege is no longer available then the average implied three-month bill rate of 2.34% calculated above in turn implies a bid on the new issue of 25.35.

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 since things could, conceivably, change dramatically prior to the conversion notification deadline.

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.

Such a 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.

On the other hand, the current bid of 24.89 for BNS.PR.Q gives a current yield of 3.63% (calculated from the new 3.61% coupon rate), compared to an average Current Yield of 3.42% for the FixedResets noted above. On that basis – without looking at anything else – BNS.PR.Q looks cheap. So … some might wish to speculate, on the basis that BNS.PR.Q should be priced higher than it is and the FloatingReset issue that results from conversion should be higher still. Just remember it’s a speculation!

This entry was posted on Friday, September 27th, 2013 at 5:06 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.