The Bank of Nova Scotia has announced:
a domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares Series 36 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 36”).
Scotiabank has agreed to sell 12 million of Preferred Shares Series 36 to a syndicate of underwriters led by Scotia Capital Inc. on a bought deal basis. Scotiabank has granted the Underwriters an option, exercisable in whole or in part up to 48 hours before closing, to purchase up to an additional 2 million Preferred Shares Series 36 at the same offering price.
Scotiabank will issue Preferred Shares Series 36 priced at $25 per share and holders will be entitled to receive a non-cumulative quarterly fixed dividend, as and when declared by the Board of Directors of Scotiabank, for the initial period ending on and including July 25, 2021 at an annual rate of $1.3750 per share to yield 5.50 per cent annually.
On July 26, 2021 and on July 26 every five years thereafter, Scotiabank may, at its option, with the prior approval of the Superintendent of Financial Institutions (Canada), redeem all or any number of the then outstanding Preferred Shares Series 36 at a redemption price which is equal to par. Thereafter, the dividend rate will reset every five years at a rate equal to 4.72% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series 36 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 37 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 37”) of Scotiabank on July 26, 2021 and on July 26 every five years thereafter.
Holders of the Preferred Shares Series 37 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 4.72%, as and when declared by the Board of Directors of Scotiabank. Holders of Preferred Shares Series 37 will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series 36 on July 26, 2026 and on July 26 every five years thereafter.
Closing is expected to occur on or after March 14, 2016. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure.
Net proceeds from this transaction will be added to Scotiabank’s funds and will be used for general business purposes.
They later announced:
that as a result of strong investor demand for its previously announced domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares Series 36 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 36”), the size of the offering has been increased to 20 million shares. The gross proceeds of the offering will now be $500 million. The offering will be underwritten by a syndicate of underwriters led by Scotia Capital Inc.
Closing is expected to occur on or after March 14, 2016. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure. Scotiabank intends to file a prospectus supplement to its June 27, 2014 base shelf prospectus in respect of this issue.
Net proceeds from this transaction will be added to Scotiabank’s funds and will be used for general business purposes.
$500-million is good size!
Implied Volatility analysis is not very useful for the BNS series, but when performed anyway yields the following chart:
Click for Big
The reason this analysis is not particularly useful is that the four lower-spread issues are NVCC Non-Compliant while the two higher-spread issues are compliant (the new issue is one of these, with a deemed price of 25.00). So there are really two separate series, with not enough data to examine the compliant issues only.
However, this new issue appears to be quite cheap relative to BNS.PR.E, which is a FixedReset, 5.50%+451, that commenced trading 2016-12-17 after being announced 2015-12-8. At today’s closing bid of 25.37, BNS.PR.E has an Expected Future Current Yield (EFCY) of 5.11%, compared to 5.40% for the new issue given a deemed price of 25.00. So the 21bp of extra spread are resulting in an expected EFCY pick-up of 29bp compared to a normally expected (as of the February PrefLetter, Table FR-11, Charts FR-31 and FR-58) pick-up of 2-8bp.
To make the EFCY pick-up for the new issue equal to 5bp – to strike a happy medium – its price would have to be about 26.15 (given a price of 25.37 for BNS.PR.E) so I suspect we’ll see a certain amount of price adjustment between the two issues!
Regrettably, BNS does not have any NVCC-compliant Straight Perpetuals trading, so it is impossible to compute Break Even Rate Shock.