The Bank of Nova Scotia has announced:
a domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 40”).
Scotiabank has agreed to sell 10 million of Preferred Shares Series 40 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 40 at the same offering price.
Scotiabank will issue Preferred Shares Series 40 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 January 26, 2024 at an annual rate of $1.2125 per share to yield 4.85% per cent annually.
On January 27, 2024 and on January 27 every five years thereafter, Scotiabank may, at its option, subject to regulatory approval, redeem all or any number of the then outstanding Preferred Shares Series 40 at a redemption price of $25 per share. Thereafter, the dividend rate will reset every five years at a rate equal to 2.43% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series 40 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 41 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 41”) of Scotiabank on January 27, 2024 and on January 27 every five years thereafter.
Holders of the Preferred Shares Series 41 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 2.43%, as and when declared by the Board of Directors of Scotiabank. Holders of Preferred Shares Series 41 will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series 40 on January 27, 2029 and on January 27 every five years thereafter.
Closing is expected to occur on October 12, 2018. Scotiabank will make an application to list the Preferred Shares Series 40 as of the closing date on the Toronto Stock Exchange.
Net proceeds of the offering will be used by Scotiabank to fund a portion of the redemption of Non-cumulative 5-Year Rate Reset Preferred Shares Series 20 and Non-cumulative Floating Rate Preferred Shares Series 21 announced on September 25, 2018.
The new issue is quite expensive according to Implied Volatility Analysis:
Click for Big
According to this analysis, the fair value of the new issue on October 2 is 23.43. However, it should be noted that the analysis is forced to do some major extrapolation, as the only other BNS FixedReset NVCC-compliant issues are BNS.PR.E, BNS.PR.G and BNS.PR.H, all of which have Issue Reset Spreads in excess of 400bp.
The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.
I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called. Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue.