New Issue : Scotiabank 4.5% Perpetuals

Scotiabank has announced (via CCN Matthews)

a domestic public offering of 12 million, 4.50% non-cumulative preferred shares Series 15 (the “Preferred Shares Series 15”) at a price of $25.00 per share, for an aggregate amount of $300 million.

The Bank has agreed to sell the Preferred Shares Series 15 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 15. This over-allotment option is exercisable at any time up to 30 days after closing.

Closing is expected to occur on or after April 5, 2007.

I have no details on the call schedule as yet, but will post more, later, when I do.

I’m pleased to see this! Scotiabank has lots of Tier 1 Capital room for new issuance!

Update & Bump 3/21 : The redemption schedule is

BNS Ser 15 Embedded Options
Option From To Price
Redemption 2012-07-27 2013-07-26 26.000000
Redemption 2013-07-27 2014-07-26 25.750000
Redemption 2014-07-27 2015-07-26 25.500000
Redemption 2015-07-27 2016-07-26 25.250000
Redemption 2016-07-27 INFINITE DATE 25.000000

and some comparatives are:

Scotia Bank 4.45% Perp New Issue & Comparatives
Price due to base-rate  22.80  22.93  22.92
Price due to short-term  -0.32  -0.32  -0.32
Price due to long-term  1.28  1.28  1.28
Price to to Cumulative Dividends  0.00  0.00  0.00
Price due to Liquidity  1.67  1.67  1.68
Price due to error  -0.05  -0.05  -0.05
Curve Price (Taxable Curve)  25.38  25.51  25.50
Dividend Rate $1.125 $1.125 $1.125
Quote 3/20 25.00 Issue  25.10-19  25.20-24
YTW (after tax)  3.58%  3.60%  3.58%
YTW Date  2016-8-26 / Infinite  Infinite  2016-3-25 / Infinite
Credit Rating (DBRS) Pfd-1 Pfd-1 Pfd-1
YTW (Pre-Tax)  4.50% 4.53%  4.51% 
YTW Modified Duration (Pre-Tax)  7.67  16.29  7.33
YTW Pseudo-Convexity (Pre-Tax)  -61.97  -52.65  -61.67

7 Responses to “New Issue : Scotiabank 4.5% Perpetuals”

  1. Drew says:

    It seems that issuers engaged in issuing new preferred shares create buying opportunities in their existing outstanding preferred shares as well as, quite often, the new issue. Many of the Royal Bank preferred shares (not all) seem to be the most attractively priced in comparison to the other banks, and it seems to be more than a coincidence that Royal Bank has been the most active of the banks in issuing new preferred shares. Then BNS came along with this new issue and suddenly its existing preferred shares seem to trade off (for the first time in a long while), potentially creating a buying opportunity. I recall that when Sun Life was issuing new preferreds last year a similar pattern developed with its new and existing preferred shares. Is my impression correct? If so, it seems to be an easily exploitable pattern, too easy.

  2. Drew says:

    One other comment. I note great disparity in modified duration of the three issues you cite as comparable. This arose at least once before. You explained it but, as is customary and due entirely to defects on my end and not yours, I failed to comprehend. Practically, I’m inclined to look through the two low duration calculations and read them as actually long duration issues, comparable to the BNS.PR.L. As a rough & ready approach, is there anything wrong with this?

  3. jiHymas says:

    Your impression of cheapening at the time of a new issue is correct – although I can’t quote you facts and figures to back up my agreement. It’s simply supply & demand, based largely on the name of the issuer and somewhat less on the type of new issue.

    You see this behaviour in all markets, including that holy of efficient holies, the US Treasury (bond and note) market.

    With respect to the second comment … you can look at all three issues as having – effectively – similar durations even though the reported numbers are very different. This is due to the pseudoModifiedConvexity that at enormous cost in time and effort I graphed in the post RY.PR.F : Another New Issue Staggers to Market.

    This number provides a reasonable estimate of how bad the embeddedOptions are for the shareholder.

    Let’s say you like yields, but are terrified of the chance that market yields will rise. Of the three issues, you might then choose RY.PR.E, on the basis that it has the lowest modified duration (of the YTW scenario) (MDYTW) and should therefore be hurt less than half as much as the BNS.PR.L should yields increase.

    Well, this is where you have to understand what is meant by “convexity” a term used in fixed-income analytics that means “I’ve spent a lot of time studying this, so you better pay me lots of money to manage your portfolio”.

    Suppose they do increase.

    Before you even have the chance to pat yourself on the back, the MDYTW of RY.PR.E will have increased, with all the increase in sensitivity to rates implied by that remark (see the graph of MDYTW vs. Price in the linked post). This is because the pseudo-Convexity is LARGE and NEGATIVE. The “negative” means that MDYTW will change in response to yield changes in a way that you don’t like, and the “large” means “and not by just a little bit either, sucker”. The pseudo-convexity of a pref with a single, known maturity date a few years off will be about +0.2 – as will its better known “convexity” cousin.

    The confusion arises because you calculated your first estimate of YTW based on the idea that the issue was going to be called at a known date and a known price. But once yields increase, there is no reason to believe in a call any more. Pfuttt-t-t, it’s gone. Such is the nature of embedded options.

    Say you’d bought the BNS.PR.L with the expectation that yields would decline and you wanted the biggest MDYTW possible to capitalized on that. This figure is calculated on the basis that the issue really is perpetual and will pay its 4.5% p.a. forever (well … let’s be honest. My calculations cap the term of each issue at 30 years, which I call a limitMaturity).

    So you buy the thing and – hurrah! – yields decline. Unfortunately, so does your MDYTW, in a LARGE and NEGATIVELY APPRECIATED fashion, because now you have to assume that the issue will be called. Embedded options – exercisable at the whim and pleasure of the issuer – have struck again.

    I really am going to write about this soon. In the meantime, for those of you too cheap to subscribe to Canadian Moneysaver, my article “Perpetual Hockey Sticks” is related to this idea and was published in the February issue, available now, on-line, for those fine, upstanding gentlemen and ladies who are not too cheap to cough up a few lousy bucks for a magazine that has the good taste to publish my articles.

    The rest of you – and you know who you are – will have to wait until the publication of the next extremely valuable issue ends the current black-out period and I republish the article on my own sites.

  4. […] The closing trade was RBC’s cross of 100,000 at $26.18. Now with a pre-tax bid-YTW of 4.12% based on a bid of $26.25 and a call 2014-5-28 at $25.00. Note that Scotiabank″>has announced a new issue. […]

  5. […] Virtually the same terms as the new issue, so it’s interesting to see this one closing at 25.14-17 on good volume. Note, however, that this issue has an initial dividend of $0.28125 and goes ex-dividend prior to settlement of the new issue. I wonder if they do this type of thing on purpose, as a snare for the unwary, who might think it marvellous that such a close comparable is trading at a premium? Now with a pre-tax bid-YTW of 4.53% based on a limitMaturity. […]

  6. […] The Scotia new issue, announced March 21, closed its first day of trading at 24.87-89, on heavy volume of 724,590 shares. There was a tight trading range, 24.85-92. […]

  7. […] This issue was announced March 21 and closed April 5 […]

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