North America Financial Bond: Bank of Nova Scotia's US$1.25bn perpetual non-call five
Paving the way
The bank capital issuance space was crowded again in 2017 but Bank of Nova Scotia’s Additional Tier 1 bond stood out for its unique structure, which opened up a path towards offshore US dollar-denominated AT1s for Canadian financial institutions.
Scotiabank’s US$1.25bn perpetual non-call five issue, which has a fixed coupon for the initial five years and then switches to floating, was the first by a Canadian issuer and the first Yankee FIG that had a non-call five structure with a fixed/floating format.
The structure broke through what had been a barrier for entry for Canadian banks into US dollar markets – withholding tax requirements.
The structure satisfied criteria set by the Office of the Superintendent of Financial Institutions for Basel III compliance such that no Canadian withholding tax will apply to interest or principal paid to non-resident holders.
“The deal diversified our access to capital and funding sources across multiple currencies and products,” said Christy Bunker, managing director for group treasury at Scotiabank.
“It also provides a blueprint for other Canadian banks to access global capital markets for AT1 capital structure.”
The bond was also a win for investors as it gave them meaningful portfolio diversification as the first-ever high-yielding, investment-grade-rated Canadian bank AT1 instrument.
Scotiabank’s AT1s were rated Baa3/BBB– (Moody’s, S&P).
The lack of supply of AT1s in the US dollar market this year made for a conducive backdrop, but the bank did not leave anything to chance and embarked on a global marketing effort.
The deal initially featured standard “life after Libor” language, which investors wanted changed because it was ambiguous. The bank then appointed a third party to make the decision of what would happen if Libor is scrapped, but also said it could appoint itself if the third party resigned and a replacement couldn’t be found.
The deal was announced at the Asian open when initial price thoughts suggested the 5% area but as books built quickly to US$3.3bn throughout the European morning, price thoughts were revised to 4.875% area.
The order book was over US$7.7bn by 11am New York time, allowing Scotiabank to revise price guidance to 4.7% area, plus or minus 5bp.
The final book of US$6.7bn had some 58% of orders from North American investors; 20% each from Asia and Europe and about 2% from the Middle East. UBS was global coordinator, structuring agent and joint bookrunner with Scotia Capital, Citigroup and Bank of America Merrill Lynch.
More banks are expected to mimic the structure.
“The next bank will have to prepare docs, go through internal vetting/approvals and approach regulators for official approvals, just like Scotiabank had done. It will take them months to get an approval, so if a bank had started the process on September 29 – the day we announced Scotia – best case scenario for the next will be in January,” said Ahmet Yetis, Americas head of capital solutions at UBS.