Ahead of the curve
For precision and excellence in a globe-trotting issuance programme, for leadership in capital innovation, and for charting a path to funding normality after the disruption of the pandemic, Bank of Nova Scotia is IFR’s Financial Issuer of the Year.
For banks in many jurisdictions, 2022 promises to be a challenging year, as issuers plot a return to a more normal course of business and plan for the ultimate withdrawal of generous central bank support measures extended during the coronavirus pandemic.
For banks in Canada, that’s old news.
Bank of Nova Scotia and its domestic rivals were notably active across funding markets after the Bank of Canada withdrew liquidity measures earlier than many of its counterparts in other countries.
Banks in Europe, for example, continued to satisfy much of their funding needs with cheap loans from the ECB while Canadian banks led the return to capital markets through something closer to normality.
Standing out among its peers, Bank of Nova Scotia handled that transition while breaking records and achieving multiple firsts, executing a sizeable funding plan with style and assurance.
“Our funding strategy is always focused on innovation, agility and diversification to deliver consistent results in what are persistently volatile markets,” said Tom McGuire, group treasurer and executive vice-president at BNS.
“I’d most emphasise charting a path through the many phases of the pandemic, which likewise percolate through the markets in both ups and downs.”
Through those ups and downs, BNS raised C$38bn-equivalent (US$30.1bn) of debt in 2021 across 19 benchmark transactions and five currencies.
“It was a transition year, no question, where central bank funding programmes had stopped and we rolled off those and back into our normal course,” said McGuire. “That transition was an integral part of our funding activity.”
Another significant driver was year-on-year growth of some C$35bn in the bank’s Canadian mortgage book.
Those funding needs translated into some big transactions, perhaps the most eye-catching being its US$3.5bn five-year covered bond in October, the largest single-tranche covered bond on record.
A lack of supply of US dollar covered bonds, and pent-up demand for BNS specifically after a lengthy absence from the market, helped drive a US$3.9bn book.
The issuer was able to take size without compromising on price, launching the deal at 17bp over swaps, 1bp inside supply from one of its rivals a month earlier.
The bank can also boast about issuing the largest covered bonds of 2021 in euro and sterling markets, landing a €1.75bn six-year deal in December and a £1.5bn March 2025 FRN in September that set the record for the largest Sonia-linked covered, though it has since been matched by two other issuers.
Notably, some C$16bn-equivalent of BNS’s C$38bn of issuance in 2021 was raised outside its two primary currencies of Canadian dollars and US dollars.
Picking its moment
Time and again, the issuer picked its moment with precision. A £1.3bn five-year covered bond issued in June came flat to the level it could have achieved in euros. And when BNS came to market in August it was among the banks reopening the euro senior market after the summer break with a €750m seven-year, reading a changing tone and showing what kind of premiums were required for entry.
McGuire credits the issuer’s read of global markets to the strength of BNS’s team and its relationships with dealers and investors, “all of whom keep us abreast of what is going on real time, so there’s a continuous dialogue within those three subsets.
“That’s one of the hallmarks of our term funding operation – to develop good relationships with dealers and investors, but at the same time to make prudent risk decisions in terms of balancing market conditions, competing supply and the prospect that the markets can come and go,” he said.
“Timing is not always your choice, but you have to pick your spots and make prudent decisions in terms of when you access the market.”
Behind the numbers
Impressive though the sheer volume of deals may be, it is the achievements behind the numbers that sets BNS apart. The bank claimed multiple firsts across asset classes and geographies.
One standout transaction is the bank’s US$600m limited-recourse capital note in September – the first LRCN issued by a Canadian bank in the US dollar market.
The structure – first introduced in the Canadian dollar market in July 2020 by Royal Bank of Canada – is designed to count towards Canadian banks’ Additional Tier 1 capital resources while allowing the issuer to make tax-deductible coupon payments, in contrast to previously issued Canadian AT1s or preferreds.
BNS’s deal comprised a 60-year non-call five note issued directly to investors, giving holders recourse to perpetual AT1 notes issued by BNS with the same coupon rate and reset spread and held by a trust.
In a process that took many months, BNS put its own spin on the format by including the use of AT1 notes rather than preferred shares in the trust. That gives investors recourse to an asset that has preferential tax treatment, is established in institutional markets in other jurisdictions and has a higher subordination ranking.
BNS first took the format to its home market in June, printing a C$1.25bn bond, before crossing the border after the summer break.
With demand strong, the deal was priced with a coupon of 3.625% and a historically low back-end reset spread.
The deal, which is expected to spur follow-on supply from other Canadian lenders, is a relatively rare example of innovation in bank capital, which is tightly controlled by Basel III rules.
It built on BNS’s legacy of innovation in the US dollar capital sphere, as the bank became the first Canadian lender to issue an AT1 in the currency in 2017 – a deal recognised as IFR’s North America Financial Bond that year.
McGuire notes the challenges involved in coordinating the multiple stakeholders on the transaction, both internal and external, from work with the regulator and tax authorities to educating the investor base on the bond’s new features.
“It was an orchestration effort, but the team was definitely up to the challenge of that orchestration,” he said.
Other notable achievements include the launch of the first Libor-to-Sonia consent solicitation by a non-European bank, targeting BNS’s sterling covered bonds in March, and the issuance of the largest sustainable bond from a Canadian bank or corporate, a US$1bn three-year senior issuance in July.
The latter followed the publication of BNS’s sustainable bond framework, work that added new eligible asset categories to expand the scope of the previous green bond framework. A portion of the proceeds of the deal will be used for lending to women-led and owned businesses, for example.
“Investors are consistently interested in new opportunities, new asset classes and on that front the LRCN and some of the enhancements we made to our previous green bond programme, now a sustainable programme, aligned quite nicely with investors’ interests,” said McGuire.
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