Bank of Nova Scotia Prices U.S. Dollar Covered Bond - Update

Bank of Nova Scotia (BNS) launched a three-year, U.S. dollar-denominated covered bond in the amount of $2.5 billion via Scotia Covered Bond Trust (July 15).

Pricing was at 52.2 basis points over the relevant benchmark, for a yield of 1.498%.

BNS will be the fourth Canadian bank to issue a U.S. dollar-denominated (USD) covered bond, in the footsteps of Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Bank of Montreal (BMO) — all in 2010.

The $2.5 billion amount will make the BNS covered bond (CB) the largest USD CB so far from Canada, exceeding previous $2 billion CBs from CIBC and BMO.

Including the BNS issue, U.S. investors have ordered $11.04 billion in covered bonds this year, as per Dealogic figures cited in the Wall Street Journal — exclusively from issuance by foreign financial institutions. 

According to Dealogic, the $11.04 billion year-to-date figure surpasses the whole-year record of $10.7 billion, which was set in 2007.  That year saw a big debut issue from Bank of America.  But U.S. issuance — which began only in 2006 — came to a halt as the mortgage crisis began to rear its head a year later. 

BNS' USD covered bonds will be issued under a US $15 billion Global Public Sector Covered Bond Program to be established under Ontario and Canadian law, according to Moody's Investors Service, which has assigned a provisional long-term rating of (P)Aaa.

Although BNS initially took steps to set up a covered bond program years ago, the bank has never actually issued a covered bond before now.  Early this year (Jan. 25), Moody's withdrew the provisional ratings of (P)Aaa assigned in 2008 to the covered bonds expected to be issued, "given the length of time that has elapsed without an actual issuance being completed."  This followed a similar ratings withdrawal by Fitch Ratings (December 2009).

Potentially, BNS could issue up to about C$19 billion (US $18.2 billion) in covered bonds before reaching a Canadian regulatory cap, according to calculations by the Canadian rating agency DBRS earlier this year (using bank financials from Oct. 31, 2009).

BNS' $2.5 billion debut comes in the wake of a dual-tranche, $1.8 billion USD CB priced July 13 by France's Compagnie de Financement Foncier (CFF).

Meanwhile, U.S. banks have not issued any covered bonds since 2007.  Specific Congressional legislation regulating covered bonds, which almost made it into the financial regulatory reform bill, is now widely seen as essential to facilitate new issuance here.