Scotiabank Will Sell Hybrid Debt as Fed’s Hikes Overwhelm LatAm

Financing in Latin America is becoming more expensive as major central banks raise interest rates to tame inflation and to contain reduced investor appetite for riskier assets, the IMF said last week

Scotiabank generates almost a third of its revenue from its Latin America-focused international unit.
By Esteban Duarte
October 17, 2022 | 02:32 PM

Bloomberg — Bank of Nova Scotia (BNS), the Canadian bank with the largest exposure to Latin America, plans to sell $750 million of loss-absorbing hybrid securities amid mounting concerns about the spillover effects of US Federal Reserve rate hikes on emerging-market economies.

Scotiabank is issuing 60-year so-called limited recourse capital notes at a yield of 8.625%, down from around 8.75% initially discussed, according to people with knowledge of the matter. That’s an extra yield of 50 basis points compared to Toronto-Dominion Bank’s $1.75 billion issuance of the securities earlier this month.

“We think Scotia should trade somewhat outside of Toronto-Dominion,” said Peter Simon, a New York-based analyst at CreditSights Inc. “We see value up to 8.55%.”

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The bonds are eligible for Additional Tier 1 buffers as the yield of a Bloomberg index of BBB rated bonds issued by banks reached 6.78% on Friday, the highest since 2010, as investors fret about global financial stability. Scotiabank’s new notes are expected to be rated BBB- by S&P Global Ratings, its lowest investment grade, and one step lower than TD’s notes priced early this month.

Financing in Latin America is becoming more expensive as major central banks raise interest rates to tame inflation and to contain reduced investor appetite for riskier assets, the International Monetary Fund said last week. Scotiabank generated almost a third of its revenue from its Latin America-focused international unit in its most recent fiscal year.

AT1s, the riskiest form of bank debt, have been sold in various denominations in Europe, Asia and the US. The securities seek to transfer risk during times of firm-level financial distress to creditors and potentially away from taxpayers.

A representative from Scotiabank didn’t immediately provide a comment.

Bloomberg.com