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The Bank of Nova Scotia has introduced a new series of complex equity-linked securities maturing in July 2029, with returns tied to the performance of the lowest-performing stock among Affirm Holdings, Salesforce, and CrowdStrike. These securities offer contingent monthly coupons with a memory feature, automatic call options, and carry significant principal risk if the weakest stock drops below specified thresholds. Investors bear full downside exposure to the poorest-performing technology stock throughout the investment period.
Key Points
- NYSE: BNS
- Bank of Nova Scotia released a preliminary pricing supplement for auto-callable equity-linked securities maturing July 27, 2029
- Contingent coupon rate set at pricing with a minimum of 23.30% per annum; coupon threshold price fixed at 45.00% of each stock's initial price
- Original offering price is $1,000 per security with a $23.25 agent discount; estimated value ranges from $907.59 to $937.59 per security if priced on announcement date
Product Structure and Mechanics of the Three-Stock Linked Offering
The Bank of Nova Scotia's offering is a sophisticated structured product designed to deliver enhanced coupon payments while exposing investors to significant downside risk. Returns depend solely on the lowest-performing stock among Affirm Holdings, Salesforce, and CrowdStrike relative to their starting prices on each calculation date. This "basket worst" design means that strong performance by two stocks does not benefit investors; their returns hinge entirely on the weakest stock.
The securities include a contingent monthly coupon payment schedule or until an automatic call is triggered. The coupon rate is established on pricing and guaranteed not to fall below 23.30% per annum, compensating investors for the considerable risks, including potential total principal loss if any underlying stock declines sharply.
Contingent Coupon Payments with Memory Feature
Coupon payments are contingent on the lowest-performing stock closing at or above 45.00% of its initial price on each monthly calculation date. If the worst-performing stock falls below this threshold, no coupon is paid for that month, though principal remains outstanding.
The memory feature ensures that missed coupons accumulate and are paid in full if the lowest-performing stock later recovers above the threshold. However, if the stock remains below 45.00% throughout the entire three-year term, investors receive no coupon payments. Upon recovery, all withheld coupons are paid simultaneously without additional interest.
Automatic Call Feature and Early Redemption
Starting January 2027 through June 2029, the Bank may automatically call the securities if the lowest-performing stock closes at or above its initial price on any monthly calculation date. Upon automatic call, investors receive the $1,000 principal plus the final contingent coupon and any unpaid accumulated coupons.
This feature introduces uncertainty regarding the holding period, potentially ending the investment early if market conditions favor the lowest-performing stock. The combination of automatic call and contingent coupons results in varied outcomes depending on stock performance and market movements over three years.
Principal Risk and Downside Exposure
If the securities are not called early and the lowest-performing stock closes below 45.00% of its initial price on the final calculation date, investors face losses exceeding 55% of principal. In extreme cases, complete loss of principal is possible if the weakest stock declines substantially.
Investors bear full downside exposure to the worst-performing stock’s price decline, with no participation in gains or dividends from any underlying stock. Losses are realized dollar-for-dollar based on the weakest stock’s performance, regardless of the other stocks’ appreciation.
Underlying Stocks and Sector Concentration Risk
The three technology stocks underlying this product are Affirm Holdings, Salesforce, and CrowdStrike, each operating in distinct technology segments: fintech point-of-sale lending, cloud-based CRM software, and cybersecurity solutions, respectively. Despite differing business models, all are subject to technology sector volatility, competitive pressures, and macroeconomic cycles.
The "lowest performing" basket structure increases vulnerability to sector-wide downturns or negative sentiment impacting multiple technology stocks simultaneously. The disclosure does not provide forward-looking performance estimates or probabilities regarding threshold breaches.
Estimated Pricing and Valuation
If priced on July 23, 2026, the securities’ estimated value ranges from $907.59 to $937.59 per security, or approximately 90.759% to 93.759% of the $1,000 offering price. This valuation reflects probabilities of coupon payments, automatic calls, and principal repayment or loss based on volatility and market assumptions.
The difference between the offering price and estimated value represents the embedded profit margin for the Bank and dealers. The offering price excludes profits from hedging activities and includes dealer spreads, likely resulting in lower secondary market prices and potential discounts for investors selling before maturity.
Distribution and Agent Compensation
Scotia Capital (USA) Inc., affiliated with the Bank, will purchase and distribute the securities through registered broker-dealers, including Wells Fargo Securities. The agent discount is $23.25 per security (2.325% of face value), with Wells Fargo Securities receiving up to $17.50 and Wells Fargo Advisors potentially earning an additional $0.75 per security for retail distribution.
Additional fees up to $3.00 per security may be paid to selected dealers for marketing and distribution. Scotia Capital and affiliates may also engage in market-making post-sale, influencing secondary market pricing and liquidity.
Credit Risk and Issuance Details
These securities are senior unsecured debt obligations of the Bank of Nova Scotia, subject to the Bank’s credit risk. They are not insured by the Canada Deposit Insurance Corporation, the U.S. FDIC, or any government insurance scheme. Investors rely solely on the Bank’s creditworthiness.
Registered under Registration Statement No. 333-282565 and filed as a preliminary pricing supplement under Rule 424(b)(2), the offering is supported by product supplement WF-1, a prospectus supplement, and a base prospectus dated November 8, 2024. Final terms, including the exact coupon rate and estimated values, may differ from preliminary disclosures.
Complexity, Risk Profile, and Suitability
The Bank emphasizes the securities’ complexity and risks, including contingent coupons with memory, automatic call features, and principal loss potential. Outcomes depend heavily on stock price movements over three years. Detailed risk factors are outlined in the pricing supplement and related documents.
While the 23.30% minimum annual coupon may appear attractive, it compensates for substantial risks, especially downside exposure tied to the worst-performing stock. The below-par estimated value indicates market pricing that reflects these risks. The absence of an exchange listing and the recommendation to hold to maturity suggest limited liquidity and significant execution risk for early sellers.
