Bank of Nova Scotia Launches Equity Linked Securities Backed by Amazon, Alphabet, and NVIDIA Performance

Security Structure and Underlying Stock Performance Mechanism

The Bank of Nova Scotia’s equity linked securities function as multi-asset derivatives where investor returns depend solely on the weakest performing stock among Amazon, Alphabet, and NVIDIA. Using a "lowest performing" approach, the bank identifies on each quarterly calculation day which of the three technology stocks has declined the most relative to its starting price. This design means investors do not benefit from stronger performers and bear the full downside risk of the weakest stock in the basket.

According to the preliminary pricing document, the securities’ estimated value ranges from $900.22 (90.022% of face value) to $930.22 (93.022% of face value) if priced on the filing date. This valuation includes dealer spreads and anticipated hedging profits by the issuer. The finalized pricing supplement will confirm the exact coupon rate and initial stock prices, which are critical for calculating future contingent payments and automatic call eligibility.

Contingent Coupon Payments and Memory Feature Explained

The securities feature a contingent coupon structure with a memory component, allowing unpaid quarterly coupons to accumulate and be paid later if market conditions improve. Coupons of at least 13.90% per annum, paid quarterly, are issued only when the lowest performing stock’s closing price remains at or above 50% of its starting price on the quarterly calculation day. This creates a trigger that suspends coupon payments during significant underperformance.

The memory feature ensures that if the lowest performing stock falls below the threshold on one calculation day but recovers above it later, the issuer must pay the coupon for the recovery quarter plus all previously unpaid coupons since the stock first dropped below 50%. If the stock remains below 50% throughout the securities’ life, no coupons are paid. This asymmetric risk means investors benefit from recoveries but endure full losses during sustained weakness without interim coupons.

Automatic Call Provision and Early Redemption Risks

An automatic call feature activates if the lowest performing stock reaches or exceeds its starting price on any quarterly calculation day from January 2027 through April 2029. Upon activation, the issuer redeems the securities at face value plus a final contingent coupon and any accrued unpaid coupons. This effectively limits the maximum holding period to about 33 months from the filing date, terminating the securities early if any underlying stock fully recovers.

This early redemption introduces reinvestment risk, as investors lose potential gains from further stock appreciation. The quarterly evaluation means call decisions occur at set intervals, adding timing uncertainty. Investors should be aware that strong tech stock recoveries could shorten the holding period below the 36-month maturity, potentially requiring reinvestment in different market conditions.

Principal-at-Risk Exposure and Downside Threshold Details

Classified as principal-at-risk instruments, these securities expose investors to potential losses of their initial investment if the lowest performing stock declines substantially. If not called before July 26, 2029, investors receive full face value only if the lowest performing stock’s closing price on the final calculation day is at or above 50% of its starting price (the "downside threshold"). If it closes below 50%, investors may lose more than half their principal, with losses increasing as the stock declines further.

The structure offers no principal protection below the downside threshold, and investors do not participate in any stock appreciation or dividends. This asymmetric payoff—limited upside capped at face value plus coupons and potentially unlimited downside beyond the 50% loss threshold—reflects the complexity of these equity-linked derivatives and explains why estimated values are significantly below par even before issuance.

Credit Risk and Issuer Considerations

All payments—coupons and principal—depend entirely on The Bank of Nova Scotia’s creditworthiness. The preliminary supplement states these securities are senior unsecured debt obligations subject to the bank’s credit risk. Unlike traditional bank deposits, they lack protection from the Canada Deposit Insurance Corporation (CDIC) or U.S. FDIC, exposing investors to both market risk (linked stocks) and credit risk (issuer). In case of financial distress or default by the bank, investors would be unsecured creditors subordinate to secured and senior debt holders.

The Bank of Nova Scotia operates under Canadian and international regulatory oversight, but the filing does not provide updated financial data such as capital ratios or asset quality. Investors should perform independent credit assessments, as the supplement focuses primarily on the equity linkage structure and risks rather than issuer fundamentals.

Distribution Channels and Dealer Compensation

The securities will be distributed via Scotia Capital (USA) Inc., a Bank of Nova Scotia affiliate, which purchases the securities from the issuer and sells them to Wells Fargo Securities, LLC (WFS) at a discount up to $23.25 per security (2.325%). WFS then sells to retail clients through Wells Fargo Advisors (WFA) and select dealers. WFA receives up to $17.50 (1.75%) per security as selling concession plus up to $0.75 (0.075%) per security as a distribution expense fee.

The Bank of Nova Scotia retains net proceeds of $976.75 per $1,000 face value security after agent discounts. Additional fees up to $3.00 (0.30%) per security may be paid to dealers for marketing and distribution. These compensation structures create potential conflicts of interest, as broker-dealers earn more from selling these complex securities than simpler fixed-income products. Scotia Capital (USA) Inc. may also engage in market-making post-sale to provide secondary market liquidity while capturing bid-ask spreads.

Valuation Methodology and Secondary Market Insights

The preliminary pricing supplement estimates the securities’ value between $900.22 and $930.22 per $1,000 face value, reflecting a 7% to 10% discount to par. This discount accounts for dealer spreads, hedging profits, and embedded optionality. The document warns that these factors will likely depress secondary market prices below initial purchase levels.

The securities are intended to be held to maturity, with no exchange listing, indicating limited liquidity and potentially wide bid-ask spreads if sold early. The discount reflects the cost of embedded derivatives—contingent coupons, automatic call, and downside risk—valued by the bank at issuance. Secondary market prices will fluctuate with changes in stock volatility, interest rates, and underlying stock prices.

Technology Sector Concentration and Market Risks

Linked exclusively to three large-cap tech giants—Amazon, Alphabet, and NVIDIA—the securities expose investors to concentrated sector risk. The "lowest performing" structure means investors bear the risk of whichever stock underperforms without diversification benefits. The filing omits current stock prices and volatility data, key for assessing coupon and call probabilities, but the valuation discount suggests expectations of downside risk or low call likelihood within 33 months.

Technology sector valuations, interest rate trends, and macroeconomic factors heavily influence these stocks’ near-term outlook. Prolonged sector weakness, rising rates, or recession could drive all three below starting prices, causing coupon losses and principal impairment. Conversely, strong performance could trigger early call, capping returns. The supplement does not disclose management’s expectations, requiring investors to form independent views on sector and stock trajectories.

Regulatory Filings and Investor Disclosure

The preliminary pricing supplement is filed under SEC Rule 424(b)(2) as part of Registration Statement No. 333-282565, confirming The Bank of Nova Scotia’s SEC registration for these securities. The document states neither the SEC nor any state securities commission has approved or disapproved the securities or reviewed disclosure accuracy. Terms are governed by Product Supplement No. WF-1, Prospectus Supplement, and Base Prospectus, all dated November 8, 2024.

Marked "Subject To Completion" as of July 20, 2026, the supplement is near-final but subject to minor updates before the final pricing supplement is issued. Investors should expect confirmation of final coupon rates (minimum 13.90%), starting stock prices, and distribution dates in the final document. SEC registration ensures institutional and retail buyers receive full offering materials prior to purchase.

Comparative Valuation and Suitability Considerations

The estimated 90% to 93% face value valuation offers a benchmark against alternative investments. The contingent coupon of at least 13.90% per annum applies only if the lowest performing stock stays above 50% of its initial price; adverse market moves may eliminate coupon payments entirely. Conventional senior unsecured bank debt from The Bank of Nova Scotia would provide fixed coupons with certainty but likely at lower rates due to absence of embedded options and principal risk.

The filing lacks sensitivity analyses on how stock price, volatility, or interest rate changes impact valuation or payment probabilities. Prospective investors should conduct thorough scenario analyses based on their outlook for Amazon, Alphabet, and NVIDIA over the 36-month term. Given the complex embedded options, exclusive linkage to the lowest performing stock, and principal-at-risk nature, these securities suit only sophisticated investors with high risk tolerance and expertise in equity-linked derivatives.