Pedestrians walk past a Bank of Nova Scotia location in downtown Toronto.Louie Palu/The Globe and Mail
It has long been assumed that Bank of Nova Scotia would need to issue common equity to boost its capital ratios after acquiring abroad. No surprise, then, that the bank is in the market with a new bought deal this afternoon.
But no one was quite sure of when exactly the equity raise would come, and how much it would be worth -- especially after it was revealed that the bank is looking to sell its flagship office tower in downtown Toronto for around $1-billion. That money, many believed, could supplant some of the much-needed common equity.
For that reason, it is a bit surprising that the bank has gone so big with its capital raise, opting to selling $1.5-billion of new common shares at $50.25 each. And the timing is a little odd considering that the office tower sale is just getting under way.
Still, the use of proceeds jibes with everyone's expectations: Scotia needs capital. Combine the new equity raise with proceeds from selling the Scotia Centre tower in Calgary, as well as with issuing 10 million common shares in the Banco Colpatria acquisition, and the bank's Tier 1 common equity ratio no longer looks so dreadful.
In fact, if the Scotia Plaza sale goes through, the bank could be sitting pretty by 2013, with some room to manoeuvre, rather than barely meeting the required Tier 1 common equity ratio of 7 per cent. We're Canadians. We like our banks strong.
There's also the possibility that the common equity raise takes some pressure off the building sale. Had that been the only source of new funds for the next little while, the bank might have been forced to take whatever price comes its way. With less fire under its feet, it has more liberty to negotiate.
As for the price of the common equity raise, it's about a 3 per cent discount to stock's close. That's quite fair for a deal of this size, and demonstrates that Scotia didn't feel the need to offer an egregious price cut to get it done.
Tim Kiladze