Scotiabank's buffered digital notes linked to Euro Stoxx 50 designed for range-bound outlook

By Emma Trincal

New York, April 11 - Bank of Nova Scotia's 0% series A capped enhanced participation notes with digital coupon linked to the Euro Stoxx 50 index offer a non-directional strategy within a range for investors who do not anticipate wide moves in the European stock benchmark, said Steve Doucette, financial adviser at Proctor Financial.

For advisers worried about volatility, however, the structure may not provide enough protection in relation to the cap, said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

The notes will mature between 24 and 27 months after pricing. The initial and final index levels will each be converted into dollars using the exchange rate then in effect.

If the index finishes at or above 90% of the initial level, the payout at maturity will be par plus the digital coupon of 17.5% to 20.5%. Otherwise, investors will lose 1.1111% for each 1% decline beyond 10%.

The tenor and digital coupon will not be finalized until the trade date, according to a 424B5 filing with the Securities and Exchange Commission.

Outperforming the index

Depending on the chosen maturity and coupon, the annualized coupon may vary between 7.77% and 10.25%.

"If you believe the index will trade range bound, if you try to collect a coupon based on this, then I think it's a decent product for this type of view," Doucette said.

"You pick up some yield with some downside protection. Even with the 1.11 leverage, it's a buffer and you get a chance to beat the index."

If the index declined by 20%, a standard 10% buffer would cause investors to lose 10% of their principal versus 11.11% with the notes, he noted. The difference in losses between the two buffers would be 1.11%.

With stiffer losses - for instance in the hypothetical case of a 50% decline - the difference in losses between the two buffers would only be 4.4%. In an extreme scenario involving an index falling by 90%, the gap between the two buffers would be less than 9%, with investors losing 80% on the standard buffer and 88.88% with the notes.

"It's a decent buffer," he said.

Provided that the index at maturity finishes above the buffer and below the digital coupon, investors would be able to outperform the benchmark, he said.

"Theoretically, you could outperform if it's down 10% and you collect 20% in payout for the period. You have a chance to outperform the index by 30%," he said.

"If it's up moderately, you may not be giving up too much with a 17.5% to 20.5% return.

"If European stocks trade sideways, it is a good deal."

Volatility, cap

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that volatility was an issue for him.

"I think Europe is interesting for us. We see some opportunities there, but I think there's as much upside potential as there is downside potential, especially over a shorter period of time," he said.

"The part that concerns me on this note is: Am I getting enough of a cap for the downside risk? We're dealing with a pretty volatile asset class. Because the risk is so high, I'm not sure that the cap on the upside is enough compensation for the downside buffer.

"Or let me put it that way: With an index as volatile as the Euro Stoxx, if I'm going to collect that type of coupon, I'd rather see more downside protection.

"I like the potential return of the Euro Stoxx 50, but I'm more concerned with the potential exposure to losses.

"The European equity market is volatile, especially right now. I'm not bullish. I see myself pretty cautious about Europe at this time. It's not necessary today's headlines that I'm concerned about; it's what's coming up next in tomorrow's headlines.

"You have to be somewhat bullish to buy this note. I wouldn't call myself bullish on Europe. From a fundamental standpoint, I think most of the eurozone countries, including Greece and even France and Germany, share similar structural debt problems that have yet to be resolved."

Scotia Capital (USA) Inc. is the underwriter with Goldman Sachs & Co. as dealer.

The notes will settle April 18.

The Cusip number is 064159528.

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