Scotiabank's $128 million notes on Raymond James Analyst Current Favorites: No. 5 deal of year

By Emma Trincal

New York, Sept. 25 - Bank of Nova Scotia's $128 million issue of equity-linked notes due Sept. 21, 2016 tied to the Raymond James Analyst Current Favorites Total Return index is the fifth largest offering of the year so far, according to data compiled by Prospect News.

The product linked to equity research from Raymond James drew a heavy bid as investors seek to outperform the market through stock-picking, sources said.

The payout at maturity will be par plus the index return. Investors will be exposed to any losses, according to a 424B2 filing with the Securities and Exchange Commission.

"Equity research offers a lot of value to investors who are looking for an edge, a way to outperform the benchmark. There is only so much you can invest in the S&P. You want to gain [an] advantage with the best opportunities. Research is an appealing theme," a sellsider said.

Ahead of the Scotiabank deal, all four largest deals of the year were brought to market by Bank of America Merrill Lynch, according to the data. The top deal was Bank of America Corp.'s $284.5 million of 0% leveraged index return notes due June 29, 2018 linked to the Dow Jones industrial average, which priced at the end of June.

The Raymond James Analyst Current Favorites Total Return index is a new index developed earlier this month by Raymond James & Associates, Inc., according to the prospectus. It is based on one of the firm's recommended lists, the Raymond James Analyst Current Favorites List, which is only available to the company's clients.

The list, published monthly, is a discretionary research-based list of companies that Raymond James analysts rate either as "Strong Buy" or "Outperform." The index, rebalanced each month, is designed to reflect the list, although some differences exist between the list and the index, according to the prospectus. For instance, the index will be adjusted for corporate events, such as stock splits, that would have no effect on the list. Also, the list, which can change on a daily basis, will be updated more frequently than the index.

Monthly updates

The deal, sources said, was reminiscent of another series of structured notes also tied to Raymond James equity research picks but brought to market only once a year and by another issuer.

In December, Bank of Montreal priced $100 million of 0% senior medium-term notes, series B, due Dec. 23, 2013 linked to Raymond James Analysts' Best Picks for 2013. This note, which Bank of Montreal offers each year, is based on the Analyst Best Picks, another Raymond James internal recommended list. It is published in December recommending picks for the coming year.

"Bank of Montreal does similar notes, but they are linked to a more static index put together once a year. In that sense, this one is different and more appealing because it gives you fresher picks, updated monthly," the sellsider said.

"It's definitely a new product. It was based on a brand new index that gives you access to a basket of stock picks continuously updated and adjusted."

"Raymond James equity research is one of the top research group in the U.S.," said a registered investment adviser affiliated with the firm.

Raymond James is No. 7 in cumulative awards over the past decade, according to the Wall Street Journal's annual Best on the Street survey, he said.

Scotiabank

Scotiabank issuing a deal of that size was a surprise for some given the position of the firm in the U.S. league tables. Scotiabank is ranked No. 12 so far this year with $375 million sold in 34 offerings, or 1.40% of the total volume to date of $26.73 billion. But the Canadian bank, rated Aa2 by Moody's, offers less credit risk than most major U.S. banks, said an industry source.

"[Raymond James] want high-credit notes. It's not shocking that they would have picked Scotia. They have a high credit threshold. There are only a few double-A [credits] out there," he said.

"I'm not sure why Scotia did it. But obviously, if you're someone like Bank of America you wouldn't publish other firms' research, would you?" the investment adviser said.

"I know I'm biased, but I think Raymond James is fantastic. If a firm produces top equity research, people are going to pay attention. As long as they do the best job at stock-picking, I don't care who does the research."

While some sellsiders speculated that the notes may have been distributed internally by Raymond James brokers, this adviser said that it was not the case.

"It wasn't on our desk. I had no idea it was happening until yesterday. I can't buy a note that's not on the desk. So if I don't see it, it means that it was not designed for internal distribution at Raymond James," he said.

The success of the offering was due to investors' appetite for good stock-picking, he said.

Access

"Investors are attracted to research-based notes like this one. It gives them access to the top analysts. There is really few other ways to access a closely guarded research only available to the clients of Raymond James. Even if you know how to get around the Raymond James website, you're not going to have access to their recommended list unless you are an institutional client," the adviser said.

"A top-pick list, especially one like the Current Favorite that changes every month, doesn't really lend itself to an exchange-traded fund. It doesn't really lend itself to a note or an ETN either because your list changes every month.

"The reason why the S&P works as an underlier is because it's reconstituted once a year. All the major indexes are done that way.

"Since it's rare to see a note tied to a non-static, actively managed index, it's easy to see why the offering was such a hit."

Cost

The price to the public was 103% of par, and the underwriting commission was 2.5%.

"It's not very cheap, but at least it's a total return index, so they pay the dividends. If they're rebalancing the portfolio, then maybe there is a justification for the premium," a structurer said.

"We don't do notes based on the research of others. Raymond James is the top equity research firm, or so they claim. But we have our own research, and other analysts' views don't necessarily reflect our own. So we're not keen on structuring notes based on other firms' baskets of best picks."

The break-even level is 4%, according to the prospectus. As a result, the final index level has to be greater than 4% in order for investors to make money, the sellsider said.

"I'm not sure how they calculate that, but basically the value of the notes is $1,000. They sold at 103. Three [percent] is your markup, which is close to the 2.5% fee. The rest probably goes to the issuer," he said.

"A 3% upfront cost over the three-year period kind of makes sense if you figure any actively managed mutual fund that charges about 1% a year."

The industry source agreed that the fee was standard. "It's not really out of line with what the wirehouses charge. It's fairly typical, although the premium is less common," he said.

The notes (Cusip: 064159BL9) priced Sept. 18.

Scotia Capital (USA) Inc. was the underwriter.

Raymond James is the sponsor of the index, and Bloomberg LP is the calculation agent.

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