The Bank of Nova Scotia has filed preliminary terms for Nvidia-linked structured notes carrying a 12.92% annualised contingent coupon, but the more consequential number for investors may be the 65% barrier that determines whether $1,000 of principal is repaid in cash or replaced with Nvidia shares worth less than the original investment.
The Autocallable Contingent Coupon Barrier Notes with Memory Coupon are linked solely to Nvidia common stock and are scheduled to mature in March 2028 unless called earlier. They pay a $32.30 quarterly contingent coupon when Nvidia meets a barrier set at 65% of its Initial Value, while designated quarterly observations can automatically terminate the notes when Nvidia is at or above 100% of that starting level.
The structure creates a particularly important boundary at maturity. If Nvidia finishes at or above 65% of its Initial Value, the $1,000 principal is repaid in cash. If it finishes below 65%, investors generally receive Nvidia shares calculated from the stock's original value instead, meaning the resulting loss is measured against Nvidia's full decline from its Initial Value rather than only the portion below the barrier.
The 65% level can initially look similar to a 35% downside buffer, but that is not how the maturity formula operates once the threshold is breached.
If the notes remain outstanding until the March 24, 2028 Final Valuation Date and Nvidia is at least 65% of its Initial Value, Bank of Nova Scotia will repay $1,000 in cash for each note, in addition to any contingent coupon and recoverable unpaid coupons due under the terms.
Below 65%, the settlement method changes. The investor generally receives a number of Nvidia shares calculated by dividing the $1,000 principal amount by Nvidia's Initial Value, with cash paid for any fractional share. The filing states that the value of those shares, based on the Final Value, will represent a 1% loss of principal for each 1% that Nvidia is below its Initial Value.
The bank illustrates the effect using a hypothetical Initial Value of $100 and Final Value of $40. A $1,000 note would correspond to 10 shares, worth $400 using that Final Value, producing a 60% loss based on the value of the physical delivery amount at the Final Valuation Date.
The example demonstrates why the 65% barrier should not be read as limiting the investor's loss to the decline occurring after Nvidia has already fallen 35%. Once the final barrier is breached, the physical-delivery calculation reflects Nvidia's decline from its Initial Value.
The filing also warns that the Nvidia shares may be worth still less by the time they are delivered if the stock declines between the Final Valuation Date and the March 29 maturity date. The maximum possible principal loss is 100%.
Against that downside structure, the notes specify a quarterly contingent coupon of $32.30 for each $1,000 principal amount, equivalent to a stated 12.92% per annum.
Payment is not guaranteed. Nvidia must close at or above the Contingent Coupon Barrier Value, equal to 65% of its Initial Value, on the relevant observation date for the coupon to become payable.
A missed coupon before the Final Valuation Date is not necessarily lost immediately. It becomes an Unpaid Contingent Coupon under the product's memory feature and can subsequently be paid when a later observation satisfies the coupon condition.
The memory mechanism does not guarantee eventual recovery. If Nvidia's Final Value is below the 65% Contingent Coupon Barrier Value, no coupon is payable for the final observation and any accumulated Unpaid Contingent Coupons are not paid.
That means the same 65% percentage level ultimately governs two separate outcomes at the final observation: whether the final and previously unpaid contingent coupons can be paid, and whether principal is returned in cash or the investor instead receives the physical delivery amount.
The notes also contain an automatic-call feature that can shorten the investment before the scheduled March 2028 maturity.
Five pre-maturity observation dates are designated as Call Observation Dates, beginning on December 24, 2026 and continuing quarterly through December 27, 2027. If Nvidia closes at or above the Call Value, equal to 100% of its Initial Value, on any of those dates, the notes are automatically redeemed.
The investor then receives the $1,000 principal amount plus the contingent coupon due for that observation and any accrued Unpaid Contingent Coupons that become payable. No further payments are made after the automatic call.
The economic consequence is that investors do not receive open-ended exposure to Nvidia's appreciation. A sufficiently high Nvidia closing value on a scheduled call date can instead terminate the notes and the remaining potential coupon stream.
The absence of direct upside participation distinguishes the notes from owning Nvidia shares.
Positive return is limited to contingent coupons that become payable. An increase in Nvidia's share price does not increase the $1,000 principal repayment, and investors holding the notes do not receive Nvidia dividends, voting rights or other ownership rights unless and until shares are delivered under the maturity settlement provisions.
The result is an asymmetric payoff. Nvidia can support quarterly coupon payments while it remains above the applicable barrier, and a return to or above its Initial Value on a designated call date can end the product early. If the notes instead survive to maturity and Nvidia finishes below 65% of its starting level, the investor becomes exposed through physical settlement to the stock's decline from its Initial Value.
Bank of Nova Scotia expects the initial estimated value when the terms are set to fall between $950.08 and $980.08 for each note sold at an original issue price of $1,000.
That represents an expected difference of $19.92 to $49.92, or approximately 1.99% to 4.99% of the issue price.
The bank says its estimated value is based on internal pricing models incorporating factors including its internal funding rate and assumptions about market parameters. It also says the economic terms reflect the underwriting discount and costs associated with selling and structuring the notes, including the economic terms of related hedging arrangements.
The underwriting commission is 1.50%. Scotia Capital (USA), an affiliate of Bank of Nova Scotia, will purchase the notes at the original issue price and sell them to Citigroup Global Markets as part of the distribution.
The securities will not be listed on a US securities exchange or automated quotation system. Scotia Capital may make a secondary market but is not required to do so, leaving investors exposed to potential liquidity constraints if they seek to exit before an automatic call or maturity.
The notes are also unsubordinated and unsecured obligations of Bank of Nova Scotia, meaning payments and any physical delivery remain subject to the bank's creditworthiness independently of Nvidia's performance.
The September 18 filing remains preliminary and subject to completion. The trade date is scheduled for September 24, with issuance expected on September 29 and maturity on March 29, 2028. Nvidia's Initial Value will be established on the trade date, so the precise dollar Call Value, Barrier Value and Contingent Coupon Barrier Value are not yet available.
