Bank of Nova Scotia Issues Auto-Callable Equity Linked Securities Tied to Three Technology Stocks

Structure and Mechanics of the Three-Stock Linked Product

The Bank of Nova Scotia's new securities represent a sophisticated structured product designed to provide enhanced coupon payments while exposing investors to significant downside risk. The offering links investor returns exclusively to whichever of the three underlying stocks—Affirm Holdings, Salesforce, or CrowdStrike—performs most poorly relative to its starting price on any given calculation date. This "basket worst" structure means that even if two of the three technology companies deliver strong returns, an investor receives no benefit from that outperformance. Instead, the investor's entire return depends on the single weakest performer in the basket.

The securities feature a contingent coupon payment structure that operates on a monthly basis throughout the holding period or until automatic call occurs. The contingent coupon rate will be established on the pricing date and is contractually guaranteed to be no less than 23.30% per annum, according to the disclosure. This relatively substantial coupon rate is designed to compensate investors for the significant risks embedded in the product structure, particularly the potential for complete loss of principal under adverse market conditions affecting any of the underlying stocks.

Contingent Coupon Payment and Memory Mechanism

The contingent coupon payments operate under a memory feature that distinguishes this product from more straightforward debt instruments. Coupon payments are paid only when the lowest-performing underlying stock closes at or above its coupon threshold price, which the disclosure sets at 45.00% of the starting price for each stock. This means that if the worst-performing stock declines to between zero and 45.00% of its starting value, investors receive no monthly coupon payment for that calculation date, yet retain their principal obligation to the securities.

The memory feature ensures that if coupon payments are missed during months when the lowest-performing stock falls below the threshold, and that stock subsequently recovers above the threshold, investors receive accumulated back payments. The disclosure states that if the lowest-performing stock price remains below its coupon threshold price on every single calculation day from inception through maturity, investors receive zero coupon payments over the entire three-year holding period. Conversely, if the lowest-performing stock recovers at any point, the issuer must pay not only the current month's coupon but all previously withheld coupon payments simultaneously, without additional interest on the accumulated amounts.

Automatic Call Provisions and Early Termination

The securities include an automatic call feature that provides the Bank of Nova Scotia with the ability to terminate the securities early if market conditions prove favorable for the product's underlying economics. Beginning in January 2027 and continuing through June 2029, if the lowest-performing underlying stock closes at or above its starting price on any of the monthly calculation dates, the Bank will automatically call the securities. Upon automatic call, investors receive the face amount of $1,000 per security plus a final contingent coupon payment and any previously unpaid accumulated coupon payments.

This automatic call mechanism introduces uncertainty regarding the securities' holding period and ultimate maturity date. While the stated maturity date is July 27, 2029, investors could see their position terminated as early as January 2027 if market conditions move favorably for the lowest-performing stock. The combination of automatic call with the contingent coupon structure means investors face a range of potential outcomes depending on which stock performs worst and how market prices evolve across multiple calculation dates over the three-year period.

Principal at Risk and Downside Exposure

The securities present substantial downside risk that fundamentally distinguishes them from conventional fixed-income instruments issued by the Bank. If the securities are not automatically called before stated maturity and the lowest-performing underlying stock closes below its downside threshold price—set at 45.00% of the starting price—on the final calculation day, investors will lose more than 55.00% of the face amount. The disclosure explicitly states that investors could potentially lose all of the face amount in extreme scenarios where the weakest underlying stock declines sufficiently.

The disclosure makes clear that investors have full downside exposure to the lowest-performing underlying stock from its starting price if its closing price on the final calculation day falls below the downside threshold. This means that if one of the three technology stocks declines by 60%, 70%, or 80% during the three-year holding period, investors absorb those losses dollar-for-dollar on their investment, even if the other two underlying stocks appreciate significantly. Notably, investors receive no participation in any appreciation of the underlying stocks and receive no dividend payments from the underlying equities, meaning the entire return opportunity is limited to the contingent coupon payments.

Underlying Stock Selection and Portfolio Concentration Risk

The Bank of Nova Scotia selected three technology stocks as the underlying assets: Affirm Holdings, Salesforce, and CrowdStrike. These three companies operate in distinct but related segments of the technology sector. Affirm operates in fintech and point-of-sale lending, Salesforce provides cloud-based customer relationship management software, and CrowdStrike develops cybersecurity and endpoint protection software. Despite their different business models and revenue streams, all three companies are exposed to broader technology sector volatility, software market competition, and macroeconomic cycles affecting business spending.

The "lowest performing" basket structure creates a particular vulnerability to sector-wide downturns or negative sentiment affecting multiple technology stocks simultaneously. During periods of elevated interest rates or technology stock corrections, it becomes increasingly likely that all three underlying stocks will decline, with the worst performer falling to or below the downside threshold price. The disclosure does not contain forward-looking performance assumptions or probability analysis regarding the likelihood that any of these stocks will exceed the coupon threshold or downside threshold on specific calculation dates.

Estimated Value and Pricing Considerations

The Bank disclosed that if the securities priced on the announcement date of July 23, 2026, the estimated value would fall within a range of $907.59 to $937.59 per security, representing approximately 90.759% to 93.759% of the $1,000 original offering price. This estimated value incorporates the Bank's internal calculations regarding the probability of various outcomes—including contingent coupon payments, automatic call scenarios, and principal repayment or loss—weighted by their respective likelihoods based on volatility assumptions and other market factors.

The difference between the $1,000 original offering price and the estimated value of $907.59 to $937.59 reflects the embedded profit margin built into the product for the Bank and distributing dealers. The disclosure notes that the original offering price excludes any profits from hedging activities undertaken by the Bank to manage its risk exposure to the underlying stocks. The inclusion of dealer spread and projected hedging profits in the offering price is identified in the disclosure as likely to adversely affect secondary market prices, meaning that investors who attempt to sell the securities before maturity may face significant discounts compared to the original purchase price.

Distribution and Agent Compensation Structure

Scotia Capital (USA) Inc., an affiliate of the Bank of Nova Scotia, will purchase the securities from the issuer and distribute them through registered broker-dealers including Wells Fargo Securities. The agent discount is set at $23.25 per security, or 2.325% of the $1,000 face amount. This compensation flows through multiple intermediaries within the distribution chain, with Wells Fargo Securities receiving up to $17.50 per security in discount, and Wells Fargo Advisors potentially receiving an additional $0.75 per security as a distribution expense fee for retail sales.

Additional compensation arrangements may include fees of up to $3.00 per security to selected securities dealers for marketing and distribution services related to sales to other broker-dealers. The disclosure indicates that Scotia Capital and its affiliates may engage in market-making transactions in the securities after their initial sale. This means that the pricing supplement may be used in secondary market trading activities, and investors should be aware that the Bank's affiliates maintain direct interests in the secondary market performance and pricing of these securities.

Credit Risk and Issuance Terms

The Bank of Nova Scotia has issued these securities as senior unsecured debt obligations, meaning all payments—including contingent coupons and principal—are subject to the Bank's credit risk. The disclosure explicitly states that the securities are not insured by the Canada Deposit Insurance Corporation under the CDIC Act, nor are they covered by the U.S. Federal Deposit Insurance Corporation or any other governmental insurance mechanism in Canada or the United States. Investors rely entirely on the Bank's ability and willingness to pay, with no government backing or deposit insurance protections.

The securities are registered under Registration Statement No. 333-282565 and filed pursuant to Rule 424(b)(2) as a preliminary pricing supplement subject to completion. The offering is supported by product supplement WF-1 dated November 8, 2024, a prospectus supplement dated November 8, 2024, and a base prospectus dated November 8, 2024. The preliminary nature of the pricing supplement indicates that the final terms, including the specific contingent coupon rate above the 23.30% minimum, final estimated values, and other terms may differ from those disclosed in this preliminary document.

Complexity, Risk Profile, and Suitability Considerations

The Bank's disclosure emphasizes that these securities have complex features and present risks not found in conventional debt instruments. The product combines multiple contingent elements—contingent coupons with memory features, automatic call provisions, and potential principal loss—creating a range of possible outcomes that depend heavily on precise stock price movements on specific calculation dates across a three-year period. The disclosure dedicates significant space to risk factors, with references to detailed risk discussions appearing on page P-10 of the pricing supplement, page PS-3 of the product supplement, page S-2 of the prospectus supplement, and page 8 of the base prospectus.

Investors should understand that the 23.30% minimum annual coupon, while potentially attractive, is compensation for the substantial risks embedded in the product, particularly the downside exposure and the dependence on the worst-performing stock in the basket. The estimated value below par suggests that the market value of these securities, excluding trading costs and dealer spread, is lower than the offering price, reflecting the risk profile. The absence of exchange listing and the expectation that these securities are "designed to be held to maturity" indicate limited secondary market liquidity and significant execution risk for any investor needing to exit the position before July 27, 2029.