Bank of Nova Scotia is planning to issue Canadian defence bonds to help raise capital for companies as the financial sector moves to support Ottawa’s ambitions to build a defence industrial base at home.
The bank published guidelines Tuesday to provide transparency to investors and industry about how it will finance and refinance activities in the sector through bonds and other financial instruments.
Brandon Konigsberg, executive vice-president and group treasurer at Scotiabank, said in a written statement that “standards are still forming” in defence financing and this is Scotiabank’s way of outlining its own approach to the rapidly evolving space.
Using bonds, for example, Scotiabank will raise capital from investors, which it will then use to help finance loans to Canadian defence companies.
“As Canada makes significant investments in defence, security and resilience, access to capital will play an increasingly important role in supporting those priorities,” Paul Scurfield, executive vice-president and global head of capital markets for Scotiabank, said in a written statement.
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Defence has hardly been a priority for Canadian financial institutions in recent history and the domestic industry has long lamented the difficulties it has faced while searching for capital at home, often requiring it to turn to investors overseas for support. While change is occurring gradually in this regard in Canada, it is still a challenge cited by many companies, similar to defence procurement, that will take time to meaningfully change.
However, over the past year or so, several Canadian banks have taken steps to signal they are behind the sector. Earlier this year, all of Canada’s Big Six banks signed on to support the Defence, Security and Resilience Bank, a new multinational bank to be headquartered in Canada. In May, The Globe and Mail reported that Royal Bank of Canada is advising Ontario on a $500-million bond to fund defence projects and in August, National Bank tapped retired general Rick Hillier as a strategic defence adviser.
Scotiabank’s new Canadian defence issuance framework is its own next step toward change, in terms of being able to align itself with the goals of Ottawa’s Defence Industrial Strategy, which was released in February. The bank also has a defence and security financing policy, which it said it uses to govern its activities in defence, where unique considerations such as the “nature of the products,” “end users” and “geographies” are factors.
The Defence Industrial Strategy, Canada’s current defence policy, Our North Strong and Free, and a NATO commitment to reach 5 per cent of GDP spending on defence by 2035 have all informed its framework, according to Scotiabank.
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Using the framework for reference, the bank will be able to issue Canadian defence bonds, in private or public format. This will allow it to provide loans to public institutions, as well as public or private entities, that it deems eligible to be included in its defence asset portfolio.
These entities must demonstrate “meaningful participation in the Canadian defence and security sector,” such as being a member of industry associations, included in a government-recognized procurement program or supplier list, or engaged in one of the activities outlined within the bank’s framework. These activities span everything from manufacturing to research and development to training, across several sectors such as aerospace, ammunition, supply chains and critical infrastructure.
Certain weapons and equipment, such as cluster munitions or chemical weapons, are excluded, the bank noted in the framework, under international conventions ratified by Canada.
Scotiabank’s defence subcommittee, as well as its steering committee on the topic, which comprises a number of senior management representatives, will review and lead the bank in applying the framework.
Part of the bank’s annual reporting about its use of defence bonds will include a breakdown of how the proceeds were used to finance small- and medium-sized enterprises.