TD Bank’s $18.63 million leveraged capped buffered notes on S&P set to navigate uncertainty

By Emma Trincal

New York, May 26 – Despite hesitations, advisers said that Toronto-Dominion Bank’s $18.63 million of 0% leveraged capped buffered notes due May 15, 2024 linked to the S&P 500 index could help investors ride a volatile market in the near term.

If the index return is positive, the payout at maturity will be par plus 160% of the index return, capped at par plus 29.584%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index finishes flat or falls by up to 17.5% and will lose 1.2121% for every 1% index decline beyond 17.5%.

Bearish tilt

Steve Doucette, financial adviser at Proctor Financial, said the structure showed a bearish bias.

“It’s a nice, simple note. You’re going to outperform all the way down. It gives you pretty good parameters in either direction,” he said.

“But it’s especially attractive if you’re bearish. Having this 17.5% buffer looks pretty good since we’re already down 20%. You would have to be down 37% before you start losing money.”

What was more problematic was the cap on the upside.

“With the cap, you are more of a bear than you are a bull. You’re capping yourself at 29% over two years.

Fear of missing out

The limitation on the gains could be an issue if the market strongly rebounds, he said.

“The S&P could come screaming back and you may be capped out well below the market,” he said.

The 48% cap over two years represents a 13.83% annualized compounded return, which would only require an annual increase in the index of 8.85%.

For Doucette, given the market sell-off since the start of the year, such an annual return could be easily attained.

“Since we’re already down so much, do you really need a 17% buffer? For bears, the answer is definitely yes. That’s why I think you need to be more bearish than bullish to buy this note,” he said.

Doucette would reconstruct the note to allow for higher returns.

“I would try to get as much upside as possible, for instance take a 10% geared buffer and get rid of the cap. If it’s not possible since it’s only two years, I could go for a 5% buffer with uncapped leverage,” he said.

The other side

But the current market does not show a clear trend despite the downturn, which makes it difficult to have a clear opinion about the note, he said.

“So far, I was making the bullish case. But you could argue the opposite.

“People for years were buying this market like crazy. Now they want to sell. The market is on sale. Do you jump in at depressed prices? Do you wait and see what the Fed is going to do ... if we’re going to be in a recession? That’s a tough call.

“In the long run, the market always comes back. But this is not the long run. This is a two-year paper and that’s the point.

“If it was a five-year, I wouldn’t be looking for protection. I would go for leverage uncapped,” he said.

The note may be more attractive than initially thought in a volatile market environment.

“If you are bearish, it’s a good play. Personally, I tend to have a bullish bias because I’m more of an optimist than a pessimist.

“But if the market continues to be choppy, it might be a decent note. You may want to have this buffer. Sure, you could be off to the races very quickly like in 2020. Or the pullback could drag on,” he said.

“You don’t know really because you can never time the bottom.”

Possible rebound

Matt Medeiros, president and chief executive of the Institute for Wealth Management, expressed a similar balanced view even if he leaned toward caution.

“I don’t mind the cap with current pricing. I would be fine with that,” he said.

“I’m concerned about the continued volatility we may have over the next couple of years.”

The current market downtrend provided some level of protection.

“There is a case for some upside in the market due to the big drop in equity markets,” he said.

“Some people may say: it’s oversold.

“We’re already down 20%. The S&P would have to come off 40% of its high before you start getting into the gearing. Plus, you have a two-year window to bounce back. Future earnings are looking decent, that’s another positive. Companies in the S&P derive most of their revenues outside of the U.S. and global economic growth is likely to pick up, which would translate into equities.”

Headwinds

Despite some signs of potential recovery, the financial adviser remained cautious.

“All that said, the market continues to face ongoing uncertainty in so many ways. If we get into a large-scale war in Ukraine, all bets are off,” he said.

While “a lot of the Fed tightening has already been priced,” there is still uncertainty regarding the impact of the new monetary policy on the economy. Furthermore, soaring inflation, higher interest rates, Covid lockdowns in China continued to weigh on the markets.

“In this volatile environment, I do like having the buffer,” he said.

“You get some reasonable upside potential with the additional benefit of the downside protection.

“Using this product rather than an index fund makes sense to me at this point in time.

“It is a good note.”

TD Securities (USA) LLC is the agent. Simon Markets LLC, a broker-dealer affiliated with Goldman Sachs & Co. LLC, is acting as a dealer.

The notes settled on Tuesday.

The Cusip number is 89114Y3F6.

The fee is 0%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.