Scotia’s $11.2 million trigger autocall on S&P is growth, not income play, advisers say

By Emma Trincal

New York, Aug. 23 – Bank of Nova Scotia’s $11.2 million of 0% trigger autocallable notes due Aug. 24, 2027 tied to the S&P 500 index should not be treated as an income product, advisers said.

The notes will be called at par plus 10.3% per year if the index closes at or above its initial level on any quarterly observation date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above its initial level, the notes will be called at maturity at par plus 51.5%.

If the index declines but finishes at or above the downside threshold, 75% of the initial level, the payout at maturity will be par. Otherwise, investors will lose 1% for each 1% decline of the index from its initial level.

Below the trendline

One adviser said the timing for the trade was opportune.

“The market already pulled back. We are now lower under the trend line. So, you are buying the notes at a decent entry price,” said Matt Chancey, financial adviser at Dempsey Lord Smith.

The 75% barrier at maturity was another benefit.

“Any time you can get additional protection over the long-term horizon, it’s safer than buying the index fund outright. If you had bought the same note earlier this year, it would be a lot riskier. But we already experienced the pullback,” he said.

After going through a bear market in this year’s first half, the S&P 500 index has rebounded from its June bottom but remains in correction mode, down more than 13% from its Jan. 4 high.

Despite a summer rally, which moved the S&P 500 index up, the benchmark is still below its 200-day moving average, he said.

“If you ignore the noise and the short-term view, we’re still under the 200-day average. We’re below the trendline,” he said.

The 200-day moving average is a line on the chart that plots the average price over the past 200 days. It is used by traders as a technical indicator of long-term trends.

Growth product

The note pays a call premium, not a contingent coupon, which distinguishes it from autocallable contingent coupon notes paying a coupon at barrier level, which is below the initial price.

“It’s not an income note. It’s a growth note,” he said.

While the premium comes with a memory feature allowing investors to capture formerly missed payments, it is paid upon the call event only, which, when triggered, will prevent future payments, he explained.

“As long as it’s allocated correctly, provided that it’s not going into the wrong portion of the portfolio as a 10% fixed-income instrument, it’s totally reasonable,” he said.

The gains are “capped” at the 10.3% premium level, but so are the capped returns in most growth products.

“With any structured product, you’re giving up some of the upside for the downside protection.”

In conclusion, Chancey was neutral.

“I’m not saying I would invest in the note. But it’s investable,” he said.

No extremes

Jonathan Tiemann, president of Tiemann Investment Advisors, was more skeptical.

“The final payout of 51% requires that the S&P would remain negative quarter after quarter for five years. Hard to imagine...,” he said.

For Tiemann, the 10.3% return was not exactly equity-like.

“You could get a much higher return if the market recovers,” he said.

The adviser pointed to other objections.

“I’m not sure I like the five-year tenor. Yes, the notes are callable so your duration could be shorter. But if you’re not called, you could be stuck for a long time, during which you’re not getting any income. It could be dead money for five years,” he said.

The odds for such outcome were low, he conceded, given the memory feature associated with the premium.

“I’m just not sure what this note is for,” he said.

“There’s no income. That to me is an issue. I don’t love that.”

“It’s a bearish view kind of instrument. But the view can’t be too bearish. It has to be somewhat in the middle.”

Beating the market

One scenario may lead investors to outperform the market.

“We could have a bear market for another year or two. The market would be down and then back to level, sometime in the second year or even sooner.

“If you get called in 18 months with a 15% gain, you will feel pretty good,” he said.

But a severe bear market may render such outcome less likely to happen than it appears to be.

“If the market drops a lot, you won’t get back to par any time soon. You just can’t be too bearish. You can only hope for a couple of years of decline followed by a market climbing back.

“I think your chances of outperforming are limited depending on the intensity and length of the downturn, if you’re outlook is bearish,” he said.

Upside, downside

Some risk could also be found on the upside.

“I’m not saying it’s a terrible risk. But if we have a strong and resilient uptrend following the pullback, you could be missing some of the upside since you’re capped at 10.3%.”

The downside protection was sufficient but perhaps not “meaningful,” he said.

“I’m not sure you’re going to need this barrier over five years,” he said.

In conclusion, Tiemann said he did not find a compelling reason to invest in the notes.

“If you want exposure to the market, get exposure to the market,” he said.

Scotia Capital (USA) Inc. and UBS Financial Services Inc. are the agents.

The notes will settle on Wednesday.

The Cusip number is 06417U305.

The fee is 2.5%.

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