TD Bank’s $28.95 million autocallable notes on S&P 500 offer new twist on popular structure

By Emma Trincal

New York, Dec. 14 – Toronto-Dominion Bank’s $28.95 million of 0% autocallable buffered index-linked notes due Dec. 10, 2024 linked to the S&P 500 index are an “improved” version of a popular structure seen over the past couple of years, according to a sellsider.

The notes will be automatically called at par plus 11.12% if the index closes at or above 90% of its initial level on Dec. 14, 2023, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index closes at or above 90% of its initial level, the payout at maturity will be par plus the greater of the index gain and 22.24%.

Investors will lose 1.1111% for each 1% loss beyond 10%.

A new thing

Brady Beals, director, sales and product origination of Luma Financial Technologies, said the product was a variation on an increasingly popular structure comprising a one-time call and uncapped return at maturity.

“I’ve seen that structure before. With the traditional version, you get uncapped leverage at maturity, not an uncapped digital. So, this is a bit different. And for the call, the trigger is typically at-the-money like a snowball. Here, it’s in-the-money.”

The call trigger of 90% is “in-the-money” because the current price of the underlying (initial price at 100%) is above the call strike of 90%. When the current price (at-the-money) and the strike price match, the option is “at-the-money.”

Digital, not levered

Beals compared the TD digital notes with the traditional leveraged version of this structure type.

“I think this new format with the uncapped digital is an improvement,” he said.

In both versions, investors should be comfortable with the call premium. The automatic call occurs only once, at the end of the first year.

“It’s your cap,” he said.

“If you’re looking for point-to-point growth, they’re capping you out of your positive return on the first year and you have to reinvest at higher levels.”

At the source of the structure was issuers’ desire to offer uncapped participation over shorter maturities than the cost of the options would allow in a bullet note. The introduction of a single autocall event allowed them to eliminate the cap at maturity, shorten the duration while providing competitive call premiums.

No memory

For Beals, the traditional leveraged version of this one-time autocall structure presented one problem.

Unlike snowballs and memory coupon notes, which offer cumulative income, the call premium was paid only once and upon the call. Separately, investors who wanted the uncapped leveraged participation had no assurance they could get it as the autocall made this outcome uncertain.

“It’s not really an income note. It’s not really a growth note either. You don’t really know what you’re in for,” he said.

A better product

The new version was different. It substituted the uncapped digital payout to the uncapped leveraged return.

“I think it’s an improvement,” he said.

If the notes are not called, investors get the cumulative premium of 22.24% on the upside, he explained.

“You get the equivalent of a memory coupon. You don’t give up your income.

“If the index rises above the digital, it’s a growth note with no cap.

“You get the best of both worlds: income with memory and uncapped participation. You’re just giving up the leverage on the upside,” he said.

90% threshold

The structure featured two other advantages.

“It’s an in-the-money digital. You get paid as long as the index is above 90%.

“I like the idea of still getting a digital return even if the index is down 10%. In that regard, it’s better than a snowball,” he said.

The call trigger for most snowball notes is “at-the-money” when the underlying is flat or positive.

The inclusion of a buffer was another attractive term.

“Income notes tend to be skewed toward barriers. But there is not necessarily a reason for that. We worked with a client who wouldn’t do any barrier and we did a lot of buffered income notes with them,” he said.

Alternative investment

A financial adviser said the notes would be particularly well suited for clients with a rangebound view of the market.

“If you’re bearish or mildly bullish, this is an attractive offering because of the 90% trigger. You get paid 11% even if the index is negative as long as it stays within the buffer range,” he said.

“If you don’t get called, you get 22% in two years or the index gain whichever is higher.”

Only a very bullish investor would oppose the call scenario.

“You get called at 11%. What’s wrong with that?

“If you’re really bullish, you wouldn’t be buying a note on the S&P. You would be buying the S&P itself,” he said.

The notes could be a component of the portfolio in a variety of places.

“It could be part of an aggressive or bullish allocation since your return is unlimited. Or you could put it in a more defensive allocation due to the buffer. It’s also some kind of alternative investment. You generate alpha with the buffer, get a positive return even if the index is slightly down while having some downside protection.

“The note checks a lot of boxes in terms of your portfolio construction,” he said.

TD Securities (USA) LLC is the agent.

The notes settled on Tuesday.

The Cusip number is 89114YHC8.

The fee is 2%.

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