TD Bank’s $1 million step down snowballs on S&P 500 reflect conservative pricing trend

By Emma Trincal

New York, July 12 – Toronto-Dominion Bank’s $1 million of 0% step down autocallable barrier notes due July 9, 2026 linked to the performance of the S&P 500 index may appeal to investors seeking equity-like returns with less risk, sources said.

The notes will be called at par plus a 10.2% annualized call premium if the index closes at or above its initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above 90% of initial level, the notes will be called at maturity for a payout of par plus 30.6%.

If the notes are not called at maturity, the payout will be par unless the index finishes below its 70% barrier level, in which case investors will lose 1% for the 1% decline of the index from its initial level.

Three-year, barrier

“I kind of like it. But I wouldn’t use it with retiree clients or if I did, it would be a small position,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

Pool said the note was not high on the risk spectrum. But picking the right client was part of the due diligence process and retirees should not be the main target given their limited risk tolerance.

Overall, though, the structure was relatively conservative, he noted, in part because of the three-year tenor.

“It has a great probability of paying well. On the risk side, the chances for the S&P to be down three years in a row are extremely low. I don’t believe it has happened over decades,” he said.

Pool felt comfortable with the level of protection.

“The 70% barrier is decent. The S&P is comprised of the 500 strongest U.S. companies. I’d be willing to say that three years from now, I don’t see the market being down more than 30%,” he said.

Not yet retired

Pool would present the notes to clients who have at least five more years to work and accumulate wealth before they retire.

“It’s just a bit too risky for retirees. I would be aiming this at people who have plenty of time prior to retirement,” he said.

“It could be for instance a good fit for young professionals, newly licensed doctors or lawyers, those younger investors who have 25 years of putting money away.”

The snowball structure may not be the easiest to explain. But its benefits would speak for themselves, he added.

“It’s not a hard sale,” he said pointing to the barrier, the cumulative premium and the 90% step down at maturity as attractive features as well as the double-digit premium.

“We don’t do a lot of autocalls. But this is one of the better deals that has come across my desk in the past five or six months,” he said.

Conservative approach

Brady Beals, director, sales and product origination at Luma Financial Technologies, also liked the notes.

“It’s pretty good.

“We’ve been pricing a few snowballs like this lately. It fits a trend that we’ve observed, which is an increasing need for risk mitigation.

“Buyers of income notes are seeking a more conservative approach,” he said.

Some of the “conservative” features of the notes included the choice of the underlying and the “step down” at maturity.

“People are avoiding the Nasdaq given the ride this year. The S&P is much less volatile,” he said.

Investors’ ability to capture the full 30.6% premium at maturity at a 90% strike instead of the initial price was another way to lower risk, he said.

The use of the S&P 500 index alone contributed to the relative safety of the investment.

As a more general trend, Beals said he has observed a decreasing appetite for worst-of structures.

“There’s more demand for single indices. Using the S&P 500 as a single underlying reflects what we’re seeing right now,” he said.

TD Securities (USA) LLC is the agent.

The notes settled on Monday.

The Cusip number is 89115F2G5.

The fee is 0.75%.

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