TD Bank’s $2.58 million leveraged buffered notes on Euro Stoxx offer growth play

By Emma Trincal

New York, Jan. 4 – Toronto-Dominion Bank’s $2.58 million of 0% leveraged buffered notes due Dec. 29, 2022 linked to the Euro Stoxx 50 index offer what most structured notes buyers would want for growth – return enhancement, full upside potential and buffer protection – but the five-year tenor is the necessary tradeoff for those benefits. Advisers discussed how acceptable the term was for their portfolio.

If the index return is positive, the payout at maturity will be par plus 172% times the index return, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 25% or less and will lose 1% for every 1% that the index declines beyond 25%.

Growth

For Steve Doucette, financial adviser at Proctor Financial, the notes are probably too long and would have to be rebuilt. But he agreed that the structure is adapted to the need of long-term bullish investors as it can maximize growth.

“Who’s going to argue with 172% leverage and no cap? And you have this 25% buffer, which is nice,” he said.

Timing is everything

At the same time, Doucette said that most strategists expect a continuation of the bull market over the short term, followed by a reversal. This makes a five-year bet all the more complicated.

“If you listen to every forecast, maybe we’ll have another good 2018, maybe 2019 but then a pullback is coming.

“If you’re holding this for five years, where do you end in the cycle?

“I would try to shorten the duration myself.”

One way to do it would be to add a cap.

“Hopefully, if I sell away the upside, I may be able to shorten the duration considerably,” he said.

Fine-tuning

But how far? Depending on whether the notes get really short or simply slightly shorter than the current tenor, Doucette would “fine-tune” the structure according to where he sees risk.

For instance, a duration between one and two years would call for a more bullish structure.

“If you listen to all those prognosticators, we may have a good couple of years. I haven’t heard anybody saying we’re going to be in a bear market in the next 12 to 24 months.

“In that case – and hopefully they’re right – you want to throw in more leverage and minimize the buffer.

“But on a three to five year, that’s when I would give up the leverage and capitalize on the buffer.”

The five-year note as it just priced presents a reasonable structure, however, as it “balances” protection on the downside and aggressive growth potential on the upside.

“It’s got you covered on both ends,” he said.

But it may not be appropriate to have such tenor at this point in the market cycle.

“After two years we could go all the way down. I’d rather have it shorter,” he said.

Core portfolio

For Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, the five-year term was acceptable as long as the notes fit in the right portion of his portfolio.

“I’m not concerned about the five-year tenor on this. I like Europe and I would consider my core European holding in this kind of product,” he said.

A long-term exposure would be a good fit for a neutral position, he noted.

“This is a basic portfolio construction determination,” he said.

“A weighting for Europe if I’m neutral would be perfectly compatible with a five-year view,” he said.

“But if my tactical indicators support that I should be overweight Europe. In order to play my tactical tilt, I would need to consider something that’s more liquid.”

Unlimited upside

Medeiros added that the terms of the notes for a core allocation were attractive.

“I like that it’s a true buffer.

“But what I mostly like about this obviously is the leverage on the upside and the fact that there is no cap.

“I’m uncomfortable investing in equities if I take the risk of equities without getting the full reward.

“In that case not only do I have the reward if the index is positive, but I have the enhancement of the leverage so the no-cap is very compelling.

“It’s an interesting note,” he said.

TD Securities (USA) LLC is the agent.

The notes (Cusip: 89114QJZ2) priced on Dec. 22.

The fee is 3.5%.

© 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.