TD Bank’s $6.1 million notes with absolute return buffer on S&P 500 offer timely hedge

By Emma Trincal

New York, April 1 – Toronto-Dominion Bank priced $6.1 million of absolute return notes tied to the S&P 500 index as the stock market was about to end its worst first quarter ever.

While the market rebounded last week, the deal, which priced on March 26, offered a 19.3% discount from the beginning of the year.

The capped notes due March 25, 2022 will pay any index gain, up to a maximum return of 10% at maturity, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 21.9%, investors will receive par plus the absolute value of the index return.

Investors will be exposed to any index decline beyond 21.9%.

Defensive tool

Tom Balcom, founder of 1650 Wealth Management, said he knows several clients who would be considering this type of structure.

“It’s a good thing for someone looking to hedge their portfolio,” he said.

“You may miss a bit on the upside if you get 5% a year, but at least you assuage your concerns about the market.”

The most attractive feature was the combination of a buffer and absolute return payout.

“You have a 22% buffer with absolute return. If the market from its already depressed level falls another 25%, you’re down only 3%.

“It’s a great defensive play.”

Bond replacement

Some investors may even consider the notes as a fixed-income substitute, he noted.

“A 5% annual return for the next couple of years may be modest, but if all you’re looking for is income, it’s not,” he said.

“You could use it as part of your fixed-income allocation since you already have a healthy downside protection in addition to the recent pullback.”

Precious buffer

Matt Rosenberg, head of trading and strategic initiatives at Halo Investing, said he has noticed renewed interest for absolute return notes, also known as dual directional structures.

“A lot of people are drawn to these absolute return, twin-win style of product,” he said.

“Typically, you don’t see many of these products with a hard buffer.

“It will cater to a wider audience for that reason.”

Mildly bearish

The asymmetrical payout limits the use of the notes to a more cautious type of investor.

“This note is more skewed to the downside given that the amount of gain is bigger on the downside than on the upside. It’s a good fit for a moderately bearish mindset,” he said.

“On the upside, you don’t expect more than 5% a year. It’s fair if your outlook is slightly more bearish.

“From that perspective, it’s a good note.”

Autocallable alternative

Rosenberg said the notes can also be used as an alternative to the typical income-generating structured product.

“Not everyone wants income-oriented deals. Most income deals come with a barrier. Buffers tend to be more expensive especially on a single index,” he said.

“So, this is a way to capture a single payment rather than income and to do that with a buffer. There’s more optionality than many other products because you get paid regardless of the direction of the index within specific margins.”

Credit

TD Bank is one of the issuers used by Bank of America in its distribution platform. But the name is not as common as other Canadian issuers such as Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia, also used by this agent.

“TD like most Canadian issuers is a pretty sound and strong credit,” said Rosenberg.

“People are probably looking to diversify although in today’s market environment, investors tend to prefer U.S. credit. The brand recognition factor seems to prevail as people are concerned. They want to buy America. They have a better understanding of the policies put in place and their impact on the banks and the market.”

BofA Securities, Inc. is the agent.

The notes will settle on Thursday.

The Cusip is 891160491.

The fee is 2%.

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