Scotia’s market-linked step-up autocalls on equity basket offer Asian exposure with Japan core

By Emma Trincal

New York, March 23 – Bank of Nova Scotia’s 0% autocallable market-linked step-up notes due April 2024 linked to an Asian equity index and ETF basket provide diversification away from richly valued U.S. markets with a strong emphasis on Japan, a region that has recently revived investors’ interest, sources said.

The basket consists of the Nikkei Stock Average index with a 50% weighting, the iShares China Large-Cap ETF with a 35% weighting and the Kospi 200 index with a 15% weighting, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus an annualized call premium of 8.15% to 9.15% if the basket closes at or above its initial level on any annual observation date. The exact call premium will be determined at pricing.

If the basket finishes above the step-up level – 130% of the initial level – the payout at maturity will be par of $10 plus the basket gain.

If the index is unchanged or gains by up to the step-up level, the payout will be par plus the step-up payment of 30%.

Investors will lose 1% for each 1% decline.

“It seems pretty appealing to me,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“There’s probably going to be more upside in this area than in the U.S. There’s no protection at maturity but there’s a strong likelihood that you will be called off at the end of year one anyway.

“With what’s happening in the world, we’re spending more time looking at other asset classes. The U.S. has been overvalued for a while. We’re looking at international equity.”

Asian growth

The heavy weighting on Japan was a positive, he said.

“Japan is undervalued and they’re starting to make some ground. I do like Japan.

“China survived the coronavirus pretty well.

“There is a lot of growth in these two areas,” he said.

Korean stocks

Chisholm had no comment on the Korean exposure. The Kospi 200 index is a capitalization-weighted index of 200 Korean blue-chip stocks listed on the Kospi (Korea Composite Stock Price index) market.

The Kospi is not a common underlier when it comes to structured notes.

Barclays Bank plc in March 2014 was the last issuer to use it in a structured note, according to data compiled by Prospect News, which tracks U.S.-registered notes.

Decent return

The likelihood of a call does not replace the safety offered by a barrier, said Chisholm. Yet, he liked the structure overall.

“The call doesn’t mitigate the risk because there is no guarantee that it will happen,” he said.

“But looking at more than 8% a year, I’m comfortable with this amount in terms of the upside. And I’m less concerned about the downside at the moment.”

Uncertain step-up

Jonathan Tiemann, president of Tiemann Investment Advisors, said he would not consider the notes.

“I’m not sure who may benefit from it, frankly,” he said.

Perhaps the most desirable scenario would be to see the notes mature and to be able to benefit from the step-up if in a range bound market. But such scenario was not likely, he said.

“You would have to be underwater for two years and then, somewhat you get back above zero. It’s not hugely likely although certainly possible,” he said.

Range bound market

If the notes were not called, the basket would have to finish below the 30% step-level to allow investors to fully benefit from the structure and to outperform the underlying, he noted.

“It’s a way to have a decent chance of a modest return in a part of the portfolio that’s typically designed to be aggressive,” he said.

“If you get called after one year, you get 8.5%, after two, it’s 17%. This is not an exceptional return.

“Plus, you’ve got the typical things that come with structured products – the credit risk exposure, giving up the dividends...the usual stuff.”

Upside risk

Another concern is the capping of the upside on an asset class with high growth potential without risk mitigation, he said.

“Japan is still not back to its all-time of December 1989. It’s been moving closer, breaching the 30,000-level last month, but it has still room to go on the upside.

“If the basket is up 25% in one year, you’ll be sorry to only get 8.5% on that first call.

“The opportunity forgone is pretty high.

“The best outcome with this note is to be down for the first two years and just come back to be flat in the third year.

“Then you can claim your 30%. Who knows if you wouldn’t get more elsewhere?” he said.

It would be different from a risk-reward standpoint if the notes offered a barrier or buffer, he said.

“The downside protection would be compressing the volatility. But you don’t have that.”

BofA Securities Inc. is the agent.

The notes will price in March and settle in April.

© 2015 Prospect News.
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