TD Bank’s $1.37 million autocalls on Apple show modest coupon, call risk amid stock sell-off

By Emma Trincal

New York., Jan. 12 – Toronto-Dominion Bank’s $1.37 million of autocallable contingent interest barrier notes with memory interest due Jan. 8, 2026 linked to the performance of Apple Inc. offered a disappointing return despite favorable pricing conditions on the trade date, said Clemens Kownatzki, finance professor at Pepperdine University.

Quarterly, the notes will pay a contingent interest payment at the rate of 9.25% per year if the stock closes at or above the coupon barrier price, 80% of the initial share price, on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

Previously unpaid coupons will also be paid at that time.

The notes will be called at par plus the contingent interest payment if the shares of the stock close at or above the initial price on any quarterly observation date.

If the notes are not called, the payout at maturity will be par plus the final contingent interest payment unless the stock finishes below the barrier price, 80% of the initial share price, in which case investors will be fully exposed to the decline.

6% drop

“The 9.25% coupon isn’t that exciting,” said Kownatzki.

“It’s also a bit surprising when you consider the entry point.”

The notes priced on Jan. 5 after Apple’s shares declined for the fourth consecutive session closing at $181.18. The sell-off was triggered by several analysts’ downgrades bringing the price down nearly 6% on that first week of the year.

Apple on the trade date was trading 9.2% off the recent one-year high of $199.62 set of on Dec. 14. The price regained some strength last week, closing at $185.99 on Friday.

On Thursday, Microsoft momentarily took over Apple as the most valuable company in the world after Apple’s pullback. On Friday Apple regained the top position with $2.87 trillion versus $2.86 trillion for Microsoft.

Fierce rivals

“AI is the dominant force in tech right now and Microsoft has done better than Apple with its investments in AI notably in OpenAI,” said Kownatzki.

“If you think that AI will continue to dominate the future, then Microsoft right now has the advantage. Apple is a software company but also a manufacturer. It makes them much more vulnerable to geopolitical risks and supply chain issues, especially given their exposure to China.”

Investors not overly bullish on Apple may find the trade attractive.

“If you have a slightly bearish or range-bound view about Apple, this note could make sense,” he said.

Missed opportunity

Still, the coupon remained too low in his view.

When volatility spikes as it did on the pricing week, income notes, which short volatility, tend to generate more premium.

The spike may have been too constrained or short-lived to allow for an enticing coupon, he noted.

“Let’s keep in mind that Apple is not a very volatile stock in general. On a two-year term, its at-the-money implied volatility is only 25%,” he said.

Barrier, memory

The risk-adjusted return also had to be taken into account.

Kownatzki said that the barrier had a15.8% probability of being breached after two years

“It’s really low,” he said.

“At least from a statistical standpoint, the downside protection appears to be pretty solid. That of course is not going to enhance the coupon.”

Another factor, which may have explained the relatively low coupon, was the payment of previously unpaid coupons.

“The memory has to be an expensive feature,” he said.

Reinvestment risk

For Kownatzki, however, the single-digit return was not the main concern.

“The notes can get called every quarter. Within a two-year period and with eight quarterly observations, there’s a high probability that you’ll get called. It’s about a 50% chance. And it’s more likely to happen sooner than later especially if the call is triggered at par or above.

“This makes the note less attractive from my perspective. The chances of getting called are just too high,” he said.

For that reason, Kownatzki did not find the risk-adjusted return of the notes very “attractive.”

“Nowadays I increasingly compare any risky assets with Treasuries. The six-month Treasury note still yields above 5% and you’re not taking any risk. I would think twice about taking equity risk when I can just park my money in Treasuries.

“The biggest drawback in this note is taking the risk of getting called too soon,” he said.

TD Securities (USA) LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 89115FNP2.

The fee is 1.5%.

© 2015 Prospect News.
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