TD Bank’s contingent interest barrier autocallables on gold fund seen as income, equity play

By Emma Trincal

New York, Nov. 8 – Toronto-Dominion Bank plans to price autocallable contingent interest barrier notes due Nov. 27, 2019 linked to the VanEck Vectors Gold Miners exchange-traded fund, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent quarterly coupon at an annual rate of 11.4% if the fund closes at or above the coupon barrier, 60% of the initial level, on the valuation date for that quarter.

The notes will be called at par plus the contingent coupon if the fund closes at or above the initial share price on any valuation date other than the final date.

The payout at maturity will be par plus the contingent coupon unless the fund finishes below the 60% barrier level, in which case investors will be fully exposed to the decline.

On the way up

Steven Jon Kaplan, founder of TrueContrarian Investments, said he likes the underlying ETF, which is listed on the NYSE Arca under the symbol “GDX.”

“It’s pretty good timing. I’m a big fan of GDX. The fund has been pretty unpopular. It has hit a low in January of this year. It had never been that low actually. Since then it has doubled. We just had another low last month, but it’s been back up,” he said.

“This fund has dropped so much in January, I think now it has the potential to go up a lot more.”

Autocallable

Kaplan paid little attention to the barrier at maturity because he said the notes are likely to be called early on.

“It’s very likely to be called after three or six months ... February or May.

“People who buy it could benefit and get some income as long as they realize that the odds of being called are high.”

The 60% barrier at maturity would appeal to conservative investors.

“For someone who doesn’t want to take too much risk with the gold miners, between the autocall and the protection, you have much less risk than if you bought GDX outright,” he said.

Naturally, a strongly bullish investor may not want to cap the upside. But the coupon is still enticing.

“It provides a pretty good return,” he said.

For a short-term investor looking for income, the notes may be a good option.

“You may want to do it to pick up a little bit of money for three or six months.”

Income

Tom Balcom, founder of 1650 Wealth Management, said that the notes could be used either as income replacement or equity substitute.

“It’s income because you get paid on a quarterly basis when you get the coupon. And it’s equity because 11.4% is an equity-like return,” he said.

The price action for the fund is encouraging.

“It had a pretty good run up. You have a nice barrier.”

Balcom said he would not buy the notes because he does not “follow” the ETF. But for investors who do, the terms are attractive, starting with the downside protection, he said.

Equity

“A 40% barrier is pretty steep. You have a something here that can protect you in a severe pullback,” he said.

“The probability is pretty high that you’ll be OK with this trade.”

A wide range of investors may be attracted to the coupon as well.

“You don’t have to be bullish, although you could. You can also be mildly bullish, mildly bearish.

“You just can’t be a permabear.”

Balcom said he would have several uses in his portfolio if he were interested in the underlying asset class.

“You can use it as income replacement. Or if you already have a position in GDX, you could sell it and buy this. It would provide a good equity substitute, something you buy for the protection.”

TD Securities (USA) LLC is the underwriter.

The notes will price on Nov. 22 and settle on Nov. 28.

The Cusip number is 89114QYE2.

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