TD Bank’s leveraged buffered notes tied to Stoxx 50 show short-term bull play

By Emma Trincal

New York, Nov. 20 – Toronto-Dominion Bank’s 0% leveraged buffered notes due Dec. 1, 2020 linked to the Euro Stoxx 50 index should be appealing to investors bullish on the European stock market, advisers said.

For those who instead have a range bound outlook, the deal offered little appeal despite a very competitive structure, they added.

The payout at maturity will be par plus 200% to 210% of any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% or each 1% decline beyond 10%.

Terms

“This is one of those where the structure is great but not the index, at least for me,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“Getting double leverage, uncapped with a 10% buffer is very, very good.

“I don’t like the short-term so much. I think two-years is quite dangerous. But the tenor is certainly not a deal-killer.”

Reasonable tradeoff

The “deal-killer” for this adviser was the underlying benchmark.

“If I had to think of an index, the Euro Stoxx is probably not the one I would pick,” he said.

He said he understood the pricing advantage offered by the high-yielding European benchmark.

“You’re giving up 3.3% in dividend yield. As a noteholder, you’re not going to see that. But if you held the ETF you wouldn’t see 2x the upside with a 10% buffer either. The tradeoff is reasonable. Again, these are very good terms. I am not going to argue with that.”

The Dow of Europe

Kalscheur’s first concern with the Euro Stoxx 50 index was its construction.

“It’s 50 names only. It’s highly concentrated,” he said.

“Also, technology is less than 10% of the index. To be fair, everyone is talking about cutting exposure to tech in the current sell-off. But if you believe that technology is the future, then there’s nothing to get excited about the Euro Stoxx.”

Lackluster performance

Finally, the performance of the underlying was unimpressive, he noted.

“The Euro Stoxx 50 index hasn’t gone anywhere over the past decade,” he said.

Looking at data going back 16 years, he noted that the index showed losses beyond the 10% buffer 28% of the time over 24 rolling month periods.

“Doesn’t seem like a great deal to me,” he said.

“If you’re a bear or think the index is going nowhere, there’s no reason to pick this note. The leverage doesn’t help you and the buffer won’t be enough to protect you. In both scenarios, you’re better off picking the dividends.”

Kalscheur concluded that the notes would be the most appropriate for a bull.

“Unlike 99% of the notes I see, the problem here is not the terms. It’s the index,” he said.

“I see no reason that this index is going to miraculously outperform that would justify such a pure bull play.”

Value play

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, held the opposite view.

“I like this note a lot,” he said.

He cited the creditworthiness of the issuer and the short maturity as positive items.

The sluggish performance of the European benchmark represented a buying opportunity in his view.

“We like the asset class,” he said.

“From a historical perspective, European stocks are not expensive, especially with the recent sell-off. It’s actually on the cheap side and we like to buy on the cheap side.”

Worth looking at

The structure was also very attractive.

“The leverage is significant. It’s uncapped, which is very good. The fact that it has a 10% buffer on a relatively short period of time makes sense.

“We surely will be considering it,” he said.

TD Securities (USA) LLC is the agent.

The notes will price on Nov. 26 and settle on Nov. 30.

The Cusip number is 89114QET1.

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