TD Bank’s contingent interest autocalls on Alibaba offer memory coupon for added safety

By Emma Trincal

New York, July 28 – Toronto-Dominion Bank’s autocallable contingent interest barrier notes due Aug. 17, 2022 linked to the American Depositary Receipts of Alibaba Group Holding Ltd. provide an additional level of guarantee with a memory interest feature, a distributor said.

If the ADRs close at or above the barrier level – 75% of its initial level – on any quarterly review date other than the final one, the notes will pay a contingent coupon for that quarter at the annual rate of 16.39%, according to a 424B2 filing with the Securities and Exchange Commission.

The memory feature allows investors to pocket on any observation date any previously unpaid contingent interest payments with respect to any previous review days on which the stock closed below the interest barrier.

If the ADRs close at or above the initial level on a quarterly review date other than the final one, the notes will be called at par plus the contingent coupon and any previously unpaid contingent interest payments.

If the notes are not called and the ADRs’ final price is at or above the 75% barrier level, the payout at maturity will be par plus the contingent coupon and any previously unpaid contingent interest payments.

Otherwise, investors will be exposed to the ADRs’ decline from the initial level.

The final price will be the average of the closing prices on the five trading days ending Aug. 12, 2022.

Hybrid structure

“This is a combination of two different elements. It’s somewhere between a Phoenix autocall and an autocall reverse convertible,” said Matt Rosenberg, director at Halo Investing.

Phoenix autocalls pay a contingent coupon at a barrier level below par. They rarely provide cumulative payments known as “memory.”

Reverse convertibles offer a guaranteed coupon.

“The coupon is contingent but has a memory. That’s what makes it different from a Phoenix autocall.

“The memory introduces a certain level of guarantee. You know that if you miss one or several coupons, you can catch up later.”

“It’s not a reverse convertible. The coupon isn’t fixed. But it gives a greater certainty to your income. It’s between a guaranteed coupon and a contingent coupon.”

Other structures also offer a memory feature, but they are entirely different, he said, as the payoff is not income. Such is the case of snowballs for instance, which allow investors to cumulate call premium upon the call.

Risk-return adjustment

“People choose the payoff that matches their own risk profile,” he said.

The same deal without the memory would probably offer a contingent coupon of 21% instead of 16.4%, he said, based on a “very indicative,” estimate.

“You have to pay for the memory. It’s a feature that adds peace of mind,” he said.

“You sacrifice a little bit of return, but it still gives you a better yield than a fixed coupon.”

Similarly, replacing the contingent coupon by a call premium as in a snowball would increase the return since the call threshold set at 100% constitutes a higher hurdle than a coupon barrier, he said.

“You can calibrate your payoff based on the risk you’re willing to take. There are many options available: you can use a guaranteed coupon, a contingent coupon, a memory coupon. These are all valuable income solutions,” he said.

Alibaba

The use of Alibaba as the underlier helped enhance the yield, he noted.

Recent Chinese government pressures on the e-commerce conglomerate have raised concerns among investors. The share price hit a 52-week low on Tuesday, down 44% from its 52-week high of October.

The implied volatility of the stock is elevated at 48.33%.

“This note is a good way to mitigate your risk if you have some exposure to the stock,” he said.

“It makes sense if you are unsure about the short-term direction of the stock price but still have a positive outlook on the name.

A market participant said that autocallable income notes in general do not offer memory coupons.

“But I’ve seen that structure. It’s not usual. When you see it, it’s usually on single stocks,” he said.

“Doing one on Alibaba doesn’t surprise me. It will price better on a single name.”

UBS AG, London Branch, Bank of Nova Scotia and Royal Bank of Canada have issued similar autocallable contingent interest barrier notes with memory interest on single stocks via JPMorgan distribution.

JPMorgan is also the placement agent for the upcoming TD offering.

The notes will price on Friday and settle on Aug. 4.

The Cusip number is 89114TNU2.

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