TD.PF.K Closes A Little Soft on Good Volume

The Toronto-Dominion Bank new issue closed today without a formal announcement from the company.

TD.PF.K is a FixedReset, 4.75%+259, announced 2018-09-04. It has been assigned to the FixedReset-Discount subindex.

TD.PF.K traded 946,070 shares today in a range of 24.86-98 before settling at 24.92-93. Vital statistics are:

TD.PF.K FixedReset Disc YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-09-13
Maturity Price : 23.13
Evaluated at bid price : 24.92
Bid-YTW : 4.73 %

The new issue is quite expensive according to Implied Volatility Analysis:

impvol_td_180913
Click for Big

According to this analysis, the fair value of the new issue on September 13 is 24.12.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, TD.PF.E, FixedReset, 3.70%+287, is bid at 24.71 (theoretical fair value of 24.84, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.25 p.a. in dividends until it resets 2020-10-31, sure, but you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

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