Filed Pursuant to Rule 433
Registration Statement No. 333-259205
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The information in this preliminary terms supplement is not complete and may be changed.
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Preliminary Terms Supplement
Subject to Completion:
Dated January 3, 2023
Pricing Supplement Dated January __, 2023 to the Prospectus and
Prospectus Supplement, Each Dated September 14, 2021, and the
Product Prospectus Supplement ERN-ETF-1 dated March 3, 2022
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Buffered Enhanced Return Notes Each Linked to a Different Exchange Traded Fund, Due February 29, 2024 Royal Bank of Canada |
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Reference Asset and Symbol
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CUSIP
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Initial
Price*
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Buffer Price
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Maximum Redemption
Amount
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Initial Estimated Value (per $1,000
in principal amount)
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Energy Select Sector SPDR® Fund (“XLE”)
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78016HKU3
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90% of the Initial Price
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[125% to 126%]
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$907 to $957
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Consumer Discretionary Select Sector SPDR® Fund (“XLY”)
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78016HKW9
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90% of the Initial Price
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[117% to 118%]
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$908 to $958
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Each of the Notes provides a 200% leveraged positive return if the Final Price of the applicable Reference Asset is greater than its Initial Price, up to the applicable Maximum Redemption Amount (to be determined on the Trade Date) per
$1,000 in principal amount.
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If the Final Price of the applicable Reference Asset is less than or equal to its Initial Price, but greater than or equal to its Buffer Price, the Notes will pay the principal amount at maturity.
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If the Final Price of the applicable Reference Asset is less than its Buffer Price, investors will lose 1% of the principal amount of the applicable Notes for each 1% that the applicable Final Price has decreased by more than 10% from
its Initial Price.
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Any payments on the Notes are subject to our credit risk.
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The Notes do not pay interest.
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The Notes will not be listed on any securities exchange.
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Per XLE Note
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Total
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Per XLY Note
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Total
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Price to public(1)
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100.00%
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$
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100.00%
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$
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Underwriting discounts and commissions(1)
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1.50%
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$
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1.50%
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$
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Proceeds to Royal Bank of Canada
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98.50%
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$
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98.50%
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$
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Issuer:
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Royal Bank of Canada (“Royal Bank”)
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Underwriter:
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RBC Capital Markets, LLC (“RBCCM”)
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Reference Assets:
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As set forth on the cover page.
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Minimum Investment:
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$1,000 and minimum denominations of $1,000 in excess thereof
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Trade Date (Pricing
Date):
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January 26, 2023
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Issue Date:
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January 31, 2023
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Valuation Date:
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February 26, 2024
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Maturity Date:
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February 29, 2024, subject to extension for market and other disruptions, as described in the product prospectus supplement dated March 3, 2022.
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Payment at Maturity
(if held to maturity):
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If the Final Price of the applicable Reference Asset is greater than its Initial Price (that is, the Percentage Change is positive), then the investor will receive an amount per $1,000 principal amount per Note equal to the lesser of:
1. Principal Amount + [Principal Amount x
(Percentage Change x Leverage Factor)] and
2. the Maximum Redemption Amount
If the Final Price of the applicable Reference Asset is less than or equal to its Initial Price, but is greater than or equal to its Buffer Price
(that is, the Percentage Change is between 0% and -10.00%), then the investor will receive the principal amount only.
If the Final Price of the applicable Reference Asset is less than the Buffer Price (that is, the Percentage Change is between
-10.01% and -100%), then the investor will receive a cash payment equal to:
Principal Amount + [Principal Amount x (Percentage Change + Buffer Percentage)]
In this case, you will lose some or a significant portion of the principal amount.
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Percentage Change:
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The Percentage Change for the applicable Reference Asset, expressed as a percentage, is calculated using the following formula:
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Initial Price:
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The closing price of the applicable Reference Asset on the Trade Date.
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Final Price:
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The closing price of the applicable Reference Asset on the Valuation Date.
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Leverage Factor:
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200% (subject to the Maximum Redemption Amount)
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Maximum
Redemption Amount:
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A percentage of the principal amount, as set forth on the cover page of this document. Each Maximum Redemption Amount will be determined on the Trade Date, and set forth in the final pricing
supplement relating to the Notes.
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Buffer Percentage:
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10%
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Buffer Price:
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90% of the Initial Price of the applicable Reference Asset
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Principal at Risk:
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The Notes are NOT principal protected. You may lose a substantial portion of your principal amount at maturity if the applicable Final Price is less
than the Buffer Price of the applicable Reference Asset.
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Calculation Agent:
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RBCCM
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U.S. Tax Treatment:
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By purchasing a Note, each holder agrees (in the absence of a change in law, an administrative determination or a judicial ruling to the contrary) to treat the applicable Notes as a pre-paid cash-settled
derivative contract for U.S. federal income tax purposes. However, the U.S. federal income tax consequences of your investment in the Notes are uncertain and the Internal Revenue Service could assert that the Notes should be taxed in a
manner that is different from that described in the preceding sentence. Please see the section below, “Supplemental Discussion of U.S. Federal Income Tax Consequences,” and the discussion (including the opinion of Ashurst LLP, our special
U.S. tax counsel) in the product prospectus supplement dated March 3, 2022 under “Supplemental Discussion of U.S. Federal Income Tax Consequences,” which apply to the Notes.
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Secondary Market:
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RBCCM (or one of its affiliates), though not obligated to do so, may maintain a secondary market in each of the Notes after the issue date. The amount that you may receive upon
sale of your Notes prior to maturity may be less than the principal amount of your Notes.
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Listing:
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The Notes will not be listed on any securities exchange.
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Clearance and
Settlement:
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DTC global (including through its indirect participants Euroclear and Clearstream, Luxembourg as described under “Ownership and Book-Entry Issuance” in the prospectus dated September 14, 2021).
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Terms Incorporated
in the Master Note:
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As to each of the Notes, all of the applicable terms appearing on the cover page and above the item captioned “Secondary Market” on pages P-2 and P-3 of this terms supplement, and the terms appearing under the
captions “General Terms of the Notes” and “Supplemental Discussion of U.S. Federal Income Tax Consequences” in the product prospectus supplement dated March 3, 2022, as modified by this terms supplement.
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Example 1 —
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Calculation of the Payment at Maturity where the Percentage Change is positive.
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Percentage Change:
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2%
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Payment at Maturity:
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$1,000 + [$1,000 x (2% x 200%)] = $1,000 + $40 = $1,040
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On a $1,000 investment, a 2% Percentage Change results in a Payment at Maturity of $1,040, a 4% return on the Notes.
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Example 2 —
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Calculation of the Payment at Maturity where the Percentage Change is positive (and the Payment at Maturity is subject to the Maximum Redemption Amount).
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Percentage Change:
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35%
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Payment at Maturity:
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$1,000 + ($1,000 x 35% x 200%) = $1,000 + $700 = $1,700
However, the hypothetical Maximum Redemption Amount is $1,150 per $1,000 in principal amount.
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On a $1,000 investment, a 35% Percentage Change results in a Payment at Maturity of $1,150, a 15% return on the Notes.
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Example 3 —
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Calculation of the Payment at Maturity where the Percentage Change is negative (but not by more than the Buffer Percentage).
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Percentage Change:
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-8%
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Payment at Maturity:
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At maturity, if the Percentage Change is negative BUT not by more than the Buffer Percentage, then the Payment at Maturity will equal the principal amount.
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On a $1,000 investment, a -8% Percentage Change results in a Payment at Maturity of $1,000, a 0% return on the Notes.
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Example 4 —
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Calculation of the Payment at Maturity where the Percentage Change is negative (by more than the Buffer Percentage).
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Percentage Change:
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-35%
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Payment at Maturity:
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$1,000 + [$1,000 x (-35% + 10%)] = $1,000 - $250 = $750
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On a $1,000 investment, a -35% Percentage Change results in a Payment at Maturity of $750, a -25% return on the Notes.
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Hypothetical Percentage
Change
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Redemption Amount as
Percentage of Principal Amount
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Redemption Amount
per $1,000 in Principal
Amount
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40.00%
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115.00%
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$1,150.00
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30.00%
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115.00%
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$1,150.00
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20.00%
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115.00%
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$1,150.00
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10.00%
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115.00%
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$1,150.00
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7.50%
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115.00%
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$1,150.00
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5.00%
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110.00%
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$1,100.00
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2.00%
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104.00%
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$1,040.00
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0.00%
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100.00%
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$1,000.00
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-5.00%
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100.00%
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$1,000.00
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-10.00%
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100.00%
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$1,000.00
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-20.00%
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90.00%
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$900.00
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-30.00%
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80.00%
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$800.00
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-40.00%
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70.00%
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$700.00
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-50.00%
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60.00%
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$600.00
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-60.00%
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50.00%
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$500.00
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-70.00%
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40.00%
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$400.00
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-80.00%
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30.00%
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$300.00
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-90.00%
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20.00%
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$200.00
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-100.00%
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10.00%
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$100.00
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Buffered Enhanced Return Notes
Royal Bank of Canada
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You May Receive Less Than the Principal Amount at Maturity — Investors in each of the Notes could lose a substantial portion of their principal amount if there is a decline
in the share price of the applicable Reference Asset. You will lose 1% of the principal amount of the Notes for each 1% that the applicable Final Price is less than the applicable Initial Price by more than 10%.
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The Notes Do Not Pay Interest and Your Return May Be Lower than the Return on a Conventional Debt Security of Comparable Maturity — There will be no periodic interest
payments on the Notes as there would be on a conventional fixed-rate or floating-rate debt security having the same maturity. The return that you will receive on the Notes, which could be negative, may be less than the return you could earn
on other investments. Even if your return is positive, your return may be less than the return you would earn if you purchased one of our conventional senior interest bearing debt securities.
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Your Potential Payment at Maturity Is Limited — The Notes will provide less opportunity to participate in the appreciation of the applicable Reference Asset than an
investment in a security linked to that Reference Asset providing full participation in the appreciation, because the payment at maturity will not exceed the applicable Maximum Redemption Amount. Accordingly, your return on the Notes may be
less than your return would be if you made an investment in a security directly linked to the positive performance of the applicable Reference Asset.
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Payments on the Notes Are Subject to Our Credit Risk, and Changes in Our Credit Ratings Are Expected to Affect the Market Value of the Notes — The Notes are our senior
unsecured debt securities. As a result, your receipt of the applicable amount due on the maturity date is dependent upon our ability to repay our obligations at that time. This will be the case even if the share price of the applicable
Reference Asset increases after the Trade Date. No assurance can be given as to what our financial condition will be at the maturity of the Notes.
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You Will Not Have Any Rights to the Securities Included in the Applicable Reference Asset — As a holder of the Notes, you will not have voting rights or rights to receive
cash dividends or other distributions or other rights that holders of securities included in the applicable Reference Asset would have. The Final Price will not reflect any dividends paid on the securities included in that Reference Asset,
and accordingly, any positive return on the Notes may be less than the potential positive return on those securities.
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Payments on the Notes Are Subject to Postponement Due to Market Disruption Events and Adjustments — The payment at maturity and the Valuation Date are subject to adjustment
as described in the product prospectus supplement. For a description of what constitutes a market disruption event as well as the consequences of that market disruption event, see "General Terms of the Notes-Market Disruption Events" in the
product prospectus supplement.
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There May Not Be an Active Trading Market for the Notes—Sales in the Secondary Market May Result in Significant Losses — There may be little or no secondary market for the
Notes. The Notes will not be listed on any securities exchange. RBCCM and our other affiliates may make a market for one or both of the Notes; however, they are not required to do so. RBCCM or any of our other affiliates may stop any
market-making activities at any time. Even if a secondary market for any of the Notes develops, it may not provide significant liquidity or trade at prices advantageous to you. We expect that transaction costs in any secondary market would
be high. As a result, the difference between bid and asked prices for your Notes in any secondary market could be substantial.
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Buffered Enhanced Return Notes
Royal Bank of Canada
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The Initial Estimated Value of the Notes Will Be Less than the Price to the Public — The initial estimated value of each of the Notes that will be set forth on the cover
page of the final pricing supplement for the Notes will not represent a minimum price at which we, RBCCM or any of our affiliates would be willing to purchase the Notes in any secondary market (if any exists) at any time. If you attempt to
sell the Notes prior to maturity, their market value may be lower than the price you paid for them and the initial estimated value. This is due to, among other things, changes in the share price of the applicable Reference Asset, the
borrowing rate we pay to issue securities of this kind, and the inclusion in the price to the public of the underwriting discount and the estimated costs relating to our hedging of the Notes. These factors, together with various credit,
market and economic factors over the term of the Notes, are expected to reduce the price at which you may be able to sell the Notes in any secondary market and will affect the value of the Notes in complex and unpredictable ways. Assuming
no change in market conditions or any other relevant factors, the price, if any, at which you may be able to sell your Notes prior to maturity may be less than your original purchase price, as any such sale price would not be expected to
include the underwriting discount or the hedging costs relating to the Notes. In addition to bid-ask spreads, the value of the Notes determined for any secondary market price is expected to be based on the secondary rate rather than the
internal funding rate used to price the Notes and determine the initial estimated value. As a result, the secondary price will be less than if the internal funding rate was used. The Notes are not designed to be short-term trading
instruments. Accordingly, you should be able and willing to hold your Notes to maturity.
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The Initial Estimated Value of the Notes that We Will Provide in the Final Pricing Supplement Will Be an Estimate Only, Calculated as of the Time the Terms of the Notes Are Set
— The initial estimated value of the Notes will be based on the value of our obligation to make the payments on the Notes, together with the mid-market value of the derivative embedded in the terms of the Notes. See “Structuring the Notes”
below. Our estimate will be based on a variety of assumptions, including our credit spreads, expectations as to dividends, interest rates and volatility, and the expected term of the Notes. These assumptions are based on certain forecasts
about future events, which may prove to be incorrect. Other entities may value the Notes or similar securities at a price that is significantly different than we do.
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An Investment in the Notes Is Subject to Risks Associated with Specific Economic Sectors — The stocks held by each Reference Asset to which the Notes are linked are issued
by companies engaged in a specific sector of the economy, specifically, the energy sector, as to XLE, and the consumer discretionary sector, as to the XLY. Accordingly, an investment in the Notes is subject to the specific risks of
companies that operate in each of those sectors. An investment in the Notes may accordingly be more risky than a security linked to a more diversified set of securities.
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You Must Rely on Your Own Evaluation of the Merits of an Investment Linked to the Applicable Reference Asset — In the ordinary course of their business, our affiliates may
have expressed views on expected movements in the Reference Assets or the equity securities that they represent, and may do so in the future. These views or reports may be communicated to our clients and clients of our affiliates. However,
these views are
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Buffered Enhanced Return Notes
Royal Bank of Canada
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An Investment in the Notes Is Subject to Management Risk — The Reference Assets are not managed according to traditional methods of ‘‘active’’ investment management, which
involve the buying and selling of securities based on economic, financial and market analysis and investment judgment. Instead, each Reference Asset, utilizing a ‘‘passive’’ or indexing investment approach, attempts to approximate the
investment performance of its underlying index by investing in a portfolio of securities that generally replicate its underlying index. Therefore, unless a specific security is removed from its underlying index, the Reference Asset
generally would not sell a security because the security’s issuer was in financial trouble. In addition, each Reference Asset is subject to the risk that the investment strategy of its investment advisor may not produce the intended
results.
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The Reference Assets and Their Underlying Indices Are Different — The performance of each Reference Asset may not exactly replicate the performance of its respective
underlying index, because these Reference Assets will reflect transaction costs and fees that are not included in the calculation of the applicable underlying index. It is also possible that the performance of these Reference Assets may not
fully replicate or may in certain circumstances diverge significantly from the performance of their underlying indices due to the temporary unavailability of certain securities in the secondary market, the performance of any derivative
instruments contained in the Reference Assets, or due to other circumstances. These Reference Assets may use futures contracts, options, swap agreements, currency forwards and repurchase agreements in seeking performance that corresponds to
their underlying indices and in managing cash flows.
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We and Our Affiliates Do Not Have Any Affiliation with the Advisor or the Sponsor of the Reference Assets or the Underlying Indices and Are Not Responsible for Their Public
Disclosure of Information — We and our affiliates are not affiliated with the investment advisor or the sponsor of any Reference Asset or their underlying indices in any way and have no
ability to control or predict their actions, including any errors in or discontinuance of disclosure regarding their methods or policies relating to the Reference Assets or the underlying indices. The investment advisor or the sponsor of
the Reference Assets and the underlying indices are not involved in the offering of the Notes in any way and have no obligation to consider your interests as an owner of the Notes in taking any actions relating to the Reference Assets that
might affect the value of the Notes. Neither we nor any of our affiliates has independently verified the adequacy or accuracy of the information about the investment advisor, the sponsor, or the Reference Assets contained in any public
disclosure of information. You, as an investor in the Notes, should make your own investigation into the Reference Assets.
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The Policies of the Reference Assets’ Investment Advisor or Underlying Indices Could Affect the Amount Payable on the Notes and Their Market Value — The policies of the
Reference Assets’ investment advisor concerning the management of the Reference Assets, or the index sponsor for each underlying index, concerning the calculation of each underlying index, additions, deletions or substitutions of the
securities held by the Reference Assets could affect the market price of shares of the Reference Assets and, therefore, the amount payable on the Notes on the maturity date and the market value of the Notes before that date. The amount
payable on the Notes and their market value could also be affected if the Reference Assets’ investment advisor or relevant sponsors change these policies, for example, by changing the manner in which an investment advisor
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Buffered Enhanced Return Notes
Royal Bank of Canada
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• |
The Payments on the Notes Are Subject to Postponement due to Market Disruption Events and Adjustments — The Valuation Date and the payment at maturity are subject to
adjustment as described in the product prospectus supplement. For a description of what constitutes a market disruption event as well as the consequences of that market disruption event, see “General Terms of the Notes—Market Disruption
Events” in the product prospectus supplement.
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Our Business Activities May Create Conflicts of Interest — We and our affiliates expect to engage in trading activities related to the applicable Reference Asset that are
not for the account of holders of the Notes or on their behalf. These trading activities may present a conflict between the holders’ interests in the Notes and the interests we and our affiliates will have in their proprietary accounts, in
facilitating transactions, including options and other derivatives transactions, for their customers and in accounts under their management. These trading activities, if they influence the prices of the applicable Reference Asset, could be
adverse to the interests of the holders of the Notes. We and one or more of our affiliates may, at present or in the future, engage in business with the issuers of the securities held by the applicable Reference Asset, including making
loans to or providing advisory services. These services could include investment banking and merger and acquisition advisory services. These activities may present a conflict between our or one or more of our affiliates’ obligations and
your interests as a holder of the Notes. Moreover, we and our affiliates may have published, and in the future expect to publish, research reports with respect to one or both of the Reference Assets. This research is modified from time to
time without notice and may express opinions or provide recommendations that are inconsistent with purchasing or holding the applicable Notes. Any of these activities by us or one or more of our affiliates may affect the price of one or
both of the applicable Reference Assets, and, therefore, the market value of the applicable Notes.
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Buffered Enhanced Return Notes
Royal Bank of Canada
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• |
Each of the component stocks in a Select Sector Index (the “Component Stocks”) is a constituent company of the S&P 500® Index.
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The eleven Select Sector Indices together will include all of the companies represented in the S&P 500® Index and each of the stocks in the S&P 500® Index will be allocated to at
least one of the Select Sector Indices.
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Each constituent stock of the S&P 500® Index is assigned to a Select Sector Index based on the Global Industry Classification Sector (GICS) structure. Each Select Sector Index is made up of all the
stocks in the applicable GICS sector.
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Each Select Sector Index is calculated by the index sponsor, Standard & Poor’s, using a capped market capitalization methodology where single index constituents or defined groups of index constituents are
confined to a maximum weight and the excess weight is distributed proportionally among the remaining index constituents. Each Select Sector Index is rebalanced from time to time to re-establish the proper weighting.
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• |
For reweighting purposes, each Select Sector Index is rebalanced quarterly after the close of business on the third Friday of March, June September and December using the following procedures: (1) The rebalancing
reference date is the second Friday of March, June, September and December; (2) With prices reflected on the rebalancing reference date, and membership, shares outstanding and investable weight factors as of the rebalancing effective date,
each company is weighted by float-adjusted market capitalization methodology. Modifications are made as defined below.
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(i) |
If any Component Stock has a weight greater than 24%, that Component Stock has its float-adjusted market capitalization weight capped at 23%. The 23% weight cap creates a 2% buffer to ensure that no Component
Stock exceeds 25% as of the quarter-end diversification requirement date.
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Buffered Enhanced Return Notes
Royal Bank of Canada
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(ii) |
All excess weight is equally redistributed to all uncapped Component Stocks within the relevant Select Sector Index.
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(iii) |
After this redistribution, if the float-adjusted market capitalization weight of any other Component Stock(s) then breaches 23%, the process is repeated iteratively until no Component Stocks breaches the 23%
weight cap.
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(iv) |
The sum of the Component Stocks with weights greater than 4.8% cannot exceed 50% of the total index weight. These caps are set to allow for a buffer below the 5% limit.
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(v) |
If the rule in step (iv) is breached, all the Component Stocks are ranked in descending order of their float-adjusted market capitalization weights and the first Component Stock that causes the 50% limit to be
breached has its weight reduced to 4.5%.
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(vi) |
This excess weight is equally redistributed to all Component Stocks with weights below 4.5%. This process is repeated iteratively until step (iv) is satisfied.
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(vii) |
Index share amounts are assigned to each Component Stock to arrive at the weights calculated above. Since index shares are assigned based on prices one week prior to rebalancing, the actual weight of each
Component Stock at the rebalancing differs somewhat from these weights due to market movements.
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(viii) |
If, on the second to last business day of March, June, September, or December, a company has a weight greater than 24% or the sum of the companies with weights greater than 4.8% exceeds 50%, a secondary
rebalancing will be triggered with the rebalancing effective date being after the close of the last business day of the month. This second rebalancing will use the closing prices as of the second to last business day of March, June,
September or December, and membership, shares outstanding, and IWFs as of the rebalancing effective date.
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Buffered Enhanced Return Notes
Royal Bank of Canada
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Buffered Enhanced Return Notes
Royal Bank of Canada
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