CIBC’s autocall market-linked step-ups on Euro Stoxx 50 need barrier or buffer, advisers say

By Emma Trincal

New York, Sept. 10 – Canadian Imperial Bank of Commerce’s 0% autocallable market-linked step-up notes due September 2023 linked to the Euro Stoxx 50 index, offer compelling upside potential, but in the absence of any downside protection in today’s market environment, advisers are skeptical.

The notes will be called at par of $10 plus an annualized call premium of 9% to 10% if the index closes at or above the initial level on any annual observation date, according to an FWP filing with the Securities and Exchange Commission.

The exact call premium will be set at pricing.

If the notes are not called and the index finishes above the step-up value, 135% of the initial level, the payout at maturity will be par plus the index gain.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 35%.

Investors will lose 1% for each 1% decline.

Sideways view

“You have to be positive and assume the index will stay pretty flat moving forward. You don’t want to be caught in the downside in three years since there is no protection,” said Steve Doucette, financial adviser at Proctor Financial.

“You’re looking at a 10% annual return, which is good. But you don’t want the index to move up too much; otherwise, you might as well buy the ETF. This is for someone who has a pretty range bound view.”

The cumulative nature of the call premium was a positive aspect of the structure as well.

Call, booster

“If the index is lower in the second year you could get double the coupon,” he said.

Doucette also liked the chance to get the equivalent of a digital return at maturity without a cap.

“You get that 35% booster. And if the index is up more than 35%, you get the one-to-one. That’s another good thing. They give you 100% participation, which is kind of neat for an autocall.”

No hedge

But while the payout was attractive in a flat or upward market, the full exposure to market declines was a stumbling block.

“We try to buy things that can outperform in either direction. That’s why we use structured notes,” he said.

“The autocalls we buy tend to have a lower coupon, but they come with a barrier. We use them for income. Sometimes you can get a deep barrier.”

Trade-off

“I’d give up a little bit of upside at the end to try and pick up some kind of protection.”

The call premium could be reduced for a barrier or even better, a buffer.

“We don’t know where we’re going to be in three years.

“The 35% coupon is nice, and you can probably make it.

“But it comes down to the type of risk you’re willing to take.

“If you buy this to replace some fixed-income allocation, which is what we’ve done with these autocalls, you can’t really afford to buy anything without some kind of protection on the downside,” he said.

Upside scenarios

Matt Medeiros, president and chief executive of the Institute for Wealth Management, had a similar view.

“It’s an interesting concept. You can get paid with the call or at maturity. I like the upside potential in both scenarios,” he said.

The automatic call is not a bad outcome with this note, he said.

“It’s not a worst-of, and you can get 10% a year, which is compelling.

“And if you’re not called, getting 35% after three years even if the index is not up very much is also attractive.”

But Medeiros felt uncomfortable with the one-to-one downside exposure.

“In this environment, having no downside protection makes the structure a lot less interesting to me,” he said.

Other aspects of the deal were attractive.

“The three-year term is fair for an equity allocation,” he said.

“I like the valuations for the Euro Stoxx 50.”

The Euro Stoxx 50 index is down nearly 14% for the year while the Dow Jones industrial average shed 3.5%.

Global uncertainty

But in Europe as elsewhere, equity returns will depend on the bigger picture associated with Covid-19, he noted.

“How will their markets and their economy look coming out of the pandemic? How are other countries going to manage the financial crisis that’s going to be the result of surging government debts?

“There is so much uncertainty. I wouldn’t want to invest in a structured note without any downside protection at this time.”

BofA Securities, Inc. is the agent.

The notes will price in September and settle in October.

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