CIBC’s market-linked notes tied to Energy Select Sector fund aimed at mildly bullish investors

By Emma Trincal

New York, March 30 – Canadian Imperial Bank of Commerce’s plans to price 0% market-linked securities with leveraged upside participation to a cap due Oct. 5, 2020 linked to the Energy Select Sector SPDR fund are designed for investors who expect only moderate growth in the price of oil stocks, sources said.

The payout at maturity will be par plus 170% of any fund gain, up to a maximum return of 33% to 38%, according to a 424B3 filing with the Securities and Exchange Commission.

The exact cap will be set at pricing.

Investors will receive par if the fund falls by up to 15% and will lose 1% for each 1% decline beyond 15%.

Moderately bullish

“It’s a good deal for investors who don’t believe energy prices will move very much,” said Jack Ablin, chief investment officer at BMO Private Bank.

The maximum return is limited, which suggested that buyers of the product would expect to reach the cap and use the notes as a yield-enhancement product, he said.

If one uses a hypothetical cap of 35.5%, which is at midpoint of the range, the maximum compounded return would be 9% a year.

Investors could reach this cap with only a small increase in the fund’s share price of 3.6% a year.

The cap would vary between 8.5% and 9.6% a year on a compounded basis, which corresponds to the two ends of the range.

Yield-seeking play

“An alternative to this product if you’re looking for yield would be MLPs,” Ablin said.

Master Limited Partnerships are publicly traded limited partnerships, often found in the energy sector. They offer high-yielding income distributions with tax benefits.

“With the notes you must forgo the dividends. But having a 15% buffer is nice. That’s your tradeoff,” he said.

The Energy Select Sector SPDR fund tracks the return of major U.S. oil and gas companies. Exxon Mobil Corp., Chevron Corp. and Schlumberger NV are the top three constituents. The fund comprises approximately 40 stocks. The average dividend yield of the first 20 holdings is only 2.25%. That is because while some stocks pay high dividend yields, such as Occidental Petroleum Corp. (4.80%) and Valero Energy Corp. (3.05%), others pay much less. As an example, Anadarko Petroleum, Cabot Oil & Gas Corp. and Devon Energy all pay less than 1% in dividends.

“This is a product for risk-averse investors. This is for someone who needs to reduce the downside risk,” he said.

“I still think that this note is designed as a yield replacement strategy. If it’s so and if you want energy exposure and income, MLPs may be a good option too.”

Easily capped

Steve Doucette, financial adviser at Proctor Financial, saw the notes as a moderate play on oil stocks.

“It’s a bet on the sector. You hope that the price of oil is going to come back,” he said.

But investors in the notes would have to be very conservative.

“If you only look at a 3.6% return a year for energy stocks you’re not very bullish,” he said. “You’re capped out pretty easily.”

Contrarian bet

Investors may expect the fund to trade range bound during the term, which is why they need the downside protection. Doucette did not object to the buffer amount. But he said that the cap was too low.

“First I would have to do a little bit of due diligence on the sector and find out if I want to bet on it,” he said.

“If I do, I would probably try and decrease the leverage so that I can increase the cap.”

The asset class, which has strongly underperformed the S&P 500 index over the past five years, offers opportunities, he said. Doucette likes to identify underperforming indexes or sectors on the view that they are more likely to appreciate.

“Raising the cap would be a good thing. If indeed there’s a reversion to the mean you’re capped without necessarily being capped out,” he said.

Wells Fargo Securities, LLC is the agent.

The notes will settle on April 5.

The Cusip number is 13605WCL3.

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