CIBC’s contingent coupon autocall notes tied to three indexes show interesting terms

By Emma Trincal

New York, Jan. 10 – Canadian Imperial Bank of Commerce’s contingent coupon autocallable notes due Jan. 31, 2023 linked to the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index offer a few interesting features, making it slightly different from the standard worst-of deal, sources said.

The notes will pay a contingent quarterly coupon at an expected annual rate of 9% if each index closes at or above its coupon barrier level, 75% of the initial level, on the observation date for that quarter, according to a 424B3 filing with the Securities and Exchange Commission.

Interesting nuances

The notes will be automatically called at par plus the contingent coupon if on any semiannual call date beginning on Jan. 31, 2019 the closing levels of all indexes is greater than their initial levels.

The payout at maturity will be par plus any coupon unless any of the indexes finishes at or below its 65% principal barrier level, in which case investors will lose 1% for each 1% decline of the worst performing index from its initial level.

“It’s interesting...the coupon barrier is higher than the principal barrier. Usually they match up,” said a market participant.

“Also quite different is the coupon being paid quarterly and the call observed semiannually. I don’t think the difference between quarterly and semiannual call dates is worth that much. But it’s slightly beneficial.”

The lag may allow investors to collect a couple of extra coupons prior to being called, he said.

There could be other reasons behind the different frequency for the coupon payment date and the call date.

“Sometimes investors want to have the semiannual call instead of quarterly call,” an industry source said.

“Pricing may be a little bit better too. The client may have wanted to achieve the 9% and the coupon may have been a bit higher that way.”

The one-year call protection is an advantage too. It pays for some of the reinvestment risk.

In effect even if called on the first call date, investors are guaranteed to receive the full 9% annual rate.

New wave of worst-of

The use of three underlyings in the worst-of structure was also worth being examined.

“I think this is definitely a trend. Volatility is so low, you see more of worst-of 3’s than before,” said the market participant.

“The 75% coupon barrier is a little bit high for three [assets]. But these are indices and they’re highly correlated.

“A lot of things are highly correlated right now. The worst-of 3’s as opposed to worst-of 2’s is a relatively new trend because correlations are on the rise. You have to find the premium somewhere.”

The 60% principal barrier at maturity “seems about right,” he noted.

“You’re not going to get a 50% barrier on a five-year. You would have to extend the maturity a lot more.”

Jefferies distribution

The agent for this deal is Jefferies LLC, according to the prospectus.

This also was a bit unusual.

“It may have been a client of Jefferies who wants to diversify. CIBC has strong credit ratings. Maybe that’s why,” said an industry source.

Jefferies is not a big agent for U.S. registered structured notes, according to data compiled by Prospect News.

Last year, this distributor sold 18 deals totaling $277 million, or less than 1% of the total market.

Deals sold by this agent in the equity asset class were all issued by CIBC, according to the data.

The rest consisted of pure interest rates-linked notes, such as notes tied to Constant Maturity Swap rates, which Jefferies Group LLC issued itself.

Interest-rate products with a structured coupon but no underlier, such as step-up notes, step-down notes, fixed-to-floating rate notes and capped floaters, are listed separately; they are not included in the database’s overall totals.

In the structured coupon market Jefferies sold 40 deals totaling $848 million last year.

Jefferies is a distribution partner of CIBC, another source said, adding that they are likely to distribute equity deals with other issuers.

This may be true if one includes non-registered structured notes, for instance notes issued under section 3(a)(5) of the SEC Act of 1934, which Prospect News does not include in its totals.

The notes (Cusip: 13605WHS3) are expected to price on Jan. 26 and settle on Jan. 31.

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