CIBC’s autocallable market-linked step-up notes on Stoxx designed for sideways market

By Emma Trincal

New York, April 19 – Canadian Imperial Bank of Commerce’s autocallable market-linked step-up notes due April 2025 tied to the Euro Stoxx 50 index offer a competitive call premium in a range bound European stock market, making the notes compelling for investors who are not excessively bullish on the index, sources said.

The notes will be called at par of $10 plus an annualized call premium of 11% to 12% if the index closes at or above the initial level on any annual observation date. The exact call premium will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

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 flat or gains up to the step-up value, the payout will be par plus the step-up return of 35%.

Otherwise, investors will be exposed to any losses.

Issuer

Steven Foldes, wealth manager and founder at Evensky & Katz / Foldes Financial Wealth Management, said he has not seen notes issued by CIBC before.

“I am not familiar with CIBC, and I don’t have their CDS spreads available so I wouldn’t comment on the strength of their credit.

“What I can see is that a 2% fee is high for a three-year.”

But Foldes said he liked the notes “a lot.”

It’s a buy

“First, you’re buying an index at a significant discount. The Euro Stoxx is down 20% since its peak in June. You’re not buying an overvalued asset,” he said.

“The index is likely to revert to the mean and be positive in the next one, two or three years.”

The drop in the index value is in large part associated with the war in Ukraine. Since its start on Feb. 24, the Euro Stoxx 50 index fell by 11.5%.

“The geopolitical issues are obviously causing this decline. But these issues will resolve themselves, certainly within the next three years and probably before that,” he said.

“With the resolution comes a positive index.”

Foldes also liked the payout.

“You get 11% in annualized return. That’s very attractive. The cumulative nature of the premium is very nice too. If you miss the first call but get called the next year, you get 22%,” he said.

Step-up return, no cap

Assuming the notes do not get called, he analyzed the three possible scenarios at maturity.

In order to get a positive return of at least 35%, the index has to be flat or up on the third year from its initial level.

“If it’s only slightly up, you benefit from the step return of 35%. That’s a great outcome,” he said.

He was more skeptical about the scenario in which the index finishes higher than 35% – one that gives investors unlimited exposure on a one-to-one basis.

“This uncapped feature is attractive at first sight. But it’s like a carrot,” he said.

“It’s very unlikely that the index would finish at or higher than 35% on the last year because you haven’t been called at the end of the second year. You would need a very big year, almost a historic year. That’s not likely to happen.

“What’s much more likely is to finish flat or positive, in which case you get your 35%.”

Given the size of the call premium, Foldes downplayed the non-payment of dividends. The Euro Stoxx 50 index yields 2.89%.

“It’s a 9% cost for a 35% gain on three-years, or a 2.89% investment for a likely 11% a year. I think it’s fair,” he said.

Refashioning

Finally, the downside scenario, characterized by the absence of any protection, was not as concerning as one might expect, he said.

“First you start at a 20% discount. Your entry is not at an all-time-high. There is no bubble in the Euro Stoxx. I’m starting low,” he said.

“Second, I’m convinced there will be a resolution to this war, which should push the index higher. Even if the index goes up a lot in a recovery rally and exceeds the call premium, it’s still a good scenario because the note is going to get called. It’s unlikely that it’s going to be around on year three. So, I’m pretty happy to take 11% or 12% a year.”

Foldes said he likes to “refashion” notes in general. When he sees a feature unlikely to be of use, he tries to eliminate it and to replace it with what he considers a more valuable term.

“Because you’re unlikely to get a +35% return on the last year, I would do away with this uncapped feature,” he said.

“How much more premium would I get by doing that? That’s the main question.”

An alternative change in the structure would be the obtention of a 15% to 20% buffer, he said.

“That would still be in exchange for giving up the no-cap. The coupon would obviously be lower. But a 6% to 7% cumulative call premium, with the step at maturity and a 15% to 20% buffer would make this note even more attractive. Of course, the issuer may not be able to price these terms but getting rid of the uncapped scenario makes sense because it’s useless,” he said.

Overall, Foldes said he could use the product in the “alternatives” portion of his portfolio.

“I could see the note as a complement to fixed-income in our alternatives bucket. This bucket is for products that do not move in tandem with stocks and bonds but still show some correlation with stocks and bonds to some degree.

“This would fit right into it,” he said.

Cap, no protection

Jeff Pietsch, founder of Capital Advisors 360, expressed reservations about the risk-adjusted return.

“On its face it looks like a good value.

“But I don’t think I would be interested in this deal.

“Europe hasn’t gone anywhere in years. At some point, it has to take off,” he said.

The note would not be a good bet for value investors who are bullish on Europe or those expecting a recovery rally after the war in Ukraine comes to an end.

“If I expect very low returns then it gives me a chance to get called away with a premium of 10%. That’s a plus.

“But I don’t want that long exposure if I’m not expecting a higher return. I want to have some room on the upside.”

Pietsch said he expects the notes to be called.

As a result, the 10% to 11% call premium had to be seen as a cap, he said.

“You’re giving away dividends. Your cap excluding dividends is about 8%.”

“I can’t have a cap without the downside protection.

“If you really expect European stocks to go nowhere, then this would be a great vehicle.

“But Europe is such a value. The Euro Stoxx has been going sideways for so long. I would expect more upside especially if the situation in Ukraine ends. Why would I cap myself?

“It just doesn’t seem like a good play.”

BofA Securities, Inc. is the agent.

The notes will price at the end of April and settle in the beginning of May.

The prospectus disclosed a 2% fee.

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