CIBC’s $1.09 million leveraged notes on Nikkei: good terms, but country-specific bet is risky

By Emma Trincal

New York, Aug. 3 – Canadian Imperial Bank of Commerce’s $1.09 million of 0% leveraged barrier notes due July 29, 2026 linked to the Nikkei Stock Average index present an attractive structure, but investing in one country may pose special risks, which may limit the appeal of the notes, advisers said.

If the index return is positive, the payout at maturity will be par plus 1.84 times the index gain, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by up to 25%.

Investors will be exposed to any losses if the index declines beyond the barrier.

Uncapped leverage

“The terms are pretty good. You’re getting a 75% barrier and some nice leverage,” said Steve Doucette, financial adviser at Proctor Financial.

“The 1.84 multiple is critical! I don’t know why but it looks better than 1.85. Joking aside, I often wonder how they come up with these numbers.”

“It’s a decent note though. Having no cap plus leverage on three years is pretty neat.”

EAFE alternative

Doucette said that he may not be in the market for this kind of product as he typically avoids focusing on a specific country.

“We get our exposure to Japan through the EAFE. It’s the No. 1 position,” he said.

The MSCI EAFE index tracks the performance of developed markets outside of the U.S. and Canada. Its largest country component is Japan with a 22.5% weighting.

Due diligence

“The question with this note is how much international exposure you want to allocate to Japan. Then you have to do the due diligence on the index,” he said.

“You have to look at this country and see what types of debt, inflation and interest rates they have. You also have to take into account their ageing population problem. What’s the impact on deficits, GDP and so on. There’s a lot to look at.”

On a tear

One concern is the strong bullish performance of the Nikkei since the beginning of the decade. In March 2020, at the onset of the Covid-19 pandemic, the Nikkei fell to a multiyear low at 16,358, its lowest level since November 2016. On Thursday, the index closed at 32,159.28, almost twice as high from its bottom. For the year, the Nikkei has already jumped 25%.

“There’s always a risk on the downside when an asset has had such a huge run. I would be curious to find out what they do in Japan in terms of AI. Is that what’s fueling this rally? That’s all part of the due diligence process,” he said.

“But three years out, you should be able to rebound from a recession assuming we have one.”

Buffet

Berkshire Hathaway’s Warren Buffet bought shares of five large Japanese trading houses in 2020 and announced in April that he increased his stakes in those names – Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui, and Sumitomo Corp. His announcement lifted the Nikkei as many investors worldwide began to mimic the famous investor, biding on Japanese stocks.

“This is a typical Buffet play,” said Doucette.

“He obviously saw something good in the fundamentals of those companies. He’s buying companies, not an index. He’s a bottom-up, not a top-down guy. We are global asset allocators. We need to know what the economy is doing. It’s a very different approach.”

The structure was attractive although he may still modify some of the terms.

“You can make a few tweaks to it. I may want to reduce the leverage a little bit and replace the barrier with a buffer on the downside. But again, you need to look at the asset class first, see if you’re comfortable taking the country risk.

“I wouldn’t just jump in based on the terms of the deal,” he said.

Momentum

Matt Medeiros, president and chief executive of the institute for Wealth Management, also liked the structure while being hesitant to invest in a single country.

“I like having foreign country exposure, but we don’t follow the Nikkei specifically,” he said.

“I would just say that it’s an interesting note on an index that has had a great run in the past three years or so.

“I’m concerned with a lot of equity markets having a tremendous amount of momentum and I’m not sure how much more steam they have in them.”

Tenor, barrier

The three-year tenor was a positive.

“Three-year is attractive, considering that it’s probably pricing at a multi-year high. I think it gives you some time to recover,” he said.

“Also, the 75% barrier built-in gives you a little bit of a cushion. There is increased risk whenever you make this type of country-specific bet. That barrier over three years could save you from taking a big loss.

“I also like that there is no cap. Your allocation reflects the full upside exposure.”

But Medeiros said he would rather invest in a note tied to a more diversified index.

“I may play the country bet differently and consider a broader global equity index like the EAFE. I’d be interested in finding out which countries in the EAFE are the outperformers, then focus on those areas to determine if I want to overweight a specific country, concentrating on the ones that have momentum in them.

“The structure is good though.”

CIBC World Markets Corp. is the agent.

The notes settled on July 31.

The Cusip number is 13607XLH8.

The fee is 2.5%.

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