CIBC’s $11.27 million autocalls on Russell may pay full premium due to beaten up index

By Emma Trincal

New York, Oct. 10 – Canadian Imperial Bank of Commerce’s $11.27 million of autocallable Strategic Accelerated Redemption Securities due Sept. 28, 2029 linked to the Russell 2000 index give investors a reasonable chance to receive the call premium at some point during the term of the notes, in part due to the relatively weak performance of the underlying. The question is whether the payout is high enough given the upside potential and the downside risk, advisers asked.

The notes will be called at par plus a premium if the closing level of the index is greater than or equal to its starting value on any annual observation date, including maturity, according to a 424B2 filing with the Securities and Exchange Commission.

The call premium will be 9.6% per year.

If the notes are not called at maturity and the index finishes at or above its 85% threshold, the payout will be par.

Otherwise, investors will lose 1% for every 1% decline beyond 15%.

Low coupon

Tom Balcom, founder of 1650 Wealth Management, first noted that the Russell 2000 index is mostly used with other indexes in worst-of rather than as a stand-alone underlying.

“The Russell is more volatile, and people are more familiar with the S&P,” he said.

But current valuations for the small-cap index offered an opportunity for investors.

The Russell 2000 index so far this year has gained less than 1% versus 13.5% for the S&P 500 index.

For Balcom, the Russell may offer a better return potential.

“The Russell is down significantly from its high of two years ago,” he said.

“I think people may shy away from this note because it only pays 9.6%. If you’re using this for equity replacement, you run the risk of underperforming the index.

“What if the Russell 2000 is up 20% a year from now and you get called at 9.6%?”

Growth note

Since its peak in the fall of 2021, the small-cap benchmark has lost nearly 28% of its value.

“The Russell has the potential to move up more than 9.6% per year, especially over a five-year term,” he said.

“I’m a firm believer that when you hit an all-time high, you need more protection, and when you’re at a low, you should have more upside.

“I would probably want less of a buffer and more upside potential,” he said.

Given his outlook, an autocallable note such as this one may not be the best vehicle to play a rebound. Balcom would opt for a growth note instead.

“It would make more sense to me to do a leveraged note to a cap. I would be looking at a cap of 12% to 15% a year,” he said.

No immediate call

Another financial adviser saw potential downside ahead but perhaps not over five years. The cumulative quality of the premium and the longer tenor may both favor investors.

“The Russell has dropped since its high of two years ago making lower highs,” he said.

“It has never been part of the AI euphoria, which is an advantage. It’s probably going to fall more for another two years or so, but the five-year tenor gives you a lot of time for a recovery.

“It might be to your benefit. You won’t get called for the next year or two and you may get the premium on the fourth or fifth year. Since you can cumulate the premium, it may work out for you,” he said.

Downside protection

It is impossible to predict the outcome at maturity. But this adviser said there is a “reasonable chance” to pocket the full premium of 48%.

“Even though you’re not getting the dividends, if we do have a downturn, you have plenty of time to recover and you may end up ahead,” he said.

The index’s dividend yield is 1.5%.

This adviser was not overly concerned about the downside given the protection and tenor.

“The chances of finishing down in five years are not so high. And even if you’re down, you do have a buffer. You also might end up with your principal back only, no gains. You would only be losing the dividends,” he said.

The notes were not without risk however, especially when compared with the safest instrument.

Close call

“The main thing to consider is that when buying the notes, you’re also giving up a pretty good risk-free return you would get if you had invested in a five-year Treasury,” he said.

The five-year Treasury yield is at 4.61%, which represents approximately a total return of 25.25% over the term of the notes.

“Is it worth trying to get the potential five-year premium of 48% with a risk of loss and give up a guaranteed 25% return?” he asked.

“You get double the return of Treasuries if it works out. But there is no guarantee.

“It’s some kind of symmetric chance: an all-or-nothing type of play.”

Again, it was impossible to forecast the outcome at maturity.

“It’s a close call. You could end up being behind or ahead of the safer Treasury play.

“But it’s not a bad note. It’s actually an interesting proposition,” he said.

BofA Securities, Inc. is the agent.

The notes settled on Friday.

The Cusip number is 13608J586.

The fee is 2%.

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