CIBC’s leveraged notes linked to Euro Stoxx 50 elicit mixed reviews due to index, outlook

By Emma Trincal

New York, March 7 – Canadian Imperial Bank of Commerce’s 0% market-linked securities with leveraged upside participation to a cap and fixed percentage buffered downside due Oct. 7, 2019 linked to the Euro Stoxx 50 index provide an attractive structure, financial advisers said, pointing to the leverage and buffer amounts. But their outlook on Europe is not optimistic, and they take issue with the cap.

“I’m a little bit torn on this one,” said Carl Kunhardt, wealth adviser with Quest Capital Management.

The payout at maturity will be par plus 175% of any index gain, up to a maximum return of 35% to 40%, with the exact cap to be set at pricing, according to a 424B3 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 20% and will lose 1% for every 1% decline beyond 20%.

Good terms

“I see pluses and minuses, definitely,” Kunhardt added.

On the “plus” side, he mentioned the buffer.

“I love buffers and barriers. With a 20% hard buffer, I have a reasonable expectation of controlling the downside risk,” he said.

The point-to-point observation is helpful as well.

“Compared to a direct investment in the fund, it mutes volatility. All the ups and downs in between don’t matter. What matters is when I buy it and when it matures."

Finally, the maturity is appropriate.

“Three and a half years: I view that as a positive. As a financial planner, I would say three and a half years is a minuscule timeframe for investing. It’s the time of a general business cycle,” he said.

800-pound gorilla

Another reason to invest in the notes is the need to allocate to Europe, he noted.

“Europe is one of your major asset allocations. It’s the 800-pound gorilla in an international portfolio. I’ve got to have exposure to Europe because I’m an asset allocator. If I abandon Europe, I’m basically abandoning asset allocation.”

However, Kunhardt said he is not very optimistic about Europe.

“I’m not so confident over a three-year period of where Europe is heading,” he said.

“It can be the perfect note, but if you’re not very positive about the geographic area – and I’m not, based on their GDP, the unbalanced budgets, the non-resolution of the debt issues and now the migrant crisis with no apparent solution anywhere on the horizon – then it doesn’t really matter. The structure can only do so much.”

In addition, Kunhardt pointed to the severe “underperformance” of the Euro Stoxx 50 compared to the S&P 500 index. The U.S. benchmark for instance has lost 2.20% so far this year while the Euro Stoxx 50 is down 5.80%. Over the past year, the Euro Stoxx dropped more than 15% versus a 3.45% decline in the S&P 500.

Upside

The 1.75 times leverage is “definitely a plus. It juices up the return,” he said.

“But I don’t like the cap.

“I would prefer this note to the ETF because I can control the downside risk, I can reduce the volatility.

“At the same time, I don’t like the cap, and my macroeconomic outlook on Europe is not particularly optimistic.

“I’m kind of torn because there are both good things and bad things about this investment.”

Credit

Michael Kalscheur, financial adviser with Castle Wealth Advisors, is just as hesitant.

On the positive side, Kalscheur said he likes the creditworthiness of the issuer. CIBC is rated A+ by Standard & Poor’s.

The hard buffer is also a positive element.

“We like buffers, but it always boils down to what are the chances of having more than a 20% decline?”

Buffer

Using historical data his firm compiled on some of the major benchmarks since 1986, he found that in any 42-month period, the Euro Stoxx 50 lost 20% or more 23.7% of the time.

“It’s very encouraging. If I can lose 20% or more a quarter of the time, that defense provided by the buffer is great.”

He used the same statistics to measure the odds of getting a positive return in excess of the cap in the past 30 years and found a probability of 38.6%.

Cap

He then used the same statistics to calculate the chances of “capping out” and found a 39% probability.

“Twenty-five percent of the time I’m going to be below the buffer. I’m going to be ahead of the game. The flip side is that I’m going to miss some of the upside 40% of the time.”

Investors would also have to consider the amount of yield they will give up by not receiving dividend payments. The Euro Stoxx 50 pays a “generous” 3.34% dividend, he noted.

“The leverage factor is significant, so it wouldn’t take much index increase to catch up even though the dividend yield is fat,” he said.

“You can outperform if the index goes up moderately.

“The structure is attractive with the leverage and the buffer. What really limits your upside potential is the cap. Almost 40% of the time you’re not going to keep up. That’s significant.”

Concentration

But the biggest drawback for Kalscheur is perhaps the underlying benchmark.

“I’m not a fan of the Euro Stoxx 50. It’s a well-known index in the sense that most investors have heard of Bayer or Siemens. But it’s a concentrated index, a little bit like the Dow Jones. We prefer more diversified benchmarks,” he said.

This is one of the reasons his firm doesn’t have exposure to this index via a structured note. Instead, he prefers active management for his international allocation.

Performance is also an issue, in his view.

“It’s a non-diversified index that has a tougher time outperforming long-term. At the end of the day, it’s all about performance.

“It’s a fairly good note, but it doesn’t matter how good the note is. I just can’t get excited, and part of it is the index itself.”

Wells Fargo Securities, LLC is the agent.

The notes (Cusip: 13605WBJ9) will price March 31 and settle April 5.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.