CIBC's market plus notes linked to S&P 500 via SG Americas intrigue; issuer's name rarely seen

By Emma Trincal

New York, Feb. 25 - Canadian Imperial Bank of Commerce's 0% market plus non-principal-protected notes due Sept. 26, 2016 linked to the S&P 500 index captured the attention of some market sources as CIBC is not a frequent issuer of U.S. structured notes.

In addition, SG Americas Securities, LLC, the agent for the deal and the U.S. broker-dealer of Société Générale, is not a familiar name when it comes to the distribution of registered structured notes, they noted.

Unusual players

"It's interesting. SocGen doesn't have a registered program, so they might have cooperated with CIBC at the request of a client who may need registered paper. They may also have done it simply for credit diversification purposes," a sellsider said.

"I know that CIBC hired Gage [Olcott] a couple of weeks ago. Gage was at Citigroup for the past three years and at Barclays before that. Whether or not Gage was involved in this deal or not, I don't know. But I've noticed that CIBC is becoming a more active player."

Dean Zayed, chief executive officer of Brookstone Capital Management, said, "I haven't seen SocGen a lot, although a little bit more lately. It looks like they're getting more active."

Kirk Chisholm, principal and wealth manager at NUA Advisors, said about CIBC and SocGen: "I don't see those names much on these kinds of notes. They're more involved in other markets for sure."

Last year, CIBC issued only two U.S. registered deals of $2.56 million and $3.25 million, and both were distributed by Wells Fargo, according to data compiled by Prospect News, which tracks U.S. registered deals.

Société Générale distributed eight deals totaling $81 million through its 3(a)(2) platform last year, according to Prospect News data.

The term 3(a)(2) refers to a section of the Securities Act of 1933 that exempts a security issued by a bank from registration.

Daily trigger

The structure of the product is simple, sources noted: it offers contingent downside protection, no leverage and an American type of barrier.

A trigger event will occur if the index's closing level declines below the trigger level, 75% of the initial level, during the life of the notes, according to a 424B3 filing with the Securities and Exchange Commission.

If a trigger event does not occur, the payout at maturity will be par plus the greater of the index return and zero.

If a trigger event does occur, the payout will be par plus the index return. If that return is negative, investors will receive less than par.

Alternative to long-only

Sources said the structure offers an attractive alternative to long-only investment.

"You always have to compare it to a direct investment in an S&P fund," Zayed said.

"There's always the dividend that you're missing. With the funds, you collect the dividend, but it's not a lot, and the fund doesn't give you the protection.

"From an investor's perspective, if you are moderately bullish, if you think that a correction is going to happen but not necessarily a big one, this may be an interesting option.

"How comfortable are you with a 25% barrier? That's the real question because that's where the value proposition is.

"If you want to be long the S&P, this note gives you a conditional protection of 25%. I think 25% is a fair amount, especially over 18 months, which is a relatively short period of time.

"Historically, we get a 10% correction once every 13 months. If you think a 10% correction is likely to happen, then it may be something you would want to consider.

"There are no indications that point to a large correction for the S&P ... especially the technicals that look very strong."

Chisholm said that the size of the protection mitigates some of the risk.

"The probability of the S&P declining by 25% is low," he said.

"If you're bullish on the market, if you think the S&P should continue to go up, this is a decent way to play it because you're not giving up the upside for the protection. You're only giving up 2.7% for that protection, which I think is reasonable."

The 2.7% amount represents the unpaid dividend over the term. Currently, the dividend yield of the S&P 500 index is 1.8%.

Risk-reward

"To those who are long the S&P and bullish, I think the structure offers a fair risk-reward ratio," Zayed said.

"If you're comfortable being exposed to the S&P, this is something that allows you to get the exposure to the S&P without being long-only. That's the distinction.

"I like the terms of the notes from a risk-reward ratio standpoint.

"If you compare it to a long-only investment, this note is fairly attractive because you get some legitimate protection."

Sources, however, noted that the downside protection is contingent and can be terminated any day during the life of the notes.

Macro risks

"The concern for investors could be that in the last few years, the return of the S&P has been tied to quantitative easing," Chisholm said.

"Considering the fact that they are tapering their QE somehow concerns me that we could have another sell-off.

"That being said, the U.S. economy is improving, which is a good thing.

"But the stock market and the economy are not the same thing, and the removal of QE may have an impact, not so much on the U.S. but more - as we've already seen - on the emerging markets who are somewhat dependent on QE for their liquidity.

"I don't know how things are going to play out. Everybody's watching.

"Personally, I think that the improving U.S. economy should be able to withstand the withdrawal of QE."

Still, investors should be aware that even during a short period of time the risk of global contagion remains.

"If the emerging markets become chaotic, it will spill over to the developed markets," he said.

"History has shown us that it is the case.

"But for me, personally, I think it's fine. I'm comfortable with the notes.

"The 25% protection is a large number statistically. There is a low probability that the market will decline 25%. The economy is improving.

"Although the stock market is a little overpriced, I think 25% is a large drop.

"It's a pretty attractive way to play the S&P."

The notes will price March 21 and settle March 26.

The Cusip number is 13605WAC5.

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