CIBC’s $12.49 million capped notes on basket offer EAFE-like buffered, leveraged exposure

By Emma Trincal

New York, Feb. 22 – Canadian Imperial Bank of Commerce’s $12.49 million of 0% capped leveraged buffered notes due Sept. 11, 2023 linked to a basket of indexes provide access to developed markets via a basket mimicking the return of the MSCI EAFE index.

The basket includes the Euro Stoxx 50 index with a 36% weight, the Topix index with a 29% weight, the FTSE 100 index with a 16% weight, the Swiss Market index with a 11% weight and the S&P/ASX 200 index with an 8% weight, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket return is positive, the payout at maturity will be par plus 1.5 times the basket return, subject to a cap of 24.37%.

If the basket declines by up to 15%, the payout at maturity will be par.

Otherwise, investors will lose 1.1765% for every 1% of basket decline beyond the buffer.

Interesting items

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the structure of the notes was “fine” providing that “we don’t have a massive recession.”

The 24.37% maximum return – the equivalent of a 14.75% compounded annualized return over the 19-month period – was also attractive, he noted.

“There are some interesting things in there, including the leverage on the upside and some downside protection, which is good given what’s happening in the world,” he said.

On Tuesday, Russian president Vladimir Putin moved troops into the eastern Donbas region of Ukraine.

“If the market is pretty much normal, you get a decent accelerated return on the upside. You should be OK,” Chisholm said.

War, rising rates

Chisholm noted the similarities between the underlying basket and the MSCI EAFE index.

“I do allocate to the EAFE on occasion,” he said.

“Global markets don’t look great right now, but if they don’t display too much volatility and stay within a reasonable range, the allocation via this note is reasonable.”

Chisholm downplayed the headlines about what president Joe Biden called a Russian “invasion” of Ukraine.

“The news is about Ukraine right now. While a war would obviously impact Europe, I’m not convinced that it’s going to spill over although it seems that way today,” he said.

“You can’t predict the future. But to me, the biggest risk at this point is inflation and whether it’s going to cause a global recession. Some people think that it will, and there’s a reasonable chance they may be right.”

While the market is already expecting the Federal Reserve to hike interest rates next month, the implications for investors remain unclear as the outcome will be dictated by the extent of the central bank’s tightening.

“There is only so much the market can handle,” he said.

Selling volatility

Jonathan Tiemann, president of Tiemann Investment Advisors, said he would not consider the notes given the turbulence in global equity markets.

“It’s a risky strategy. What you’re really doing is selling volatility. If there’s an extreme outcome either on the upside or on the downside, you could be in trouble. With the notes you’re worst-of on the upside if there’s a big move. On the downside you’re protected but not sufficiently protected if you have a drastic drop.

“You really have to believe that the underlying is going to trade within a range,” he said.

Tenor

Tiemann said he was comfortable with the duration of the notes

“19-month term is pretty reasonable,” he said.

“It’s long enough to be worth the travel but not so long to be really problematic.”

The heavy weighting of European stocks in the basket was a source of vulnerability, however.

“The war risk is elevated although some of that geopolitical risk is probably partially priced in,” he said.

EAFE proxy

Issuers routinely offer EAFE-like exposure through a basket of the same five indexes. What may vary from time to time are the weightings associated with each index component.

The frequent use of this underlying basket instead of the MSCI EAFE came as a surprise to this adviser.

“Maybe issuers don’t want to pay MSCI a licensing fee,” he quipped.

“I don’t know. It’s a bit strange.

“It’s as if they tried to replicate the index. You’re missing a couple of countries like Hong Kong and Singapore. But those two countries have very small weightings in the index. Overall, it’s pretty similar.”

The cap in the note was “fairly low,” he said, although somewhat justified by the “reasonable amount of protection.”

“This product is fine. It’s not a structural issue. My take on it has to do with how I see the market. I’m not sure I want to be a seller of volatility in this environment.”

Another deal

The notes priced on Feb. 15.

A very similar deal priced on the same day.

Citigroup Global Markets Holdings Inc. sold $7.54 million of 0% buffered equity index basket-linked notes due Jan. 12, 2024 on the same underlying basket.

Investors will get 1.5 times any gain up to a 28.2% cap.

On the downside, noteholders will lose 1.2121% for every 1% of basket decline beyond a 17.5% buffer.

CIBC World Markets Corp. is the agent for CIBC’s $12.49 million deal.

The Cusip number is 13607X5S2.

The fee is 0%.

Citigroup Global Markets Inc. is the underwriter for the second offering.

The Cusip number for that deal is 17330A5J7.

The fee is 0%.

Both issues will settle on Wednesday.

© 2015 Prospect News.
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