CIBC’s notes on Raymond James top tech stocks show lasting bid for research, Canadian issuers

By Emma Trincal

New York, Aug. 16 – For the second time in a month, Canadian Imperial Bank of Commerce has partnered with Raymond James to issue a series of notes linked to a basket of stocks picked by Raymond James analysts in a specific sector, joining the bandwagon of other Canadian issuers, which have for a few years used the equity research skills of Raymond James’ analysts to create delta one notes targeting a special theme, similar in concept to Unit Investment Trusts, according to sources and data compiled by Prospect News.

Second deal

CIBC plans to price Friday 0% notes linked to Raymond James Technology Top Selections due Aug. 27, 2018, according to a 424B3 filing with the Securities and Exchange Commission.

The notes are linked to a basket of 19 technology stocks selected by Raymond James & Associates, Inc.

The payout at maturity will be par of $1,000 times a percentage rate, which will be slightly less than 100% times the basket level percentage.

Last month, CIBC priced in two trades a total of $5.26 million of one-year notes tied to Raymond James Healthcare Top Selections due July 31, 2018, according to a 424B2 filing.

“Last month health care deal was their first with Raymond James,” said an industry source.

Canadian vogue

CIBC is now joining the fray of a long-established collaboration between Raymond James research and Canadian issuers for the construction of index-linked notes offering access to stock picks considered among the best on Wall Street, a market participant said.

The most popular offspring of this alliance is Bank of Montreal’s Raymond James Analysts’ Best Picks. Priced twice in a 12-month period, first in December and then in January, the issues come for any given year.

The last one priced in January and linked to the Best Picks for 2017 reached a size of $310.24 million.

Bank of Montreal not alone

Four years ago, Bank of Nova Scotia priced one of the top deals of the year with $128 million of notes tied to the Raymond James Analyst Current Favorites Total Return index.

Scotia Bank did other deals such as notes linked to the Raymond James CEFR Domestic Equity Total Return index, an index of closed-end funds selected by the research firm.

Toronto-Dominion Bank’s collaboration with Raymond James has seen a more modest notional based on filings with the SEC. Some themes however have offered valuable niche-type of investing appealing to some investors.

Last year, the Canadian issuer priced $1.11 million of Raymond James Sustainability Equity Securities Linked Notes, which were based on a basket of 14 stocks selected for “supporting long-term ecological balance.”

Raymond James has produced a number of other underlying assets based on its research used on other products by those four issuers.

Clean balance sheets

So why is Raymond James tapping into Canadian issuers with such consistency?

“I don’t know why. Maybe they like to work with good credit,” said the industry source.

Canadian issuers are among the best credits, the market participant said, noting that “nobody wants to bet against those banks. Their balance sheets are seen as incredibly pristine.”

“It totally makes sense for Raymond James to solicit their business,” he added.

“It’s a pure credit rating play.”

Index-linked notes offer one-to-one exposure and as such bring down the cost to the manufacturer since options do not have to be purchased, he explained.

“Because these products are delta one, funding doesn’t matter. It’s a level playing field in terms of the economics, so they can choose the best credit in which the Canadian banks are clearly the tip tier of issuers in the U.S,” he said.

Access

Some registered advisers have voiced skepticism about the concept of a note tied to a theme or sector without optionality. Some have said the deals based on research tend to be too costly and could be easily replicated by the adviser himself buying the stocks at cheaper cost online.

“I’m sure there are investors who do that,” the industry source said.

“They look at the basket and buy the stocks themselves. But these are 19 stocks. You have to pay the commissions. And you get in at different times, which is not ideal instead of getting the whole basket in one block trade.

He pointed to another advantage: by virtue of owning a structured note, investors are not tempted to time the market and sell some of the stocks at the wrong time, he said.

“You’re paying for the ease of managing your investment. These notes are designed to give investors ease of access as well.”

Demand for “content” or “access,” especially when it comes to picking the right stocks, is growing.

“People are willing to pay for a product that gives you access to a carefully selected basket of stocks by the best research analysts in the business,” the market participant said about the upcoming notes.

Piggy backers

The idea of replicating Raymond James’ research effort by buying the stocks disclosed in the prospectus was dishonest, he added.

“People can free ride. But any adviser claiming to do things for the benefit of their clients should be paid zero for using the proprietary research of the analysts even though it’s disclosed in the prospectus.

“Not only they’re not adding any value to their clients but they’re stealing the value of Raymond James’ research. “They should pay them a royalty fee for doing that.

“If some people do that, I question their ethics,” he said.

Two offerings

For its upcoming deal this week, CIBC, as it did last month, will price two separate issues, one with a lower participation rate designed for retail and the other with a rate closer to 100, created for fee-based accounts.

The fee-based offering has a 99.05% participation rate, hence a break-even level of 100.96% to get at least par at maturity. The Cusip is 13605WEV9.

The commission-based issue offers 97.8% upside participation. As a result the break-even level is higher at 102.25%. The fee paid to Raymond James is 1.25%. The Cusip is 13605WEU1.

The 19 constituents of the Raymond James Technology Top Selection basket are ACI Worldwide, Inc., Broadcom Ltd., Avnet, Inc., Alibaba Group Holding Ltd., Flex Ltd., FLIR Systems, Inc., Fleetcor Technologies, Inc., Finisar Corp., Alphabet Inc. class A, Instructure, Inc., Lumentum Holdings Inc., Microchip Technology Inc., Microsoft Corp., Motorola Solutions, Inc., ServiceNow, Inc., Nuance Communications, Inc., Orbcomm Inc., RingCentral, Inc. and Roper Technologies, Inc.

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