CIBC’s $117.25 million leveraged notes tied to S&P 500 rank among top 10 deals this year

By Emma Trincal

New York, July 5 – Canadian Imperial Bank of Commerce priced $117.25 million of 0% Accelerated Return Notes due Aug. 30, 2019 linked to the S&P 500 index, the ninth largest offering so far this year, according to data compiled by Prospect News.

Excluding five very large cash-settled trades totaling $1.7 billion, this offering, which BofA Merrill Lynch priced last week on the behalf of the Canadian issuer, would represent the No. 4 deal for the year. The top one among those more conventional offerings, priced at $132.21 at the end of the first quarter. It was also distributed by BofA Merrill Lynch on the behalf of CIBC.

Mildly bullish

The $117.25 million deal was designed for investors who expect only a very limited appreciation in the index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 11.94%, according to the filing.

Investors in the notes may not be too bullish. But they need the confidence to do away without downside protection as they will lose 1% for each 1% decline of the index from its initial level.

Short volatility

Jack Ablin, chief investment officer at BMO Private Bank, said the notes reflected a view on markets’ ups and downs.

“These are for those who essentially are betting against volatility,” he said.

“The volatility to the upside is capped pretty quickly. The volatility to the downside, you would participate one for one.

“It was designed for investors who believe that volatility will likely stay low.”

In order for investors to reach the cap of approximately 12% over 14 months, the index would only need to rise by 4% during that period, or 3.4% on an annualized compounded basis.

“You expect a positive return but really not that much,” he noted.

Looking for consensus

This view is embraced by a number of investors, who expect the market to continue its sideways pattern over a short time horizon, he said.

The swings in stock prices and volatility, trade war concerns along with the Federal Reserve’s tightening trajectory have not so far triggered another correction since February. The S&P 500 index is not back up to its late January high, but the trend has been bullish through most of the spring.

“I’m not sure what the consensus view is now,” Ablin said. “But you could argue that we’re in a stale correction. Fundamentals remain good. The year 2018 earnings growth exceeds the growth of the S&P.

“If we continue to have this range bound market for a while, that’s the best way we have to avoid a correction.

“The market is going nowhere for now and the longer it continues to go nowhere, the more bullish you can expect it to be in the future.”

The notes offered an opportunity to benefit from the trend.

“This kind of structure is a good fit in a market that’s trading sideways, especially for that short timeframe.”

Short tenor

A market participant looking at the short tenor said it made sense the notes would offer no protection.

“There’s not enough for a buffer or even a barrier,” he said.

Asymetrical leverage is one of the most attractive features of structured notes.

“Three to one up and one to one down: it becomes an access trade. How else does one get leverage on the upside only without using derivatives?”

The Accelerated Return Notes brand is a successful product on the BofA Merrill Lynch platform, he noted.

But he said the leverage is almost overdone as it would leave aside the more aggressively bullish investors.

“Three times with a cap of 11.94%, that’s about 3% a year. Why not changing it into a digital? I never really understood that,” he said.

The risk profile would be the same. But at least the cap would be guaranteed when the index finishes positive.

“Those ARNs are wirehouse products. Who knows, maybe digitals are not an approved structure...”

He was referring to compliance at this firm, which incites its salesforce to show only straightforward, easy-to-understand products.

Downside exposure

The 12% maximum return with an unlimited downside risk did not strike him as a very safe bet.

“It’s a short maturity. Buyers always see short as safer. They will jump on short-dated notes,” he said.

But for cautious investors, the unlimited downside exposure should be a concern, especially on a short-term product.

“One for one downside makes more sense to me on a five to 10 year,” he said.

“Take the S&P any rolling 10-year period...it never went down.”

Finally, for bulls, the notes would offer no appeal, he said.

“The risk of not getting paid as much as the market would be a real issue,” he said.

The fee is 2%.

The notes (Cusip: 13606M482) priced on June 28.

© 2015 Prospect News.
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