CIBC’s $27.93 million market-linked step-up autocalls on bank stocks to shine in flat market

By Emma Trincal

New York, May 4 – Canadian Imperial Bank of Commerce’s $27.93 million of autocallable market-linked step-up notes due April 26, 2024 linked to a basket of three bank stocks give investors a chance to outperform the stocks in a flat to moderately bullish market, sources said.

The basket consists of the common stocks of Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley, each with a weight of 33.33%, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus a call premium of 12.3% a year if the basket closes at or above its initial level on May 6, 2022 or April 21, 2023.

If the notes are not called and the basket finishes above the step-up value, 145% of the initial level, the payout at maturity will be par plus the basket gain.

If the basket finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 45%.

Investors will lose 1% for every 1% basket decline.

Mildly bullish

“If you have a slightly positive view on the banking sector, this could be a decent play although I’m not sure why you would take on the risk of having no downside protection at all,” said Donald McCoy, financial adviser at Planners Financial Services.

“You’d be long the stocks if you expected a strong performance, especially given the fact that the note won’t pay you any dividends.”

JPMorgan’s dividend yield is 2.35%. Citigroup and Morgan Stanley pay dividend yields of 2.85% and 1.7%, respectively. The average dividend yield for the basket is therefore 2.3%.

“This is more for people trying to squeeze the upside. But they really have to thread the needle to do it,” he said.

A call is a cap

While the return is uncapped at maturity. McCoy noted that in the event of an autocall, investors would see their gains capped at 12.3%.

“I guess people are not going to be mad at 12.3% per year although if you thought the banks were a good play, you would expect 15% to 25% over the next 12 months, not 12%. So, you may very well underperform on those calls,” he said.

Pocketing a call premium of 12.3% at the end of the first year was the most likely outcome, he said.

“This is more of a one-year play, maybe a two-year play,” he said.

In that regard, investors incur some “upside risk,” in comparison to a direct investment in the shares, he noted.

Make or break

But the upside risk was not the worst part.

“The possibility for the basket to tank and not recover at the end of the three-year timeframe is not a high probability, but it’s still possible,” he said.

And while the risk is lower with a basket than with a worst-of exposure, the diversification across three bank stocks was limited.

For McCoy, picturing what the worst-case scenario may be in the absence of a call was critical.

“Those are big banks. But if one of the three stocks drops for any reason, you could certainly end up negative.

“If you’re still playing this game after two years, you’re going to be concerned about possibly losing money at maturity.

“And by definition, if you get to the third year, you haven’t got any income along the way.”

The automatic call was a risk mitigating factor but not a protection. In its absence and without any barrier or buffer at the end, investors were in a dangerous position, he said.

“If you didn’t get called you don’t have anything to show for. Either you’ll make all of it, or you’ll lose money without having earned anything.

“You’re probably sweating out that last month...You’re going to wonder whether you’ll get the boost or lose.

“The other option, to be long the basket, which means you’re up 45% in the last year seems more like a miracle.”

McCoy said he likes to show structured notes that offer a hedge against market declines. The benefits of being long the underlying outweigh a structured note that lacks downside protection in his view.

Alpha in flat land

In contrast, a buysider said he liked the notes.

“The only risk here is you don’t recover the dividends for any of those companies,” he said.

“This note is for investors who expect the performance of those big banks to be flat. If they’re right, 12.3% over one year or 24.6% over two years is quite attractive. Nobody will balk at that. You can definitely outperform in a flattish market and that’s the purpose of this note.”

The appeal of the notes will disappear for investors holding a bullish or bearish view, he noted.

“You will underperform if the market rallies dramatically over the three years in addition to losing your dividend payments,” he said.

“Same thing applies to the downside. You don’t have the dividends to buffer some of your losses.

“But again, this is not for a bull or a bear. You want those stocks to show muted returns. If they do, you’ll do tremendously well.”

Toppish

There may be another reason for a moderately bullish investor to expect slower returns from the three underlying bank stocks, he added, pointing to their strong performance.

The share price of Morgan Stanley has more than doubled over the past 12 months. JPMorgan and Citigroup have gained 69% and 65%, respectively.

“Obviously, there is always a risk. But if you believe in the recovery, if interest rates continue to rise, this could benefit these three institutions.”

The autocall payout delivered as a call premium rather than a coupon was also advantageous, according to this buysider.

“It’s a different story to tell the client. It’s not a worst-of. You can cumulate the coupon. There’s a booster at maturity. I like the terms of this note.”

BofA Securities, Inc. is the agent.

The notes (Cusip: 13607V838) will settle on Friday.

The fee is 2%.

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