CIBC’s contingent coupon autocalls tied to three stocks show enticing coupon, barrier but risk

By Emma Trincal

New York, Nov. 5 – Canadian Imperial Bank of Commerce’s contingent coupon autocallable notes due Nov. 15, 2021 linked to the lower performing of the common stocks of American Airlines Group Inc., Kellogg Co. and Exxon Mobil Corp. offer a mid-double-digit coupon with a low barrier, which makes the deal attractive for income investors. But the number of underlying, the fact that these are single stocks and in disparate sectors present also significant risks, advisers said.

The notes will pay a contingent quarterly coupon at an annual rate of 14% if each stock closes at or above its coupon barrier level, 60% of the initial level, on the observation date for that quarter, according to a 424B3 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus the contingent coupon if on any quarterly valuation date the closing levels of all the stocks are greater than their initial levels.

The payout at maturity will be par plus any coupon unless any of the stocks finishes below its 60% principal barrier level, in which case investors will lose 1% for each 1% decline of the worst performing stock from its initial level.

Low barrier

“The 60% barrier is pretty low. It reduces the risk of loss at maturity,” said Tom Balcom, founder of 1650 Wealth Management.

“14% a year is pretty good too. It’s 3.5% per quarter. In one quarter you’re almost earning two years’ worth of a 10-year Treasury note.”

The 10-year Treasury yields 1.86%.

“It’s a juicy coupon as opposed to a miserable yield on Treasuries,” he said.

Early exit

A call after three months is a likely outcome, he said.

“It’s not the worst thing that can happen to you. You get your money back. You get paid. You’re still winning.”

The worst-case scenario would be a more-than 40% price drop in the price of one of the three underlying stocks.

“It’s always possible, but two years from now, it doesn’t seem really likely. They didn’t give you volatile stocks like Uber. These three are pretty solid blue chips,” he said.

Balcom however said he would not buy the notes: his firm does not invest in individual stocks.

“If we did, I would probably consider it,” he said.

Recent price action

The three underlying stocks have recently seen their price increase as a result of their third-quarter earnings.

The share price of American Airlines has gone up 10% since the company reported its earnings on Oct. 24.

Exxon Mobil has gained 8% since Friday, and Kellogg moved up nearly 5% since announcing its results on Oct. 21.

Typically, buyers of autocallable notes prefer to buy at a lower price, but the market as a whole has been rallying last week, advisers noted.

One more permanent factor of risk however is the low correlation between Exxon Mobil, Kellogg and American Airlines. The highest coefficient of correlation is between Exxon Mobil and American Airlines at 0.5. Correlation drops to 0.33 between Exxon and Kellogg. The least correlated stocks are American Airlines and Kellogg with a 0.16 coefficient.

Limited upside

Donald McCoy, financial adviser at Planners Financial Services, was concerned about the risks.

“The 14% yield is nice, but your upside is going to be limited. Chances are you’ll get called out after three months,” he said.

Also, the full payment of the coupon is never guaranteed. If one stock drops more than 40% during the life of the notes, investors will not be paid on that quarter, he noted.

“You’re not going to get your entire coupon,” he said.

This led him to assess the barrier at maturity.

Pain and probabilities

“That’s the fly in the ointment. One stock could be down 42% and you lose 42%. But your upside is capped at 28%, and 28% is very unlikely,” he said.

Some stocks are riskier than others.

“My biggest concern would be American Airlines. Kellogg is a defensive, consumer staples stock. Exxon just by its size has sufficient cash-flow. But if American Airlines is down 45%, you then have to sit there for two years, keeping your fingers crossed that the stock may rebound.

“It’s a real risk because the loss is substantial. It would be at least 40% of your investment if you hit this level at the end.”

Even if the probabilities of breaching the barrier at maturity may not be all that high, the amount of potential losses gave him pause.

“That big downside risk is sitting there. It’s like a piano hanging over your head. It’s not likely to fall but if it does, it hurts.

“I can see why you would love to be called as soon as possible and be done with it,” he said.

CIBC World Markets is the agent.

The notes are expected to price on Thursday.

The Cusip number is 136071BG1.

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