CIBC’s $51.27 million market-linked step-up autocalls on S&P 500 offer high call premium

By Emma Trincal

New York, March 18 – Canadian Imperial Bank of Commerce’s $51.27 million of autocallable market-linked step-up notes due March 24, 2023 linked to the S&P 500 index pay a high call premium with memory, but investors must forgo any downside protection at maturity. However, if the notes are not called, their gains are unlimited.

The notes will be called at par of $10 plus an annualized call premium of 15.1% if the index closes at or above the initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index finishes above the step-up value, 121% of the initial level, the payout at maturity will be par plus the index gain.

If the index 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 21%.

Investors will be exposed to any losses.

Memory coupon

The autocallable offers a premium with “memory,” which means that the returns are cumulative: a missed premium can be recouped on the next call date.

If the notes are called on March 19, 2021 on the first observation date, investors will receive 15.1% in call premium. A call on the second and final observation date of March 11, 2022 will yield a return of 30.20% upon the early redemption.

Lower step

However, the structure is slightly different from similar products in that the last observation date for the call is one year prior to maturity, according to the filing.

If the notes are not called after the second call date, the equivalent premium at maturity would be the 21% step return, which is lower than the second call premium of 30.2% even though investors have been holding the notes one year longer.

Investors will enjoy the one-to-one exposure to any price increase above the 121% step level. But the unlimited exposure above the step is standard for market-linked step up notes coming from BofA’s franchise.

BofA Securities, Inc. is the agent. Market-linked step-up autocalls are one of the firm’s top selling products.

“It’s weird. I don’t know why you’re getting so much less at maturity,” a market participant said referring to the 21% step payout.

“Typically, it should be 45% for a 15% annual call premium over a three-year period.”

Full downside risk

The full exposure to the market decline was not for everyone although the new bear market provides a much lower floor than just a few weeks ago, said Matt Rosenberg, head of trading and strategic initiatives at Halo Investing.

The S&P 500 index, when the deal priced on March 12, closed at 2,480.64, or 26.75% lower than its all-time high of Feb. 19.

But more conservative or income-oriented investors may prefer a more classic type of autocall, he said.

“I can price a three-year autocall on the S&P with a 75% barrier and 15% yield... indicative,” he said. The barrier of 75% of the initial price would apply to both the coupon payment and principal repayment at maturity.

“You get regular income that way with significantly less risk. If the market rebounds, the notes are called and you can reinvest for growth.”

Hybrid style

The Phoenix autocallable structure he described differed from the CIBC deal in that it did not offer unlimited return at maturity.

“Yes, the step-up product still gives you the upside if the index moves higher,” he said.

“But for many people, if you’re playing the rebound, you can get two times leverage with no cap especially if you have 0% protection like this one.

“If you want to get income, you’re better off getting it periodically with a lower coupon barrier.

“You pick one of the two types of products instead of merging the two. Each will get you different results.

“That said, it’s still a good investment.”

The Cusip is 13607G161.

The fee is 2%.

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