CIBC’s $23.81 million leveraged buffered autocalls on Nasdaq-100 show ‘strong’ terms

By Emma Trincal

New York, July 29 – Canadian Imperial Bank of Commerce’s $23.81 million of 0% autocallable leveraged buffered notes due July 26, 2022 tied to the Nasdaq-100 index come on the heels of several similar structures seen recently, which provide either a call premium upon one single call date or uncapped leveraged return at maturity.

The notes will be called at par plus a call premium of 10.75% if the index closes above 90% of its initial level on July 30, 2021, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.5 times any index gain.

Investors will receive par if the index falls by up to 10% and will lose 1.1111% for each 1% decline beyond 10%.

Call scenario

“It does look fairly attractive on the surface,” said a market participant.

“If the market is flat or even down to the 90% buffer level you get called with a 10.75% call premium in one year.

That’s pretty good. If you run a simulation, my guess is you have a 75% chance to see that happen.”

The outcome is more uncertain if the market declines.

Down and up

“What happens in a bad market? If the market is down substantially, you don’t get called. The underlying could finish up but it’s not very likely,” he said.

“If the market is down 25%, what are the odds that you will benefit from the leverage at maturity? In that scenario, the option is probably not very valuable.

Potential outperformance

“Having said that it still looks very reasonable to me.

“First you get a double digit return after one year even if the index is down 10%. That’s pretty good,” he said.

Because the index does not even have to be merely flat or up but can still be below initial price, the probabilities of catching the premium are high.

“There’s a greater opportunity to get called with that 90% strike,” he said.

“If it’s down more than 10%, you’re still outperforming given that you have a buffer.

“The only time you’re underperforming is if the index is up more than 10.75%.

“It doesn’t seem like a big deal since most people are not very bullish on the Nasdaq right now.”

Nasdaq

One factor, which may have facilitated pricing, he noted, was the use of the Nasdaq as the underlier as opposed to the S&P 500 index.

The implied volatility of the Nasdaq-100 index is 29.1% compared to 20.2% for the S&P 500.

“It’s not a huge difference, but it does help,” he said.

Taxes

The observation date on July 30, 2021 gives investors long-term capital gain tax treatment if they earn the call premium on that day. The notes priced on July 22.

“Since the call date is a little bit longer than a year, you also get tax-efficiency on your call.

“That’s an advantage compared to most autocalls.

“It looks pretty strong. I like it,” he said.

Call options

A structurer said the leverage at maturity was made possible due to the modest cost of the call options.

“The probability of getting called is high, which makes the call options at maturity probably relatively cheap,” he said.

“A model would probably show that the probabilities of getting to maturity are very small, especially with a call barrier at 90%, which increases the chances of getting called.”

Comparable offering

A JPMorgan deal, which priced on Tuesday, showed a similar structure characterized by the one-day call date at the end of the first year and the uncapped leveraged upside exposure with a buffered protection at maturity.

The price was unknown at press time as the notes settle on Friday.

JPMorgan Chase Financial Co. LLC’s 18-month autocallable buffered return enhanced notes linked to the S&P 500 index present slightly different terms due to a shorter maturity, a less volatile underlying index, and an at-the-money call strike. The 10% buffer is straight with no gearing.

After one year the notes will be called at par plus 6% if the index closes above or at its initial level.

If not, the notes at maturity will pay par plus 2 times any index gain.

The CIBC deal on the Nasdaq was distributed by CIBC World Markets.

It priced on July 22 and settled on Wednesday.

The Cusip number is 13605WA50.

The fee is 1.73%.

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