CIBC’s $30.08 million notes with absolute return buffer on S&P offer neutral to bearish play

By Emma Trincal

New York, June 29 – Canadian Imperial Bank of Commerce’s $30.08 million of 0% capped notes with absolute return buffer due June 28, 2024 linked to the S&P 500 index provide a neutral to bearish strategy to conservative investors concerned about volatility spiking over the next two years, sources said.

The payout at maturity will be par of $10 plus any index gain, up to a maximum return of 15%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or falls by up to 21.8%, investors will receive par plus the absolute value of the index return. Otherwise, investors will lose 1% for every 1% decline beyond 21.8%.

Protection first

“Obviously, there’s more upside on the downside. It’s somewhat of a bearish play,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“If the market was to drop substantially, it would be hard for us to find a client that would be upset with the outcome, which is absolute return plus a hard buffer.”

Some people want to “have it both ways,” and the 15% maximum return over a two-year term may not be high enough for everyone, he said.

“I would explain the client that the index could go either way. No one knows where the market will be in two years. This note gives some upside but mostly it’s geared toward the downside. You get up to 22% in return if the index is down plus the 22% buffer beyond that. It’s mostly bearish and that’s OK because most clients prefer to be protected on the downside right now.”

Fed at the wheel

Pool said that many advisers feel encouraged to deploy money in the market after a 20% decline in the S&P 500 index year to date.

“A number of advisers feel comfortable buying at those lows; some even believe the worst is behind us. We don’t feel as strongly as those advisers. For us, a 20% drop is not really a solid margin of safety. So, we think it’s wise to have this 22% buffer in addition to this year’s decline.”

Over the next two years, the market outlook is uncertain, he said.

“My personal view is that the Fed will stop raising rates when they feel they’re getting too much pressure and that pressure of course will come from the market,” he noted.

“How do you define that tolerance level? Hard to tell. But I think the Fed will stop at some point even though they’ve been telling everyone they’ll do whatever it takes to fight inflation. In reality, the Fed would rather not fight the market. We’ve seen discrepancies between what they tell us and what they actually do. They have been acting that way for a long time.”

Given the likely rise in volatility over the next two years due to the market adjusting to the Fed’s monetary policy, a defensive strategy makes sense, he said.

“I do like that note. It’s a big size and I can see why,” he said.

Neutral to bearish

A market participant said the notes would be best used in a sideways market.

“It’s one of these trades where you expect in the next couple of years the S&P to trade in a range,” he said.

“We’re going to be squeezed between the counteracting forces of inflation and deflation. The S&P could easily be flat.

“It’s some kind of a neutral bet.”

He emphasized the defensive aspect of the structure.

“It’s aimed more on the side of caution because of the hard buffer. If the index is down 25%, you only lose 3.2%. It’s a pretty good hard buffer for a two-year trade,” he said.

The note however was not entirely “neutral.”

“If you had to do something during that timeframe, there are worse strategies out there. Since you can get more return on the downside than on the upside, it’s neutral leaning toward bearish,” he said.

“With a 15% cap on two years, it’s not bullish. You’re looking at the 15% as a hedge in case the market goes up.”

Too short

The note would benefit from a longer maturity, he said.

“It’s very short-term. That’s my main concern.

“In two years, we’re going to see a lot of damage if they continue to raise rates. We could get more money printing if the economy really slows down. But then the inflation problem will remain unresolved. Either way you’ve got a problem. Inflation is going to squeeze corporate earnings. They’re already trading at inflated P/Es. And if we have a massive deflation, everybody is going to sell everything.

“It’s hard to get excited about the S&P right now,” he said.

A longer version

Viewing himself as “pretty bearish,” this market participant said he liked the structure of the notes but would be more inclined to use it over a longer duration.

“I just saw a very similar version of this deal from Morgan Stanley. I sort of liked it,” he said.

He was referring to Morgan Stanley Finance LLC’s $1.38 million of six-year dual directional notes on the S&P 500 index. At maturity, the payout is 1.1 times any index gain. If the index is negative, investors get a 20% buffered protection with absolute return.

“It’s a longer horizon, and I prefer that. In six years, the market could rebound. You have some leverage and no cap. The downside is comparable. It gives you a chance to do well on both sides of the trade. It might be a better way to go,” he said.

BofA Securities, Inc. is the agent for the CIBC’s $30.08 million offering.

The notes will settle on Thursday.

The Cusip number is 13607W679.

The fee is 2%.

Morgan Stanley’s $1.38 million of dual directional buffered PLUS (Cusip: 61774DLZ8) priced on June 27 and will settle on Thursday.

Morgan Stanley & Co. LLC is the agent.

The fee is 4.25%.

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