CIBC’s leveraged index return notes tied to S&P offer buffered protection, absolute return

By Emma Trincal

New York, June 5 – Canadian Imperial Bank of Commerce’s 0% capped leveraged index return notes with absolute return buffer due June 2024 linked to the S&P 500 index allow long-term investors to get leveraged exposure to the U.S. benchmark with a buffered protection and absolute return, according to an FWP filing with the Securities and Exchange Commission.

If the index finishes at or above the initial level, the payout at maturity will be par plus 1.15 times the index gain subject to a cap of 46% to 56% that will be set at pricing.

If the index falls by up to 20%, the payout at maturity will be par plus the absolute value of the index decline.

If the index falls by more than 20%, investors will be fully exposed to any losses beyond the buffer.

Five-year tenor

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said longer tenors can be advantageous in today’s uncertain market.

“I like five-year notes,” he said.

“Looking at former bull markets, we may be at the end of this bull run. We’re probably in the ninth inning.

“If we head into a recession within the next one-and-a-half years, we’ll still have three-and-a-half years to make up for it and be on a more solid ground so we can end up with a gain.”

Time factor

A market participant explained that while it’s hard to generalize about what makes a deal cheaper or more expensive to price, longer maturities tend to be helpful.

“There are many factors to take into account with pricing. You can’t oversimplify it. But it’s true that typically, longer-dated notes tend to be a bit cheaper. You have more dividends to work with on a four-year than on a one-year.”

Most absolute return notes price on a barrier rather than a buffer, which made the product interesting.

Upside

He explained how the issuer may have structured the deal.

The “first ingredient” is a zero-coupon bond.

The capped leveraged upside is not out of the ordinary, he said. It is a combination of a long at-the-money call position (calls striking at the initial price of 100) and short 146 to 156 calls, which is the range of the cap. The number of calls is multiplied by the leverage factor.

More legs

It’s the downside structure that requires a little bit more “legs,” he said.

“Your first step is to start it like a typical buffered note. You buffer it with a put spread. You buy an at-the-money put and you sell an 80 strike put.”

With the initial price at 100, the “at-the-money” strike is 100. Buying protection at 100 means that investors are covered for all losses. The short put at 80 simply means that the protection ends after the first 20%. With a short put contract, any decline of the stock below 80 would force the investor to buy the stock at the higher strike price of 80, hence incurring a loss, which is proportional to the amount of decline from that level.

“That’s your put spread. That’s your buffer.”

“Now you’re protected from 100 to 80 and since you sold a put at 80 you start to lose when the index falls by more than 20.”

To create and terminate the absolute return payout, the issuer needs to sell a digital option at 20.

Once the price drops more than 20, the absolute return payout expires.

“Combine this binary option with your put spread, and you get this buffered note with absolute return,” he said.

BofA Merrill Lynch is the agent.

The notes will price in June and settle in July.

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