CM.PR.S Settles Firm on Good Volume

Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 18 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 47 (Non-Viability Contingent Capital (NVCC)) (the “Series 47 Shares”) priced at $25.00 per share to raise gross proceeds of $450 million.

The offering was made through a syndicate of underwriters led by CIBC Capital Markets. The Series 47 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.S.

The Series 47 Shares were issued under a prospectus supplement dated January 11, 2018, to CIBC’s short form base shelf prospectus dated March 16, 2016.

CIBC has designated the Series 47 Shares as eligible to participate in the CIBC Shareholder Investment Plan along with Series 41, 43 and 45. Holders of eligible shares may elect to have dividends on those preferred shares reinvested in common shares if they reside in Canada, or may elect stock dividends if they reside in the U.S. See “CIBC Shareholder Investment Plan” at www.cibc.com for more information.

The CIBC Shareholder Investment Plan – hard to find on their website! – is described here.

CM.PR.S is a FixedReset, 4.50%+245, NVCC-compliant, announced January 10. It will be tracked by HIMIPref™ and is assigned to the FixedReset subindex.

The issue traded 734,395 shares today in a range of 24.94-00 before closing at 24.96-97. Vital statistics are:

CM.PR.S FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-18
Maturity Price : 23.15
Evaluated at bid price : 24.96
Bid-YTW : 4.36 %

This issue looks quite expensive to me, but quantifying the degree of richness is difficult. According to Implied Volatility Analysis:

impvol_cm_180118
Click for Big

Well, it’s starting to get monotonous, but we see in this chart many of the same features we saw when reviewing the recent BIP new issue as well as last week’s BEP.PR.M issue, the CM issue and NA issue:

  • The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
  • The extant issues are trading relatively near to par

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; in turn, I suggest that this reflects a rather touching faith that the existence of a minimum rate guarantee on reset also indicates that the issues will never, ever trade below par. There will be a lot of long faces when this test gets failed in the future! All it will take is a spread-widening, whether market-wide or company-specific.

However, for the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

I cannot even begin to imagine what the buyers of this issue must have been thinking. For example, CM.PR.O is a FixedReset, 3.90%+232, that commenced trading 2014-6-11 after being announced 2014-6-2. It resets 2019-7-31. It closed today at 23.71, very close to the fair value calculated by the above analysis of 23.68. How in the name of God’s Green Earth can anybody reconcile the prices of these two issues? [Hint: Maybe the 3% stockbrokers’ selling commission has something to do with it.]

All told, though, I have no hesitation in slapping a ‘Very Expensive’ label on this issue. According to the analysis illustrated by the above chart, the fair price is 23.94.

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