CIBC announced today that it will be further strengthening its balance sheet by considerably reducing its remaining exposure to the U.S. residential real estate market.
Following the completion of a competitive bidding process, a fund arranged by Cerberus Capital Management has agreed to invest US$1.050 billion in cash in CIBC's U.S. residential real estate portfolio.
The fair value of the reference portfolio as of the effective date of the deal, June 30, was US$1.186 billion. As of the end of CIBC's fiscal third quarter, July 31, the value was US$1.075 billion.
The fund has agreed to purchase US$1.050 billion of amortizing senior notes that will have a capped return, payable in cash. The recourse on the notes will be limited to the assets in the reference portfolio.
Additionally, CIBC will retain 100% of the potential upside on the portfolio following repayment of the notes. The reference portfolio consists of U.S. RMBS and CDOs of RMBS. These securities
are part of CIBC's legacy structured credit runoff portfolio.
As an all-cash deal, CIBC will not be providing any of the financing to the senior notes investor and will not be providing any performance guarantee in respect of the portfolio. Interest and principal payments on the senior notes will be paid from the portfolio only if the RMBS and CDOs of RMBS perform. Following the repayment of the notes, CIBC will retain all future
cash flows of the portfolio.
As a further potential enhancement to CIBC's upside, CIBC has retained the ability to call the notes at the end of three years upon payment of accrued and unpaid interest, remaining principal and a fixed redemption premium.
Under the transaction, CIBC will retain ownership of the assets. CIBC will also keep all financial guarantor insurance contracts and related rights associated with the portfolio.
"This transaction sets a floor under CIBC's exposure to the U.S.residential mortgage market," said CIBC President and CEO Gerry McCaughey. "At the same time, retaining ownership of these securities, combined with the option regarding the timing of any redemption of this note, provides us with important flexibility to benefit from a future recovery in the cash flows of
CIBC's Tier 1 capital ratio at July 31 was 9.8%. Giving effect to a US$300 million preferred share issue completed in September, CIBC's Tier 1 capital ratio at July 31 on a pro forma basis was roughly 10.1%, well above CIBC's target of 8.5%.
This deal, at inception, is expected to have a positive impact on CIBC's Tier 1 capital ratio of 13 basis points. More importantly, this deal also considerably reduces CIBC's future Tier 1 capital exposure to the U.S. residential real estate market.
When the value of the U.S. residential real estate securities falls to zero and recoveries from financial guarantors on U.S. residential real estate insurance contracts are roughly 15%, there would be no further exposure to CIBC's Tier 1 ratio pro forma July 31.
If recoveries from financial guarantors on U.S. residential real estate insurance contracts were 30%, this would have a positive impact on CIBC's Tier 1 ratio of roughly 36 basis points.
This assumes an unlikely and hypothetical scenario where the value of the U.S. residential real estate securities falls to zero and there are no recoveries from financial guarantors that are related to these securities, the impact on CIBC's Tier 1 capital ratio on a pro forma basis at July 31 would be limited to a decrease of roughly 0.45% related to losses on U.S. residential real estate holdings.
"Our capital position is strong and our actions to reduce risk in our structured credit portfolio further that strength," McCaughey said. "In addition, retaining the right to future recoveries provides the potential for further enhancement to CIBC's performance."
"I would like to thank the professionals at Cerberus Capital for their commitment and diligence in this process. Together, we were able to structure a transaction that is advantageous to both parties," McCaughey concluded.