CIBC announces transaction that will significantly limit U.S. residential real estate exposure
Portfolio investment by Cerberus will allow CIBC to reduce downside risk while preserving upside potential TORONTO, Oct. 3 /CNW/ - CIBC announced today that it will be further strengthening its balance sheet by significantly 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, L.P., 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 transaction, June 30, 2008, was US$1.186 billion. As of the end of CIBC's fiscal third quarter, July 31, 2008, the value was US$1.075 billion. The fund has agreed to acquire US$1.050 billion of amortizing senior notes, which will have a capped return, payable in cash. The recourse on the notes will be limited to the assets in the reference portfolio. In addition, CIBC will retain 100% of the potential upside on the portfolio following repayment of the notes. The reference portfolio consists of U.S. residential mortgage-backed securities (RMBS) and collateralized debt obligations (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 these securities." CIBC's Tier 1 capital ratio at July 31, 2008 was 9.8%. Giving effect to a US$300 million preferred share issue completed in September, CIBC's Tier 1 capital ratio at July 31st on a pro forma basis was approximately 10.1%, well above CIBC's target of 8.5%. This transaction, at inception, is expected to have a positive impact on CIBC's Tier 1 capital ratio of 13 basis points. More importantly, this transaction also significantly reduces CIBC's future Tier 1 capital exposure to the U.S. residential real estate market. In a scenario where 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 approximately 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 approximately 36 basis points. Assuming 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 related to these securities, the impact on CIBC's Tier 1 capital ratio on a pro forma basis at July 31st would be limited to a decrease of approximately 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," said McCaughey. "In addition, retaining the right to future recoveries provides the potential for further enhancement to CIBC's performance." McCaughey concluded, "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." --- CIBC will hold a conference call for analysts and investors to discuss this announcement today at 8:30 am (EST). An investor presentation and live audiocast will be available in English at www.cibc.com, About CIBC. Participants can also listen to the conference call in English (416-340-2217 in Toronto, or toll-free 1-866-696-5910 throughout the rest of North America, passcode 3272373 followed by the number sign). A telephone replay will be available (416-695-5800 or 1-800-408-3053, passcode 3272373 followed by the number sign) until midnight (EST) on October 17, 2008. From time to time, CIBC makes written or oral forward-looking statements within the meaning of certain securities laws, including in this press release, in other filings with Canadian securities regulators or the U.S.Securities and Exchange Commission and in other communications. These statements include, but are not limited to, statements about the transaction with a fund arranged by Cerberus Capital Management, L.P. referred to in this press release. Forward-looking statements are typically identified by the words "believe", "expect","anticipate", "intend", "estimate" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could". By their nature, these statements require CIBC to make assumptions and are subject to inherent risks and uncertainties that may be general or specific. A variety of factors, many of which are beyond CIBC's control, affect CIBC's operations, performance and results, and could cause actual results to differ materially from the expectations expressed in any of CIBC's forward-looking statements. These factors include: credit, market, liquidity, strategic, operational, reputation and legal, regulatory and environmental risk; legislative or regulatory developments in the jurisdictions where CIBC operates; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions; the resolution of legal proceedings and related matters; the effect of changes to accounting standards, rules and interpretations; changes in CIBC's estimates of reserves and allowances; changes in tax laws; that CIBC's estimate of sustainable effective tax rate will not be achieved; political conditions and developments; the possible effect on CIBC's business of international conflicts and the war on terror; natural disasters, public health emergencies, disruptions to public infrastructure and other catastrophic events; reliance on third parties to provide components of CIBC's business infrastructure; the accuracy and completeness of information provided to CIBC by its clients and counterparties; the failure of third parties to comply with their obligations to CIBC and its affiliates; intensifying competition from established competitors and new entrants in the financial services industry; technological change; global capital market activity; interest rate and currency value fluctuations; general economic conditions worldwide, as well as in Canada, the U.S. and other countries where CIBC has operations; changes in market rates and prices which may adversely affect the value of financial products; CIBC's success in developing and introducing new products and services, expanding existing distribution channels, developing new distribution channels and realizing increased revenue from these channels; changes in client spending and saving habits; and CIBC's ability to anticipate and manage the risks associated with these factors. This list is not exhaustive of the factors that may affect any of CIBC's forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on CIBC's forward-looking statements. CIBC does not undertake to update any forward-looking statement that is contained in this press release or in other communications except as required by law.
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