CIBC lowers U.S. risk with $1.05 billion Cerberus loan

TORONTO (Reuters) - Canadian Imperial Bank of Commerce (CM.TO), which has been hurt more than its peers by the credit crisis, said on Friday that a $1.05 billion loan agreement with private equity group Cerberus Capital Management LP CBS.UL will help cut its U.S. mortgage exposure.

Under the financing deal, CIBC will still own the poorly performing U.S. mortgage securities, but could benefit from any increase in their value down the road.

A fund arranged by Cerberus agreed to invest $1.05 billion in cash in CIBC's U.S. residential portfolio, which was valued at $1.075 billion as of July 31.

The fund won a competitive bidding process to acquire amortizing senior notes that have a capped return, approximately 20 percent, payable in cash.

Recourse on the notes will be limited to CIBC's portfolio, which is made up of U.S. residential mortgage-backed securities (RMBS) and collateralized debt obligations of RMBS.

Shares of CIBC closed at C$58.50, up 1.2 percent on the Toronto Stock Exchange, after trading as high as C$61.08 in the session.

CIBC, the country's fifth-largest bank, has been hurt more than its Canadian peers by the subprime mortgage turmoil, with more than C$6.7 billion in writedowns in the last three quarters.

Rob Sedran, an analyst at National Bank Financial, noted that the bank had already booked large writedowns related to this residential mortgage portfolio, which has a notional value of more than $6 billion.

"Because of the accounting treatment and where (the securities) are being carried, it looks like, wow, they're getting the best of both worlds," Sedran said of the deal. "But they've already had the worst of one world, and are now getting a little bit of it back."

CIBC said it will not provide financing to the Cerberus fund, nor will it provide a performance guarantee on the portfolio.

"I don't think there have been any other deals done like this," Ron Lalonde, CIBC senior executive vice president, said in an interview.

Investment banks UBS (UAG.P) and Merrill Lynch MER.N have sold structured-credit assets, but unlike CIBC, the two sellers have no way to benefit from a potential increase in the assets' value, Lalonde noted. And in both cases, the sellers provided most of the purchase financing, he said.

The notes issued to the Cerberus fund are recallable after three years. Once they are repaid, CIBC will retain all future cash flows.

"This transaction moves CIBC down the road toward achieving our strategic goal of a very balanced, consistent stable return and the derisking of the bank," Gerry McCaughey, CIBC's chief executive, said on a morning conference call.

"We're also very pleased that in this transaction we've managed to retain the upside potential."

The deal is expected to improve CIBC's Tier 1 capital ratio by 13 basis points. This ratio was 9.8 percent at the end of July.

Several analysts estimated that the Cerberus deal would trim CIBC's earnings per share by about 30 Canadian cents a year.

"That sounds a little high to me," CIBC's Lalonde said.

The bank will earn a return on the cash it receives from Cerberus, replacing money that CIBC would otherwise have borrowed in the market, he said. The loan could also amortize faster than the estimated three- to four-year life of the loan, Lalonde said.

Jim Bantis, an analyst at Credit Suisse, cut his 2009 EPS forecast to C$7.20 from C$7.50.

"This is an expensive but pragmatic move made by CIBC," Bantis said of the Cerberus deal.

While positive, the transaction removes risk in only one of the four areas where CIBC has structured finance exposure, RBC Dominion Securities said in a note. The other three areas are its hedges with bond insurers, hedged structured-finance products tied to corporate debt, and unhedged holdings, RBC said.

($1=$1.08 Canadian)

(Reporting by Ka Yan Ng and Lynne Olver in Toronto and Megan Davies in New York; Editing by Frank McGurty)