CIBC Trims U.S. RMBS, CDO Exposure in Deal with Cerberus

The Canadian Imperial Bank of Commerce said Friday that it was the latest non-U.S. institutional investor to flee U.S. real estate, selling a $1.05 billion stake in its portfolio of U.S. RMBS and CDOs to a fund managed by Cerberus Capital Management, LP. CIBC said its U.S. real estate reference portfolio had been valued at $1.19 billion as of June 30 but was down to $1.08 billion just one month later. Under the all-cash deal, the Cerberus affiliate will receive $1.05 billion of amortizing senior notes, which will have a capped return; recourse on the notes will be limited to the assets in CIBC’s U.S. real estate portfolio. The deal means that CIBC will retain ownership of the assets and maintain existing wraps from any monoline guarantors on the individual MBS/CDO deals it owns. (It might help here to think of a covered bond limited only to the cashflow thrown off by the reference pool, and nothing else). CIBC said its deal with Cerberus contains no guarantees of performance tied to the MBS/CDO holdings — probably a good thing, given the uncertainty that yet hangs over the sector — and that interest and principal payments on the senior notes will be paid from the portfolio only in the RMBS and CDOs of RMBS perform. CIBC will retain future cash flows once the Cerberus notes are paid off, and has a call option after three years, the bank said in a press statement. “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.” Cerberus is already heavily invested into the U.S. mortgage market, owning a majority stake in GMAC LLC; GMAC owns troubled residential mortgage lender Residential Capital LLC. ResCap has been struggling to deal with mounting losses tied to ongoing mortgage woes, and reported a net loss of $1.86 billion for the second quarter at the end of July; the loss came after a massive $60 billion refinancing package saved it from likely bankruptcy. For more information, visit http://www.cibc.com.