CIBC strikes deal with Cerberus Capital Management

Canadian Imperial Bank of Commerce said Friday that it is reducing its exposure to the U.S. residential mortgage market by selling part of its structured credit portfolio to Cerberus Capital Management LP in a $1.05 billion deal.

The transaction covers residential mortgage-backed securities and related collateralized debt obligations valued at $1.19 billion at June 30 and $1.075 billion a month later.

The Cerberus investment will "significantly limit our future exposure to the U.S. residential real estate market," CIBC Chief Executive Gerry McCaughey said on an investor conference call Friday morning.

CIBC will continue to own the securities and can benefit from any future recovery they might make, the bank said.

CIBC has been the hardest hit Canadian institution exposed to the U.S. subprime mortgage crisis, and the deal will hopefully allow it to mitigate some of its losses, McCaughey said.

"We're a bank, where our primary interest is in de-risking but preserving the potential long-term value for our shareholders," he said.

Over the past year, CIBC has been slammed with writedowns related to its U.S. subprime mortgage assets which sent the price of its stock tumbling and left analysts with concerns about the bank's future.

CIBC had an estimated $6 billion Canadian dollars ($5.6 billion) in exposure to the residential mortgage market in its structured credit portfolio, and after a series of writedowns its value is estimated to be worth about C$1.1 billion ($1 billion).

Cerberus is buying $1.05 billion of senior notes backed by the assets, and CIBC said it "will retain 100 percent of the potential upside on the portfolio following repayment of the notes."

"We believe future recoveries are quite possible, given the extreme discount on valuations currently as a result of the highly illiquid markets," McCaughey said.

The bank said it will not be providing any financing to Cerberus and is giving no performance guarantee on the portfolio, in which it retains ownership.

"During a period of huge uncertainty, the economics of the transaction are pretty good," said Chris Blumas, a banking analyst at Morningstar.

"They're able to do things that other people, because of fair value accounting rules and public shareholders, really can't do," Blumas said in a phone interview. "I think what they're really betting on is that when liquidity comes back into the market, over the long term, then their values will go up."

CIBC's Tier One capital is about 10.1 percent _ far in excess of regulatory requirements _ and the Cerberus agreement should increase that by about 0.13 percent, the bank said in a statement.

CIBC said its capital ratio _ the key measure of a bank's stability _ now will not be hit even if the value of the U.S. residential real estate securities falls to zero and recoveries from financial guarantors are only 15 percent.