To repair the damage inflicted on it by the meltdown in the U.S. subprime mortgage
market, Canadian Imperial Bank of Commerce is selling $2.75-billion in shares of itself - to Hong Kong billionaire
Li Ka-Shing, two Canadian pension funds, an insurer
and the investing public.
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It is the first Canadian institution to join the ranks of financial giants - including Citigroup Inc., Morgan Stanley, and Merrill Lynch & Co. Inc. - that have sold off stakes in themselves to shore up their financial positions.
The plan to raise new equity is the equivalent of building a financial nuclear bunker against a U.S. mortgage market that could see further meltdowns.
While the other banks each sought money from investment funds that are controlled by foreign governments, most of the infusion CIBC is receiving is coming from Canadian investors.
It was back in November that the bank started hunting for a way to raise capital, after it realized that its potential losses from subprime mortgage exposure were growing rapidly.
Yesterday, it announced a further $2.46-billion (U.S.) in writedowns.
By raising the $2.75-billion, the bank has created a large cushion to protect its balance sheet and keep regulators satisfied. It has now taken nearly $3.5-billion in charges as a result of its exposure to the U.S. subprime mortgage market, eclipsing its well-known troubles with Enron Corp., which cost it less than $2.5-billion in writedowns.
While yesterday's moves are a sign of weakness, they were greeted positively by some investors who took comfort in the vote of confidence by the group of prominent investors, and in the fact that the bank is now insulated from a further deterioration in its subprime mortgage exposure.
"The fact that they've got the Caisse, Li Ka-Shing and Manulife willing to put in half a billion there and a quarter billion there is a pretty positive long-term sign, which I'm sure they'll do very well on, as indeed you would have done if you had bought CIBC after the Enron writeoffs a couple years ago," said Gavin Graham, chief investment officer at Guardian Group of Funds.
CIBC chief executive Gerry McCaughey made it his priority to reduce risk at the bank when he took the helm in mid-2005, just as it was finally putting to rest its Enron headache.
That's why CIBC's large exposure to the subprime mortgage market - which sets it apart from its Canadian rivals - has been particularly painful for the bank and its investors.
The exposure comes by way of complicated securities in which CIBC invested, and those investments have soured along with the subprime market to which they're tied.
While this problem has not caused any immediate problems for CIBC, Citibank and others, these banks have been pushed to shore up their financial positions because of strict regulatory rules that force them to curb their lending if they do not have a sufficient financial cushion.
With yesterday's announcement, Mr. McCaughey is attempting to erect a fence around CIBC's subprime problem.
The bank could now hypothetically take an additional $4-billion in writedowns and still have enough of a cushion to keep regulators satisfied.
"The capital raised through this offering will assist in enabling our management team to direct their full energy and resources on continuing to execute our strategy," said the CEO.
He has revamped his team in recent weeks by replacing some of his most senior executives due to the bank's stumble.
CIBC will raise $1.5-billion from Mr. Li's company, Cheung Kong (Holdings) Ltd., insurer Manulife Financial Corp., Caisse de dépôt et placement du Québec, and OMERS Administration Corp., the investing arm of the Ontario municipal employees pension fund.
It is understood that Manulife and the Caisse are taking the largest stakes of the four investors.
CIBC will also sell at least $1.25-billion in shares to public investors.
It became clear to CIBC in November that its more than $10-billion (U.S.) in exposure to subprime mortgages was quickly deteriorating in value.
The bank had $3.5-billion in exposure that was effectively insured by ACA Financial Guaranty Corp., a bond insurer whose future has been precarious since November, due to its strained financial position.
With his own reputation on the line as well as the bank's, Mr. McCaughey was personally involved in the process of stirring up investor interest in the bank.
"We saw an opportunity to invest in the bank at a highly opportune time," Donald Guloien, chief investment officer at Manulife, said yesterday.
He added that "the price reflects very good value."
A spokesperson for the Caisse said the pension plan decided to make the investment because the bank still has a favourable earnings outlook in the future.
For Mr. Li, it's a return to a previous role as an investor in the bank.
He was CIBC's largest individual investor until he sold his entire $1.2-billion stake at the beginning of 2005, parting with more than 17 million shares for $70 apiece.
His company will pay $65.26 a share for its new stake in the bank, and receive a commitment fee of 4 per cent.
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