CIBC to appeal U.S. court decision ordering it to pay $1.16-billion to Cerberus

CIBC to appeal U.S. court decision ordering it to pay $1.16-billion to Cerberus

Canadian Imperial Bank of Commerce CM-T +1.05%increaseCM-T +1.05%increaseis appealing a U.S. court decision that could force the lender to pay about $1.16-billion, after it was found liable for losses incurred by a New York hedge fund in debt deals related to the 2008 U.S. housing crisis.

A New York State court said late Tuesday that CIBC must pay US$491-million in damages before prejudgment interest. That is less than the US$1.1-billion the hedge fund, Cerberus Capital Management LP, sought when it first brought the bank to court in 2015.

Including prejudgment interest, CIBC said it expects to pay US$848-million. That could cause the bank to record a pretax provision of $1.16-billion in its earnings for its fiscal first quarter, which ends Jan. 31.

New York court issues liability ruling against CIBC in Cerberus lawsuit

Cerberus alleged CIBC defaulted on payments on a limited recourse note the bank issued in 2008, and on a related transaction in 2011. Limited recourse notes are a type of debt instrument that combines elements of preferred shares and corporate bonds to provide fixed-income investors with higher yields.

CIBC has said in its public filings that the two transactions with Cerberus reduced the bank’s exposure to the U.S. residential real estate market.

“CIBC strongly disagrees with the legal and factual basis for the court’s decision,” the bank said in a news release announcing its appeal on Wednesday.

The court initially found CIBC liable for damages in an early December decision, but it had yet to decide how much the bank would have to pay. At the time, CIBC said in a release that it had not set aside any money for a potential loss because it believed it was “more likely than not to prevail at trial.”

The court-ordered charge would take a chunk out of the bank’s common equity tier (CET1) ratio, a key measure of a bank’s ability to cover sour loans, at a time when Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, is increasing the amount of money that banks are required to hold for this purpose.

In December, OSFI increased the domestic stability buffer (DSB), meaning banks must now store more capital during good economic times to limit the damage from downturns. It also increased the maximum level to which the DSB can rise, opening the possibility of the minimum CET1 ratio reaching 12 per cent, from the current 11 per cent.

CIBC said the charge could push its CET1 level down to 11.4 per cent, from its current 11.7 per cent. This would bring the bank closer to the current minimum level and put it in danger offalling under if OSFI were to hike the DSB again. Some analysts have speculated that this could prompt CIBC to turn to public markets to raise funds.

If CIBC had borne the full brunt of Cerberus’ claim, its CET1 ratio would have dropped to 11.2 per cent, which would probably have been “high enough to avoid an equity issue” unless other issues cropped up, RBC analyst Darko Mihelic said in a note in December.

Bank of Montreal is so far the only bank to have done a share sale after OSFI’s change. The lender raised a total of $3.35-billion in a share offering in early December to help cushion the blow of the higher capital requirements as it works toward closing its deal to take over California-based Bank of the West from BNP Paribas.

BMO also lost a year-long legal battle last year, resulting in a $1.1-billion charge. In November, a Minnesota bankruptcy court found the bank’s U.S. arm was liable for US$564-million in damages related to one of the largest-ever Ponzi schemes. The bank is appealing the decision.


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