Cerberus in $1bn mortgage-backed securities deal

The New York private equity firm will buy a chunk of the Canadian Imperial Bank of Commerce's troubled US real estate portfolio, purchasing amortising senior notes that will have a capped return of about 20 percent.

Cerberus Capital Management will invest $1 billion in the Canadian Imperial Bank of Commerce’s US real estate portfolio, from which the bank has been bleeding money in the global housing crisis.

The New York-based private equity firm will pay cash for amortising senior notes that will have a capped return of about 20 percent, according to a statement. The bank has the right to buy back the notes at the end of three years and retain future cash flows.

The real estate portfolio consists of US residential mortgage-backed securities and collateralised debt obligations. The bank will not provide Cerberus with any performance guarantee on the investment. Canada’s fifth-largest bank has written down its debt investments by about C$7.6 billion (€5.1 billion; $7.1 billion) since last year.

“Interest and principal payments on the senior notes will be paid from the portfolio only if the residential mortgage-backed securities and the collateralised debt obligations of the residential mortgage-backed securities perform,” the bank said in a statement.

“This transaction sets a floor under [the bank’s] exposure to the US residential mortgage market,” said the bank’s president and chief executive Gerry McCaughey in a statement.

“We believe the transaction benefits both parties,” a Cerberus spokesman said, declining further comment.

Cerberus, chaired by former US Treasury Secretary John Snow, announced last month it was in talks with Daimler to purchase the German vehicle maker’s remaining stake in ailing US auto-manufacturer Chrysler.