NEW YORK — U.S. private equity giant Cerberus Capital Management is injecting $1-billion into Canadian Imperial Bank of Commerce, a deal designed to help build a protective wall around CIBC's toxic sub-prime mortgage holdings.

CIBC has been negotiating with four private equity firms over the past several months in an effort to strengthen its balance sheet and limit its exposure to the faltering U.S. real estate market.

The bank's sub-prime mortgage portfolio was valued at $1.075-billion as of the end of July, and Cerberus is investing essentially at par, with a $1.05-billion commitment.

Sources said Gerry McCaughey, CIBC's chief executive officer, was determined to retain the portfolio and maintain any upside should the value of these housing loans improve in the future. However, that option comes at a price: Cerberus will receive a substantial interest on its investment, payable over three years.

“This transaction sets a floor under CIBC's exposure to the U.S. residential mortgage market,” Mr. McCaughey said in a statement. “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.”

The mortgage-fuelled credit crisis has battered CIBC more than any other Canadian financial institution. The bank has taken $6.8-billion in write-downs over the last three quarters, much of it stemming from the sub-prime collapse and faltering bond insurers, which sold protection on complex derivatives known as collateralized debt obligations, or CDOs.

The write-downs forced CIBC to raise approximately $2.9-billion in capital this year to strengthen its balance sheet.

“CIBC wanted to put a bullet in this,” said one person familiar with the Cerberus talks.

Several struggling U.S. financial companies, like Merrill Lynch, have also cut deals to limit their sub-prime headaches, although these typically resulted in the sale of the portfolio at a steep discount. Given the prospect of a record government bailout, and moves in the industry to help ease the crisis, Mr. McCaughey was unwilling to strike a similar deal that would prevent CIBC from benefiting if the climate improved, according to people familiar with his thinking.

In order to accomplish this, however, it is believed that Cerberus extracted a handsome interest premium on its investment.

The Cerberus deal should help allay fears of additional major write-downs at the bank, and also assuage any concerns about the bank's capital position. Even if in the unlikely event that the value of this portfolio were to drop to zero, along with CIBC's exposure to monocline bond insurers, the total hit to the bank's Tier One Capital ratio would be less than 45 basis points. Tier One capital is a measure of balance sheet health monitored by regulators.

CIBC's Tier One capital is about 10.1 per cent—far in excess of regulatory requirements—and the Cerberus agreement should increase that by about 0.13 per cent, the bank said in a statement. The bank plans to hold a conference with analysts this morning to discuss the deal.

“Our capital position is strong and our actions to reduce risk in our structured credit portfolio further that strength,” said Mr. McCaughey