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Callidus Capital shares plunge on wider fourth-quarter loss

Callidus Capital Corp. shares tumbled 31 per cent to a new low after it reported a deep quarterly loss and said efforts to sell itself have yet to yield any tangible results after more than a year and a half.

The lending firm said its financial showing was hurt by a major loan-loss provision on money it lent to an energy-service provider operating in South America. That was the key factor in a $171.6-million fourth-quarter loss that took a significant slice out of its shareholders’ equity, a key metric for financial firms. The firm’s shareholders’ equity dropped to $177-million as of the end of December, down from $437-million a year earlier.

The results add to the growing pressure on financier Newton Glassman, who is Callidus’s chief executive officer as well as the managing partner of its majority shareholder, Catalyst Capital Group Inc. The two companies manage billions of dollars in assets, mostly in the debt and equity of companies that are in financial distress or are being restructured.

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Analysis: For Catalyst funds, a lot is riding on performance of publicly traded Callidus

But questions have arisen in recent months about Mr. Glassman’s ability to turn those investments into cash at desired prices and about Catalyst’s practice of extending the lives of its funds, allowing it to hold on to investor capital for longer than is typical for private equity funds. The concerns were brought to the fore in a Reuters news article last month. Catalyst disputed the article’s conclusions in a subsequent statement.

Catalyst, which is known for its aggressive legal tactics, last week went to court to try to block The Globe and Mail from publishing a story about a letter it sent to investors in Catalyst funds. The letter outlined plans to take public or sell a number of Catalyst holdings, and suggested that one of those investments, a unit of Therapure Biopharma Inc., could be worth US$400-million to US$500-million after an initial public offering. Catalyst argued that publication of that information in a media outlet could delay the planned IPO or depress the price. The court sided with The Globe.

Complicating matters for Catalyst is the fact that its private funds – which have raised billions from investors, including retirement funds at McGill University and the University of Toronto – own significant amounts of Callidus stock and debt. This means that problems at Callidus harm the performance of the larger part of Mr. Glassman’s operation.

Shares in Callidus fell $2.01 to $4.43 on the Toronto Stock Exchange. They traded as low as $3.74 during the day, their lowest since it went public at $14 in 2014. Its operations have come under increasing scrutiny amid questions about the strength of the loans and investments that are concentrated on a small number of companies.

In the past year, the stock has lost more than 75 per cent of its value as hopes to sell the company at an advertised price of $18 to $22 a share have dimmed. That value was derived by National Bank Financial in 2016, and Callidus launched its sale process that fall. In February, 2017, Callidus said numerous parties were considering proposals in that range. It has hired Goldman Sachs to run the talks with bidders.

Mr. Glassman said Tuesday there was little to report on the proposed privatization, other than to say that “according to the company’s agent, numerous parties remain in the process.” He suggested would-be buyers were not willing to pay up with the stock price under severe pressure.

“I will say that anybody who’s looking to buy this business would obviously want to buy it cheaper rather than more expensive,” Mr. Glassman said during a conference call. “That creates the typical, normal friction between a buyer and a seller. The seller wants to sell it as high as possible and the buyer wants to buy it as cheap as possible to maximize their return.

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“The noise in the market, in my opinion, likely created in part by short selling, et cetera, has succeeded in reducing the stock price to a level that we don’t believe reflects the real value of the assets. But if I were a buyer … I’d still try to buy it as cheap as possible. My suspicion is that they will continue to do so,” he said.

Last year, Callidus said it could be absorbed by a private debt fund as an alternative to a sale, but there was no update on that front on Tuesday. In addition, Mr. Glassman declined to discuss any prospect of Catalyst taking it over. (Catalyst or funds that it manages owned about 71 per cent of Callidus’s stock as of Dec. 31, 2017, up from 66.7 per cent a year earlier.)

“This is a conference call for Callidus, not for Catalyst, and as you probably know, that’s not a question that can be found anywhere in the [management’s discussion and analysis] or the [annual information form] or in the public domain,” he said in response to an analyst’s query. “And it’s just not appropriate to comment on that at this point in time.”

In the fourth quarter, Callidus lost a net $171.6-million, or $3.37 a share, compared with a year-earlier loss of $58.5-million, or $1.16 a share. Revenue in the period rose 33 per cent to about $53-million. For the full year, it lost $218.5-million, compared with a $1.2-million profit in 2016.

The company said it recorded provisions for loan losses and impairments of $217.4-million for the full year, with the vast majority coming in the fourth quarter. That included $131.9-million for an energy-sector loan.

It did not name the borrower responsible for the bulk of the provision. Callidus said the company operates in a South American country where the military has apparently assumed control of the state-owned oil company that is its main customer. In addition, the Canadian and U.S. governments have prohibited some business activities in the country.

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One of its borrowers, Oklahoma-based Horizontal Well Drillers, has had oil field service contracts in Venezuela, which has been in the midst of a brutal economic and social crisis under President Nicolas Maduro.

The results showed that Callidus’s book value per share fell about 50 per cent from the third quarter of 2017 to $3.44. It was the sixth straight quarterly decline.

Meanwhile, Mr. Glassman noted that Callidus removed three companies from its loan portfolio and consolidated them in its own results during 2017 after taking them over. “While the acquired companies are at various stages in said turnarounds, we are pleased in particular with the progress to date achieved at C&C Resources, a forestry products company, and at Bluberi Gaming Technologies, a gaming company,” Mr. Glassman said in a statement.

Callidus’s performance is critical to investors in Mr. Glassman’s Catalyst funds, which are held by various institutional and individual investors. Documents obtained by The Globe show that Catalyst Fund III had invested US$404.6-million in shares and debt of Callidus or related entities, as of the end of 2016. Another Catalyst fund, known as Fund IV & IV-PP, had invested US$530.1-million. It is not known how much those figures changed in 2017, although the market value of the shares has declined significantly.

Callidus’s financials show that the company recognized a $23.9-million contribution from Catalyst in 2017 under a guarantee agreement between the two entities, and an additional $31-million advance from Catalyst in February and March of this year.

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