The Callidus cure for short sellers

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Let's start this story where it ends: After a prolonged battle with short sellers that cut its share price to $7, watch for lender-of-last-resort Callidus Capital to go private in the next year in deal done at more than $20 a share.

How we get there from here will offer a case study on the strategy of a fiercely determined management team for dealing with a well-coordinated attack.

Callidus lends money to companies that have been turned down by the banks and other traditional sources of debt. The risks that come with making these loans are obvious – there is typically a good reason the banks said no – and Callidus relies on a long list of skills to ensure it gets paid back.

Those strengths start with a deep, experienced team of lenders, led by founder Newton Glassman, who comes from the Gordie Howe school of investing: Elbows out, play to win.

Callidus went public in 2014 at $14 a share. It was spun out of Catalyst Capital, one of Canada's largest private equity funds, and Catalyst remains the majority shareholder. Catalyst specializes in distressed-debt investing.

Think of a high-stakes financial restructuring in recent years, and Catalyst was likely in the thick of it, making money. Mr. Glassman is CEO of both Callidus and Catalyst, and funds that back Catalyst are also significant shareholders in Callidus.

Last year, Callidus drew the attention of short sellers – investors who make money by betting that a stock price will fall. The shorts sifted through the Callidus portfolio and concluded a significant number of the company's loans went to corporate deadbeats, and would never be repaid in full. (Recent filings from Callidus show loan losses are modest: The company has made 101 loans totalling $2.2-billion since 2006, and of that total, 12 loans needed to be restructured and losses totalled just $17 million.)

When the short sellers made their view public, the campaign was initially successful, as Callidus shares dropped from highs of $23 following the IPO to below $8 in December.

That's when Mr. Glassman showed what he's about.

As someone who is convinced Callidus has a bright future, Mr. Glassman could have taken advantage of the decline in Callidus shares by simply taking the company private at a price in that $8 range. In an interview, Mr. Glassman said that "easy solution wouldn't have been the right solution for Callidus minority investors, and ultimately, that wouldn't have been the right long-term solution for Catalyst."

Instead, Callidus took on the shorts with a tic-tac-toe series of initiatives meant to boost the share price and demonstrate the company's value.

Callidus brought in an independent set of eyes, in the form of National Bank Financial, to review the business. National Bank pegged Callidus's value is $18 to $22 a share.

Then Callidus began using its cash to buy back its own shares, with bids at $14 and $16.50 a share, and jacked-up the dividend to $1 annually from 70 cents. The stock responded by jumping into the $15 range.

Mr. Glassman said the next step, planned for this summer, is to increase disclosure on how Callidus makes money on its loans through features such as fees and warrants on equity in companies that it lends to.

Finally, Callidus said in a recent investor presentation that it is in preliminary takeover talks with at least four potential investors who are considering bidding for the shares in public hands, and partnering with Catalyst to build Callidus. But Mr. Glassman maintains that if a bid comes, it will reflect "fundamental values" in the $18-to-$22 range set down by National Bank. The bids to take Callidus private would fall away if the stock starts trading at a premium valuation, and Callidus would remain public.

As the campaign against the short sellers enters its final phase, Mr. Glassman said the Callidus team looks forward to making new loans – they have a $1-billion pipeline of deals – rather than spending capital on share buybacks.

"The need to divert resources from growth to a capital markets campaign has cost millions as well as having deferred growth for the benefit of longer-term shareholders," Mr. Glassman said.

A former lawyer who is no stranger to tough corporate battles, Mr. Glassman said what he's been through at Callidus suggests regulators need to take a long look at how short-selling campaigns unfold in Canada.

"Short campaigns based on fear with no factual basis cause enormous harm," said Mr. Glassman. "Short selling needs as tight, if not tighter, regulation than 'long' trading, and that is clearly lacking in today's markets where short sellers have been getting away with saying some of the most outrageous and outright factually incorrect things."