Callidus Capital reveals 2014 financial results, indicates plans to expand to U.S.

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After the markets closed Monday, Callidus Capital presented its financial results for 2014 – almost one year after the “provider of flexible and innovative asset-based loans, primarily to distressed or troubled companies,” completed its initial public offering.

Callidus, which reported earnings of $1.03 per share and a gross yield of 20.3% on its loans (at year end, gross loans receivables stood at $831 million) also indicated plans to expand to the U.S.

The financial results came about three weeks after West Face Capital submitted a document – so called Exhibit 46 – to an Ontario court that has become the battleground between two key players in the financial markets. Originally the two were locked in a dispute – and lawsuits – over the move of one Callidus employee to West Face. Later that battle spread to submitting bids for spectrum in the recently concluded auction conducted by the federal government.

Exhibit 46, which runs to almost 60 pages, was submitted by Anthony Griffin, a West Face partner. None of the allegations in the document have been proven in court. And Callidus did not respond to requests for comment, but has alleged the document is designed to drive down stock price.

It doesn’t take long for West Face to fire a few arrows. For instance:

• “Callidus trades at a multiple of 1.9 times book value, which is at a premium to its peers.” The document alleges that “the premium valuation is unjustified when compared against more established lending groups with stronger origination channels, higher levels of portfolio diversification, longer portfolio durations and lower risk of material loan impairments.”

• West Face concludes that if Callidus were to trade at comparable multiples to US Business Development companies then it would trade at book value – which is 33% lower.

• In his report Griffin examined Callidus’s loan portfolio which he said “gives rise to specific areas of concern.” Griffin referred to “high portfolio concentration, limited disclosure on its borowers, a portfolio where improving credits are motivated to refinance and deteriorating credits linger, [and] an unpredictable earnings stream.”

• ·After what it termed was “extensive research,” West Face compiled a list 40 Callidus loans, 14 of which are currently outstanding. (The 14 represent 40% of the loans outstanding.) The report claimed that 15 loans “involved either a bankruptcy proceeding or restructuring process.”

• According to its analysis, West Face’s valuation is comparable to a “well-run, long tenured flow business, but is more of a specialized, niche transactional lender.”

• West Face’s view is not shared by the nine analysts who follow Callidus. According to Bloomberg, of the the nine, eight have either a buy or sector outperform with just one having a sector perform. Of the nine, (and not all have published) targets range from $25 to $34. Over the past six months the stock has traded in the range $15.07 – $22.74. The shares closed Tuesday at $15.86, down $1.14.

Although, we were unable to secure a comment from Callidus, it seems that it is aware of the report, even before it became public. In a filing (dated Feb. 18) James Riley, the company’s chief operating officer, offered his comments. Riley said that West Face “began a whisper campaign,” in November 2014, “in which it suggested to other market participants that Callidus’ loan book was not as strong as disclosed in its publicly filed information.”

One month later Callidus learned that West Face “had prepared a research report on Callidus that was circulated to market participants.” In turn Callidus sought confirmation and tried to obtain a copy. In January, there were lots of letters back and forth, seeking both a confirmation and a copy. By the end of January West Face said, “that it was not appropriate for the parties to engage in further correspondence since the matter was now before the Court.”

In the affidavit, Riley noted that Catalyst “has found independent evidence that a West Face report exists and was shown to third parties in an effort to drive down Callidus’ stock price.”