Catalyst May Take Callidus Private as Short Sellers Sink Shares

Catalyst Capital Group Inc., Canada’s second-largest private equity firm, said it would consider taking distressed lender Callidus Capital Corp. private again if short sellers keep driving down the stock.

Newton Glassman, chief executive officer of both companies, said that he has several options to reverse the almost-30 percent decline in the distressed lender’s stock since November. The first step is a bid for shares announced Monday. A more substantial buyback could follow, he said in an interview. Catalyst is Callidus’s controlling shareholder.

“We are hopeful that the market will eventually understand our business,” Glassman said. “In a year and a half or so, if that doesn’t happen, we will look at all the options available to us to protect all Callidus shareholders.”

Callidus provides loans to companies that can’t tap traditional lenders because of low credit ratings, including those in distress. Glassman said it has a low default rate because of its “special sauce,” or the proprietary systems it has developed to closely monitor the performance of the companies it lends to.

Callidus, based in Toronto, said it has advanced 93 loans since 2006 representing total credit facilities of C$1.8 billion ($1.5 billion), of which 58 have been fully repaid or realized. Only three of those loans resulted in a loss, amounting to a combined C$4 million, Callidus has said in a statement. As of March 27, 35 loans were outstanding.

Short Interest

All eight analysts who cover the company have a buy rating on the stock, which is estimated to rise almost 50 percent on average to $23.82 over the next 12 months, according to targets compiled by Bloomberg. Catalyst has about a 55 percent stake in Callidus, according to the data.

Callidus advanced 4.8 percent to C$16 in Toronto Monday. Its initial public offering was in April 2014.

Short interest on Callidus has been rising since late November and reached its highest level on April 24. About 8 percent of the company’s outstanding shares are held by those betting the stock will fall, according to data compiled by Bloomberg. Short-sellers profit from price declines by selling borrowed securities and repurchasing them at cheaper levels.

A report by Toronto-based hedge fund West Face Capital Inc. questioned the quality of Callidus’s loans and detailed why the stock should be shorted. The document surfaced last month as evidence in civil litigation between West Face and Catalyst.

Veritas Report

Veritas Investment Research Corp. published a report on April 16 that cast doubt on the company’s ability to continue to grow at its current rate while maintaining the loan quality and yields. Veritas also questioned whether Toronto-based Catalyst would backstop any loans if necessary, according to a copy obtained by Bloomberg.

Callidus managed C$883 million in loan assets as of Dec. 31, up from $400 million a year ago, according filings.

Glassman said he tried to address concerns raised by Veritas and West Face in public documents, including Callidus’s annual report and press releases. He called the attacks unfounded.

“We have faith in the public market,” Glassman said. “We believe that over time the information will be digested properly, people will understand it, and the short attack will be beaten back.”

He said the situation highlights different standards that are applied to short-sellers and to issuers.

“The harm caused by the short attack to sellers that sold the stock under pressure is quite significant, and they should be held responsible for it,” he said.

Representative from Veritas and West Face, both based in Toronto, declined to comment.

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