Callidus shares plunge on earnings

CLOSE DOWN 31%

TORONTO •Sharesof Callidus Capital Corp. dropped as much as 42 per cent to a record low Tuesday morning after the lender reported a net loss of $218.5 million for 2017.

The results compared to income of $1.2 million in the prior year and were due primarily to higher provision for loan losses and impairments, as well as lower interest revenue due to the effect of consolidation of acquired businesses.

In the fourth quarter, Callidus, which lends money to companies that may not qualify for traditional loans, recorded a provision for loan loss of $131.9 million on one specific loan in the energy sector.

On a conference call Tuesday morning, executives said confidentiality provisions prohibit them from naming the borrower, but that the borrower has significant commercial interests in a South American country where sanctions imposed by the United States and Canadian governments are prohibiting certain types of business activities.

In addition, the South American country has defaulted on sovereign bonds, leading to a ratings downgrade, and the nation’s military appears to have assumed management control of the borrower’s main customer, a state-owned oil and gas company.

Analysts suggested the country in question is Venezuela, and that the borrower is Oklahoma-based Horizontal Well Drillers.

Callidus declined to name the party, but said if the borrower’s project is able to proceed and it secures “followon business,” the loan could be repaid and the non-cash provision reversed. However, if the project does not go ahead, the loans “would be impaired by a further $64 million,” as assessed at Dec., 31, 2017, Callidus said in its annual results.

On the conference call with analysts, chief executive Newton Glassman said Callidus is continuing to pursue a privatization transaction, which has been in the works for more than a year.

He said “normal friction” between prospective buyers and the firm, as a seller, is being affected by “noise” in the market.

“The noise in the market in my opinion, likely created in part by short selling, etc., has succeeded in reducing the stock price to a level that we don’t believe reflects the real value of the assets,” Glassman said. “If I were a buyer, and sometimes I am a buyer of other companies, I would still try and buy it as cheap as possible. My suspicion is they will continue to do so.”

He said if and when a transaction is tabled that the board “feels is appropriate,” it will be presented to shareholders.

Callidus shares have been trading below the $18 to $22 range pegged by National Bank Financial in a 2016 valuation, which the company had cited in the past in connection to the privatization bid.

The shares lost further ground in late March following a lengthy report by the Reuters news agency that raised questions about the valuations Catalyst Capital Group Inc., the majority shareholder in Callidus, assigned to some of its portfolio companies.

Catalyst, a private equity firm, responded to the article and refuted assertions about its investments and track record in a statement and in full-page ads taken out in newspapers including the National Post.

Callidus shares closed Tuesday at $4.42 in Toronto, down $2.01 or 31 per cent.

Scott Chan, an analyst at Cannacord Genuity, said Callidus’ results were disappointing, and maintained his hold rating while lowering his price target to $4.50 per share from $10.

“We believe continued noise (i.e. media articles) and litigation is impeding the privatization process and the ability of the firm to originate new loans (despite its strong pipeline),” Chan said in a note to clients late Tuesday afternoon.