Callidus Capital (CBL.TO) – Why is the borrow expensive?

(*Disclosure: I have no position in Callidus Capital.)

Callidus is currently suing West Face Capital (a hedge fund) and Veritas Investment Research (an independent research firm) for defamation… and I want no part in being sued.  So I will try to be neutral as I talk about my speculation as to why the borrow is expensive.  The first thing that comes to mind is the defamation lawsuit against Veritas, a firm that does not do activist shorting.  Some short sellers really pay attention when companies sue their critics- more so when the criticism was private rather than public.  I’m not saying that short sellers are necessarily right or wrong to bet against such companies- the counterexample would be Fairfax Financial (Fairfax’s stock has done quite well since launching its lawsuits).  But it is certainly something that (in my opinion) attracts short sellers.

What is the short thesis?  Why are short sellers willing to pay so much for the borrow (15%-25%+)?

West Face has put up a website to make some of the court documents available to the public.  The whole situation is a hot mess because there is bad blood between West Face and Catalyst Capital Group, the entity that IPOed its subsidiary Callidus Capital.  If you search for “Callidus Capital” from a Canadian IP address, you may see Google ads for West Face’s CatalystLitigation.com domain.

The defamation lawsuit has essentially led to West Face and Veritas making key aspects of their research public.  The statement of claim and statements of defence have great summaries of the events that have transpired from the different sides’ perspective.  For context, Callidus provides “fast, flexible and creative funding” to companies, including those that are experiencing financial distress (website).

I would start reading in this order:

  1. Pages 8 to 10 of Catalyst’s statement of claim lists statements that Catalyst considers to be false and defamatory.  Note: Because defamation lawsuits in Canada have a reverse onus, it is mostly up to the defendants to provide evidence and not the plaintiff(s).  So unfortunately, we don’t get to see evidence supporting Catalyst/Callidus’ side of the story.
  2. The allegedly defamatory claims 28a to 28e are relevant to investors:

    (a) Eight of the loans Callidus originated since 2012 are in restructuring;
    (b) Callidus’ loan book contained approximately $235 million in loan commitments that have undisclosed strong indicators of material impairment;
    (c) Callidus’ customers typically have negative cash flow, are in bankruptcy or are severely distressed;
    (d) Callidus’ public disclosure misstates the value of its loan impairment provisions;
    (e) Callidus has misrepresented the quality of its loan book to investors;

  3. Veritas’ statement of defence argues that its statements were factually accurate and provides supporting evidence/arguments.  In particular, I would pay attention to the claims about investments in bankrupt borrowers.
  4. A Business News Network article states: ‘A presentation entitled “Short Callidus Capital – Not Your Average Lender” came to light as part of a civil dispute […] It was entered into evidence earlier this month’.  A Scribd user named Business News Network has uploaded a document that seems to be the presentation.  I have not verified whether or not this document is authentic (e.g. by going to the courthouse).  However, its authenticity is not that relevant to the investment thesis.
  5. West Face’s statement of defence is worth reading mainly for their summary of events.  The summary provides detail on the history of litigation between West Face and Catalyst/Callidus.
  6. For the other side of the story, see Callidus’ investor presentations and annual reports.  Unfortunately the latest investor presentation was dated May 2016 (archive.org).
  7. Callidus has been buying back its shares aggressively and has talked about potentially being taken private.
  8. See Callidus’ news releases.  In particular, Callidus states in Callidus Statement Regarding Allegations in The Wall Street Journal that “the treatment of the Catalyst guarantee for Callidus loans made to Xchange Technology Group was in accordance with all applicable accounting requirements” (press release).  Xchange Technology Group is one company that was mentioned in both Veritas’ and West Face’s statements of defence.

With all that being said, I would point out that:

  • Speculation about the short thesis is just that.  I don’t know who the Callidus shorts are.  I don’t know what their theses are.
  • Trying to figure out both the bull and the bear story is a reasonable due diligence step when it comes to investing.  I would encourage you to perform due diligence on your investments.
  • You should do your own homework as to whether or not Callidus is a good investment.  Callidus has certainly been saying that its critics’ allegations are false.  Callidus has been buying back shares aggressively, presumably demonstrating faith in the company and putting its money where its mouth is.
  • The mention of Fairfax Financial earlier was not meant to disparage Callidus.  I see few similarities between Fairfax and Callidus.  Because very few companies sue those who have criticized them privately, Fairfax was the only name that I could think of whose stock has done quite well.
  • If the borrow is expensive, long investors can generate significant yield by lending out their shares.  The yield generated would naturally make an investment more attractive if the reward of share lending outweighs its risks.

Anyways, I hope this post helps you figure out why short sellers are paying so much money to bet against Callidus Capital.  And who knows if the shorts will be right or wrong about Callidus Capital going forward.

As well, I have likely missed information pertinent to the current short thesis.  The defamation lawsuit revolves around statements made during 2014-2015.  The Callidus story has evolved since then.

(…there’s more…)

CallidusCapitalLitigation.com is a website that seems to be setup by Kevin Baumann (@KevinBa15422460), who is clearly not a fan of Callidus.  Notwithstanding the obvious bias, some of the court documents posted on the site are interesting.

In particular, Craig Boyer’s reply and defence to Callidus’ counterclaim makes for interesting reading… especially items 11-13 and 20-22.  While I don’t know the current status of the lawsuit and assume that none of the claims have been proven in court, short sellers could potentially be basing their investment partially on these court proceedings (even if the short sellers are uncertain as to the truth; they may very well be betting on the wrong horse).  It’s also interesting that not so long ago, Callidus wished Mr. Boyer “well in his retirement” (press release | archive.org).  Later, Callidus would file its Counterclaim for $150M in damages (AIF).

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