Jerome Hass Callidus Capital Corp CBL-T COMMENT Feb 22, 2017

Makes very high risk loans to companies that don’t have other alternatives. Post its IPO, it has performed very poorly. They said they were investigating strategic alternatives. Feels the ultimate goal was to be selling the company with valuation in the $18-$22 range. There is a chance they could be successful. The business is very difficult and very hard to scale. They make loans to businesses that are in very far-flung industries, a reason banks don’t lend to them. Not a name he would own.

(A Top Pick April 26/16. Up 8%.) An asset based lender to distressed companies. They deal with companies that banks won’t touch. A controversial name and is down about 20% in the last 2 days. It is in the midst of a privatization process and had 19 expressions of interest. They’ve reduced this down to 6 or less. The guidance range as from $18-$22. Given that the stock is trading at about $14 with a 7.5%-8% yield, the privatization announcement is scheduled to take place prior to the end of June. With less than 2 months’ horizon it is a pretty good risk/return in his view. He thinks he is going to have a very happy outcome 2 months from now.

A high-risk lender. It is down a lot and offers a dividend yield, and they’ve been buying back tons and tons of stock. If there is any downturn in the economy, some of the protection that was offered on their loans from their parent company, has now expired. He would stay away.

It is specialty financing so they get caught up in the whole HCG-T space. CBL-T is in a corporate mess. You have to wait for the dust to settle. When there is something this acute, the chart and technical analysis are not useful.

(Top Pick Jun 10’16, Up 3.42%) Last year they announced a 4 stage plan. At the end of October they announced a privatization plan, but it has been delayed. They are considering a private debt fund. Hold it if you understand the math.

Things look pretty interesting right now. Payout ratio looks very low in the 10%-20% range. They provide financing to distressed companies. The core business is high risk, but all loans are backed by the assets of the Company they are providing financing to. They’ve had an independent valuation from National Bank (NA-T) and their price is $16-$18, and are in the process of trying to sell it right now. The sales process has been delayed so they are opening up to more potential buyers. To him, the distribution looks quite safe.

When buying this kind of investment, you are betting on the individual or management team running it. Whether it is a rough quarter or a good quarter, it shouldn’t change your outlook or long-term view on the business. These kinds of structures are generally focused, and the people running them do a great deal of due diligence before investing. He wouldn’t let a bad quarter derail you from holding it long-term.

He is still very confident in this. In Oct /16 they announced a privatization plan, and hired Goldman Sachs to lead the process. Had set a guidance on privatization by the end of June/17. Shortly before that, they announced privatization had been delayed, so the share price sold off. Management still expects something to occur in the fall, and still remains positive. A very good business. The underlying capacity has actually grown over the last 1-1.5 years, so when they do re-start their lending, the capacity of the company will be something that will be taken into account by potential buyers. When they announced the delay, they also announced they were exploring opportunities with private debt funds, which is something that hadn’t been taken into account. 12% dividend yield is a red flag to investors, but the leverage of the company is 25%-30%, and management feels it should be closer to 70%. They will absolutely use their balance sheet to fund the dividend, and there is no way they will cut the dividend.

Makes riskier type loans to a wide range of companies. If they don’t work out, then they take the equity in and try to fix the problem. Put themselves up for sale and were going to privatize. An independent valuation was in the $18-$20 range. There was a lawsuit. The person suing was saying bad things about the company. The stock dropped from $17-$18 down to below $10. Meanwhile the company and insiders continued to buy back and the company was saying they were still on board with the privatization process. This has a bit of a mixed view, but they continue to pay the dividend and continue to buy back stock. It has dragged on for almost a year, and investors are getting frustrated. Dividend yield of almost 12%.

He holds a very small short position in this. Anything above 5-6% for a dividend yield suggests the dividend could be at risk, he suggests. Insiders have been buying the stock aggressively, suggesting they may be trying to take it private. It is difficult to know the value of the company due to the leverage. Yield 19.6%.