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Edited Transcript of CBL.TO earnings conference call or presentation 31-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Callidus Capital Corp Earnings Call

Mar 31, 2017 (Thomson StreetEvents) -- Edited Transcript of Callidus Capital Corp earnings conference call or presentation Friday, March 31, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Nohdomi

Callidus Capital Corporation - CFO and VP

* David M. Reese

Callidus Capital Corporation - President and COO

* Newton Gershon Zev Glassman

Callidus Capital Corporation - Executive Chairman and CEO

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Conference Call Participants

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* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Associate

* Scott Chan

Canaccord Genuity Limited, Research Division - Financial Services Analyst

* Stephen Boland

GMP Securities L.P., Research Division - Director and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Chris, and I am your conference operator today. Welcome, everyone, to the Callidus Capital Corporation Fourth Quarter 2016 Results Conference Call. (Operator Instructions)

Listeners are reminded that portions of today's call and of today's discussions including responses to questions posed in today's call constitute forward-looking statements that are subject to risks and uncertainties related to the company's future financial or business performance and conditions. Actual results could differ materially from those anticipated in these forward-looking statements. Risk factors that may affect results are detailed in the company's filings with Canadian securities regulatory authorities, which can be accessed at www.sedar.com.

Please note that the company is under no obligation to update any forward-looking statements discussed today, except as required by applicable law, and investors are cautioned not to place undue reliance on these statements.

On the call with us today from Callidus are Newton Glassman, Executive Chairman and Chief Executive Officer; David Reese, President and Chief Operating Officer; Dan Nohdomi, Chief Financial Officer; Jim Riley, Secretary; and Paula Myson, Vice President.

At this time, I would like to turn the call over to Mr. Glassman. Please go ahead.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [2]

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Thanks, Chris. Good morning, everyone, and thank you for joining us for our fourth quarter 2016 results call.

During the call, we'll be referring to information provided in the financial statements and the MD&A and the associated news release for the quarter, all of such are available on our website and on SEDAR.

As always, we appreciate your feedback on our materials, so please feel free to communicate directly with any member of the Callidus management team mentioned earlier by the operator, Chris.

We will try to keep our comments brief to allow ample time for Q&A. Given the complexities of this quarter's numbers, the update on our corporate initiatives, namely the privatization process and the NCIB, we will give you as much time for questions as we can. David and Dan will provide you with some insight into the details of the operating and financial results for the quarter.

But to begin, I'd like to focus my comments on the highlights of our corporate initiatives in 2016 and events that have occurred subsequent to the year-end.

Privatization. In September 2016, we announced we would conduct a process to explore the privatization of the company. We did so after following an extensive 4-step process to have the value of our stock more fully reflected in the share price. As you recall, that started in 2015 with a normal course issuer bid followed by the implementation of the dividend, which has been increased twice since initiation, and then a substantial issuer bid to provide liquidity. In September 2016, we initiated the final step by engaging Goldman, Sachs & Co. to act as financial adviser and lead the privatization process. We are pleased with the progress of the process to date. To date, we have had 19 parties sign nondisclosure agreements to enter the first stage of the process. The process has now moved into its second stage with a more limited number of parties, which will not exceed 6 in number. Stage 2 will involve the proposal and review of structures and valuations. Early indications of interest support initial valuations that would translate into a price received by tendering shareholders that is consistent with the previously disclosed valuation range provided by National Bank Financial, $18 to $22 per share, that accompanied the substantial issuer bid in April of 2016. At this time, we are very -- we are optimistic that we can conclude a transaction on or about the end of the second quarter as previously disclosed. However, we are realistic that the timing and even the conclusion of the process can and could be influenced by the complexities introduced due to the diverse nature of the interested parties and the equally diverse transaction and operational structures under discussion as well as the negotiation of key agreements including a shareholders agreement. We will work diligently to keep to the schedule and will advise you in a timely manner of any material updates.

Growth. As you know, we held back growth of our loan portfolio while we reserved cash for the SIB and the NCIB. This was mathematically, at the time, the single best and lowest risk means of creating shareholder value. While we did not extend any new loans in the last year, we continue to actively cultivate opportunities in the market so as to be in a position to restart growth at the appropriate time and in an appropriate manner. When we spoke to you last quarter, we indicated that we would restart growth in the portfolio eminently. Using the past as a guideline, when we are in growth mode, approximately 60% to 80% of signed back term sheets result in advances or in growth of gross loans receivable. We expect at least 2 of these opportunities to develop into new loans in the near future. As a result of availability from existing credit and other facilities, loan repayments and the availability of funds from Catalyst Fund V under the participation agreement, total liquidity as at December 31 would be able to support approximately $300 million of new loans and as of today approximately $600 million of new loans. That brings me to the step we took in 2016 to diversify and lower the cost of our funding platform. Dan will be providing some comments on our liquidity and specifically on our new securitization facility a little later in our remarks, but I'd like to comment on the role of this facility in our future capital structure.

This facility, which is also generally known as a collateralized loan obligation or CLO was put in place to be our primary funding vehicle for growth going forward. It has the flexibility to be scaled up as we grow and because of the investment-grade rating across over 60% of the structure in the initial issue size, it's also our lowest-cost source of financing currently available by as much as 200 to 300 basis points overall when compared to our current cost of funding.

SIB, NCIB. As I mentioned earlier, our primary use of cash in the business for most of 2016 was to find a substantial issuer bid or SIB. At the end of 2016, we closed our SIB, ultimately taking up and canceling approximately 2.8 million shares. In 2016, because of the lower share price, buying back our shares proved, in fact, to be a better return for shareholders than extending new loans. We believe that from time to time the market price of Callidus common shares does not reflect the underlying fundamental value of the common shares. We believe that to be true still today and so have filed and the TSX has accepted our notice of intention to undertake a normal course issuer bid, the second NCIB in as many years. Under the terms of the new NCIB, Callidus may acquire up to approximately 2.5 million shares or about 5% of the outstanding float. Our plan is to enter into an automatic share purchase plan or ASPP, which will allow a designated broker to purchase common shares pursuant to the NCIB even during internal blackout periods and including regularly scheduled quarterly blackout periods.

Dividend. Our SIB was one method we employed to return cash to our shareholders during the year. The second was the increase in our dividend, something we did twice during 2016. We first increased it from $0.70 per share per year to $1 per share per year in May 2016 and then to $1.20 per share per year in October of 2016. These changes represent a 70% increase in just over a year since its introduction and demonstrates the level of confidence we have in the cash-generating capability of this business.

Yield enhancements and provisions. This brings me to the final element of our 2016 results upon which I would like to comment. The loan loss provisions and the non-IFRS unrecognized yield enhancements, which for simplicity I will refer to as yield enhancements, every quarter in addition to computing an allowance for loan losses on the overall portfolio, we, along with third parties, engage in a valuation exercise on our loans to assess any potential credit impairments. Our experience has shown that generally, when we have a loan that needs some form of accommodation, such as an extension or restructuring, we try to obtain a yield enhancement, such as a fee or warrant for undertaking the accommodation. David will be discussing the specifics of the 2016 provisions and yield enhancements, but I would like to comment on the rigorous process we have to arrive at these numbers.

The process for determining the yield enhancements is greatly influenced by the complexity of the accounting standards under which the company reports and judgments related to the future performance of the business and the industry of a business to whom we have advanced a loan. To be clear, Callidus takes the unusual approach of engaging in a 2-step external valuation process, both its auditors and another third party review the company's loan loss provisions. As a result, Callidus is confident in the veracity of its processes in determining these 2 estimates. Both provisions and yield enhancements are subject to very significant fluctuation and volatility, sometimes even quarter-over-quarter due to the applicable IFRS rules and thus greatly influence consolidated financial performance.

In 2016, the non-IFRS unrecognized yield enhancements, which are disclosed in the table in the MD&A, were approximately 2.5x the level of initial expectations found in the valuation attached to our SIB circular issued in April 2016. Loan loss provisions and yield enhancements, more specifically how yield enhancements must be recorded under technical accounting rules, can be extremely volatile and in both directions. Therefore, it is worth repeating that shareholders need to be cognizant of the aggregate results including the IFRS-driven reporting and the potential longer-term impact of non-IFRS yield enhancements on longer-term results. For example, under the IFRS rules, once Callidus controls or consolidates a borrower, it is required to automatically -- I'm sorry, automatically any related yield enhancement cannot be under IFRS rules recognized until such entity is disposed of. While the timing-related volatility of both the provisions and yield enhancements introduced by technical accounting requirement may have an immediate impact on financial reporting, we have not as yet had any negative impact on value. Our expectation is that these are offsetting measures at a minimum, and if managed correctly, a portion of the provisions may be reversed or recovered as collateral values, like yellow metal, recover.

I now ask David to walk us through the operating results for the year and the fourth quarter of 2016.

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David M. Reese, Callidus Capital Corporation - President and COO [3]

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Thank you, Newton. In terms of yield enhancements and provisions, I'd like to start with some of the details of the 2016 loan loss provisions and yield enhancements Newton mentioned.

We deal in a market segment where our clients often go through structural changes. So intentionally and by design, it is not uncommon for a client to need or desire changes to their original deal with Callidus. When such changes are requested or needed, Callidus may accommodate the borrower in exchange for a change in the economic relationship, a "yield enhancement." These yield enhancements can take many forms, most commonly understood would include revenue royalty streams, periodic fee arrangements, warrants and limited equity participations. At December 31, 2016, non-IFRS unrecognized yield enhancements were estimated to be $122.7 million or approximately $2.44 per share. During the year, we brought $3.1 million or $0.06 per share of that amount into income. We provide a full table in the MD&A breaking down the yield enhancements segregated as recognized and unrecognized, if you would like to review those in further detail.

Provision for loan losses of $134.3 million was recorded in the statement of income for the year. The majority of this provision related to 2 primary factors. The first contributing factor, for approximately 1/3 of the total, was a decrease in appraisal values for hard assets such as land or machinery and equipment or yellow metal of borrowers. Appraisal values are also subject to volatility quarter-over-quarter, particularly in the natural resource sector. The second contributing factor, approximately 1/5 of the total, was an overall decrease in enterprise values used to assess loan loss provisions as a result of lower updated forecast and market comparatives in specific industries including scrap metal and aluminum castings. These industries experience commodity-based and customer-based volatility quarter-over-quarter, and as a result, enterprise values for these companies are subject to volatility. Both of these primary factors introduce a level of volatility in the loan loss estimation whereby the company may experience higher-than-expected loan loss provisions, which may result in substantial reversals in future periods. In particular, the largest loan loss provision taken in the current year relates to a marine scrap metal salvaging business, Esco Marine, that was effectively dormant for a significant portion of 2016 and has recently restarted in 2017, achieving specific milestones that the company believes provides upside from the provisions that have been taken. During the year, the company recognized a recovery of $32 million under the Catalyst guarantee due to the recognition of specific loan loss provisions in the year.

Loan portfolio. At December 31, gross loans receivable before derecognition were approximately $1.3 billion, and our average loan size was $55 million. This is a significant increase from 2015 when our average loans was $31 million. The average loan size varies with industry, company and economic cycle, but in general it has increased as our loan portfolio's grown and now most of the loans we evaluate are between $25 million and $75 million in size. This increase in loan size also makes it easier and more practical to double the book in 2 to 3 years. Despite deliberately withholding growth for the majority of the year and receiving several loan repayments at the end of 2016, our loan book grew by almost $200 million in 2016. The utilization of existing facilities by our borrowers more than offset the impact of repayments during the year.

We ended 2016 with 24 loans in our portfolio, 15 less than in 2015. Of those 15 loans, 10 were fully repaid in the normal course while 5 were fully recovered under the Catalyst guarantee for total cash proceeds of $243.7 million.

In 2017, to date, we have had 6 facilities repay for a total of $377 million, which includes interest and fees. As a result, our current loan portfolio stands at 18 facilities.

Going through the 2017 repayments to date. The first occurred in January 2017, we had 3 loans fully repaid relating to facilities totaling $84 million and the outstanding amounts of repayment resulted in total proceeds of $69 million. These 3 facilities were initiated between 45 and 57 months ago.

In March 2017, 3 additional loans were fully repaid, relating to facilities of $318.4 million for total proceeds of $309 million. I should point out the difference between what the amounts repaid and the total proceeds relates to leverage against those facilities. These facilities were initiated between 17 and 26 months ago. While the time frame on these facilities would be so much shorter than most of our loans, the amounts were significant as the facilities included the largest loan facility in Callidus' loan portfolio of $275 million. This borrower was able to refinance through a conventional lender as a result of the advancements it made during the term of the Callidus facilities.

Now I'll ask Dan to expand on the use of proceeds for the repayments received in the fourth quarter of 2016 and early first quarter of 2017 and to discuss the financial highlights for the quarter. Dan?

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Dan Nohdomi, Callidus Capital Corporation - CFO and VP [4]

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Thanks, David. I want to start by expanding a bit on David's comments on the loan repayments, specifically the ones that occurred in March. Included in those loans was the largest in our loan portfolio and one that was financed largely by Catalyst through their loan participation agreement. As a result, the largest portion of the cash received, $206 million of $309 million, was returned to Catalyst. The remainder, plus the proceeds from the other repayments, was applied to our credit facility balances reducing the amounts outstanding while greatly increasing our liquidity to fund new loans.

We also made some modifications to our facilities since we last spoke. Our revolving credit facility, senior credit facility and bridge loan were all facing maturity dates in early '17. In light of the ongoing privatization process, we extended all 3 to terms ending at or past the anticipated conclusion of a privatization transaction. It would be our intent to review our capital structure post privatization.

CLO. We also diversified our funding structures since we last reported. In December of 2016, we finalized the securitization facility that Newton referred to earlier. As he mentioned, it is our lowest cost of capital carrying an all-in blended rate of well under 6%. With this new lower-cost capacity, we reduced the size of our revolving facility and took an option to expand that to accommodate growth. The net result was a reduction of USD 62.5 million of capacity to USD 275 million, but with the added flexibility of it being expandable to $325 million if and when needed.

Leverage and liquidity. Despite a more diversified funding platform, the impact of the repayments David outlined served to significantly reduce the leverage in the business in Q4 and the first part of 2017. At just over 40%, we consider the business to be significantly underlevered and therefore impacted both net income and ROE. However, given the size of the loan pipeline and the capacity to fund new loans through our current facilities, we anticipate the growth in our loan portfolio will reverse that trend in leverage in the first half of 2017 and therefore increase both our future ROE and net income. With our cash and availability under our various facilities, we are poised to support significant growth in our loan portfolio, as mentioned earlier in the call by Newton. As of December 31, 2016, we could support an additional $300 million of new loans. However, with subsequent repayments, that capacity doubles to approximately $600 million.

I'd like to conclude my comments by highlighting a few key metrics driving our financial performance. I won't repeat the table in the press release or MD&A, but just highlight the ones with notable changes from the last quarter or last year.

Our gross yield was up for the quarter and the year compared to the prior periods. Gross yield in Q4 was 20.1% and 19.5% on average for 2016. This compares to 19.1% in Q4 of 2015 and 18.9% for all of 2015.

Gross yield for our core product was 19.8% and for Callidus Lite was 14.7% in '16 compared to 19.3% and 14.2%, respectively, in 2015.

Our net interest margin was relatively unchanged from the last quarter at just over 11%, and on a full year basis was down slightly from 2015 from 13% to 11.7%, primarily as a result of an increase in the amount outstanding under our bridge facility.

The other key metrics need to be viewed both before the provisions and recognized yield enhancements, but adding non-IFRS unrecognized yield enhancements and as technically reported. Reported EPS for 2016 was $0.02 per share. Before provisions and recognized yield enhancements, but adding non-IFRS unrecognized yield enhancements, EPS was $3.58 per share compared to $1.74 per share in 2015.

ROE is one of our key metrics as well. However, it can be quite lumpy when viewed in the short term, so we look at it over multiple quarters, in this case, the fiscal year. Reported ROE for 2016 was 0.2% before the provisions and recognized yield enhancements, but adding non-IFRS unrecognized yield enhancements was 31% compared to 17.7% in 2015.

With that, I'll turn it back over to Newton for our final comments before we move to questions.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [5]

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Thanks, Dan and David. 2016 was an eventful year for the business. And while we are pleased with the response of our share price to our capital markets efforts including the NCIB, SIB and dividend we are disappointed with the impact that the diversion of resources and management time has had on our growth plans. We look forward to returning to growth this year. And now, operator, we would be pleased to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Stephen Boland of GMP Securities.

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Stephen Boland, GMP Securities L.P., Research Division - Director and Equity Research Analyst [2]

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Just one question. Newton, in the past, you've talked about the $18 to $22 range as conservative in your opinion because of the yield enhancements and the possibility of growth. I believe you mentioned like a $25 number in the past. Do you still feel that the $18 to $22 is conservative in light of that you've kind of had to curtail the growth and obviously some bigger provisions. Maybe I'd just get your updated view on that.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [3]

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Steve, we are still early in the process, we're in the second stage. We're pleased and optimistic with both the nature and quality of the bidders. We have no ability to give any better insight into pricing because of the complexity and diversity of the bids from the parties at this time. We're comfortable with the range from the original SIB value, and we would obviously do everything we can to maximize the value on behalf of the public shareholders. As with any auction, it will very much depend on the competitive tension in the auction process and we'll see how that plays out now that we're getting to more specificity about both price and structure. In terms of the provisions and your comments about that, it's very important, in my mind, to view the provisions at the same time as the yield enhancement. The yield enhancements, as I said in my comments, and the provisions are both very technically driven by the IFRS rules and can be very lumpy. So for example, yellow metal has recovered a substantial amount in the first quarter of this year probably as a result of, A, increased activity out west in Canada; and B, the announcement in the U.S. and in Canada by infrastructure spending, that obviously increases demand for yellow metal. The way our third parties and we value yellow metal is, for example, Ritchie Bros. or Gordon Brothers, whoever, provides a most recent auction list of the value of those assets. Under the IFRS rules, we are required to mark that yellow metal, just as an example, to that third-party valuation related to and provided as evidenced from Ritchie Bros., Gordon Brothers, et cetera. That increases volatility dramatically in both the provisions, but it also affects the IFRS and non-IFRS yield enhancement. The issue and technical issue around yield enhancement is very esoteric. The rules have no flexibility in them. The nature of timing and when a yield enhancement is recognized is explicitly and very explicitly determined under those rules. By definition, the companies where we will have the largest yield enhancements, so to give you an example, a yield enhancement could be anything from a fee for a waiver or an extension, which is very easy and would get recognized immediately, to something that's more complicated like Bluberi, which went through a restructuring and is publicly known, where we end up taking over control of the company. The first example, where we get a fee and there is no change of control or influence, is immediately recognized and is also typically a very small number relative to the book. The latter, under the rules, must be consolidated on our balance sheet if we have more than 50% or a material control over the company and cannot be recognized under the IFRS rules until actually disposed of. That creates a timing problem and it creates a volume problem because the likelihood and the value of a yield enhancement for a company where we're intimately involved in the restructuring spent a year and change going through CCAA, changed management, changed the business plan, helped them get new contracts, increased capacity of the business and projections and their own deal pipe by many, many, many fold given some of the changes, but we can't recognize any of those changes in the underlying value of the business until the business is actually sold. Our view was that as owners of the business, the shareholders are entitled to that information and therefore a few quarters ago we started creating a table that would show people both the IFRS included yield enhancement and the not included non-IFRS yield enhancement, the non-IFRS yield enhancement being the result of the application of these rules. As you can see from the year-end results, the impact is extraordinarily large, but it's also somewhat unfair because the rules treat the timing very differently. It is now up to the market and the shareholders to decide whether they want to include that number or not. To Catalyst and to management of Callidus, that number is incredibly important. As you can see, it has an enormous impact on ROE. Our view, and as you can see because of comparing it now to what was included in the National Bank valuation, is that yield enhancement is a critical component of valuing this business. We will let the market decide what it's worth. We know what it's worth to us. Others may not agree, but it's this kind of complexity and disagreement that results in, frankly, this business needs to be a private company. Does that help, Steve?

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Stephen Boland, GMP Securities L.P., Research Division - Director and Equity Research Analyst [4]

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Yes, it does.

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Operator [5]

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Your next question comes from Jaeme Gloyn of National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [6]

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First question is related to the large provision this quarter. You mentioned that about 1/3 of it came from scrap metal prices, land, machinery, things of that nature and then about another 1/5 from other sources. I was just wondering, that's about 1/2, where's the other 47% coming from?

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David M. Reese, Callidus Capital Corporation - President and COO [7]

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Jaeme, it's David. The other 47% are spread across a variety of different pools and we just thought it would make sense to pick up the 2 largest pools that make up the majority.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [8]

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So what would those pools be then? And I guess, how many loans would they relate to? Just a little bit more color because, I mean, like you said the majority and it's yes, I agree, it's slightly the majority, but there's also a bigger chunk.

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David M. Reese, Callidus Capital Corporation - President and COO [9]

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One of the other areas, again going back to IFRS and the rules, is if we have an account that we say the value stays static and there's been interest charged on that and it's in the loan balance, but the value hasn't increased, i.e., the underlying collateral hasn't changed, then under the IFRS rules, we would book the income, the interest into revenue, and then we would take it into a provision. So interest that we have written off would also be in that number.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [10]

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Well, it's actually not written off, it's part of the loan. It gets repaid with the loan. I would add the following: the 1/3 provision, roughly 1/3 that's related to scrap and natural resources, is very important. So for example, the reason we articulate Esco is that there's a very big difference in the value of a business that's been dormant most of the year versus the value of a business that, as a result of receiving regulatory licenses, et cetera, is now operating. That becomes critical -- and that happens to be in the scrap business, the marine scrap business. That would likely increase volatility going forward because we would have to recognize some value in the future. Whether that value is recognized as a reversal of the provision or an increase of the yield enhancement would very much depend on the nature of the transaction and/or the relationship. So it's public in Esco's case that we vended in our interest to a joint venture, run by another entity, one of the largest marine salvage operators in the world, plus Hilco. It's not currently determined because we haven't gotten there yet what the impact will be once the business is recognized and valued going forward now that it's up and running again including the -- all of its collateral such as a marine location, the Saratoga, et cetera. But at some point in the near future, we're going to have to deal with that, probably at the end of Q1 or the end of Q2 depending on the timing of certain issues. So we know that the licenses, et cetera, were received in Q1, but technically the operations may not be technically actually on-site until Q2. So my suspicion is in Q2 there will be a discussion with our auditors and third-party evaluators, et cetera, as to the difference in change of nature of our collateral because it's gone from having just dormant assets to an operating business that generates cash. Obviously, there's a good probability that an asset that's generating cash will be worth more than a dormant business. Similarly, with respect to the enterprise value, which represents another approximately 20% of the provision, enterprise values are calculated based on a comparative basis. So if a business is in the widget business, generally one of the most major approaches is you look at comparables, both public and private transactions in that industry, and whatever those multiples or valuations or DCF, et cetera, generate, you use the same approach and the same multiples or the same roughly metrics adjusted for the capital structure. That enterprise value can be very, very volatile if certain industries are changing and they can swing down in a quarter, and as you know, because you're an equity analyst, if multiples in that industry start expanding thereafter, they can swing pretty dramatically in the opposite direction. That's one of the reasons we think it's very important to look at the provisions at the same time as one looks at yield enhancement. Because what can often happen is a business can be impaired, it needs help, we are in the business of helping those businesses, we provided help, it restructures, it comes out and either the performance has improved or the metrics and multiples have improved or both. Bluberi is a fundamentally key example of that. The business is a substantially different business than it was when it went into bankruptcy. That's a result of a lot of hard work by people at Callidus and at the company. But it's created, as you can see, hundreds of millions dollars of value. We don't expect that kind of impact on every loan, but we expect to do our best, and as a result, create value when we do get involved. That becomes a critical issue when you tie it, as I said earlier, to the actual rules in IFRS as to when and how one recognizes a yield enhancement. The critical turning point is whether we have effective control of the business. The minute we have effective control of the business, we cannot recognize that yield enhancement until the very, very end of the process, which is likely going to result in the disposition of that asset. But we have to recognize the provision instantly. That creates a timing mismatch. That timing mismatch is something that people should be aware of. They should see what the impact could be. And they should see that it impacts the value and they can decide for themselves what the ultimate view of value will be as a result of that. We have a view. Our view has typically proven to be correct. We received a lot of heat and a lot of bad press and discussion about Bluberi when it originally entered as we -- CCAA as we did with Esco when it filed in, I believe, in Texas, in Brownsville, Texas. Move fast-forward and all of a sudden, Bluberi, which is at the end of the process, demonstrates the ability to create an enormous amount of value. We expect that to occur in any company where we've taken control. The whole point of taking control is to ensure that we do create value or at least try our damnedest to do so.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [11]

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Okay. So I have a couple more questions before I dive into Bluberi. First, you're not willing to put a number on the number of loans that drove the other half, let's say, of the provisions in this quarter. Or can you?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [12]

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I think whatever information you need will be found in the MD&A.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [13]

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Okay. And then just to refresh my memory on the Esco, what's the total exposure to Esco? What is the exposure net of the provision today? And how -- what is the value of the yield enhancements tied to Esco?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [14]

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We have not disclosed that segmented information at the moment.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [15]

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Okay. So maybe, okay, diving into Bluberi then. I guess, it's around similar questions. What's the exposure to Bluberi today? How much of the yield enhancement increase in Q4 would be related to Bluberi, if any? And have you taken any provisions against Bluberi at this time?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [16]

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Again, we haven't provided that segmented information, but I will tell you that in the MD&A table, you will find some very substantial numbers related to provisions as well as yield enhancement. Some of the yield enhancement, and a big part of it frankly, is a result of Bluberi. One has to remember that Bluberi in December of the fourth quarter, this is all public, was still in bankruptcy and was subject to exiting CCAA in Quebec to a condition related to certain licensing with certain gaming jurisdictions in the U.S. It is also public knowledge that those gaming licenses were received in the first quarter. It's therefore very likely and reasonable to assume that the receipt, while it is a fact that the receipt of those licenses resulted in Bluberi exiting CCAA, it's obvious to anybody that understands the business that a business leaving CCAA and having a fresh balance sheet and having the ability to compete with one of the best products in its market is likely to have a very quick increase in value. Under the IFRS rules, because we now control Bluberi, none of that increase in value would be recognized in the GAAP IFRS measures because, under the IFRS rules, since we now control it, we are not allowed to recognize it until we actually dispose of Bluberi, which ultimately we will do within the next year or 2. We're very happy with Bluberi, we're very happy with its progress to date, we think the management team at Bluberi and the team at Callidus did an extraordinary job of fixing a broken business and we're incredibly pleased to be involved with Bluberi and own it. And when I say incredibly, I mean, incredibly.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [17]

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I understand like when you exit bankruptcy and everything looks like it's positive going forward and you probably have some -- and given the licenses that's -- versus bankruptcy today versus bankruptcies up, what about today versus when prior to entering bankruptcy where would you be able to peg a magnitude or a difference in the value on that front?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [18]

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Again, we haven't segmented that information. But suffice it to say, suffice it to say that our return on Bluberi more than covers the original loan and represents an extraordinary rate of return, but it also represents enormous amounts of effort and energy by the management team at the company to fix what was a broken business by the prior management team and by the people both frankly at Callidus and at Catalyst. It is a great business.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [19]

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Okay, so just -- I just want to make sure I'm clear. The yield enhancements and PCLs in Q4 include Bluberi, we shouldn't -- or should we expect something in Q1 related to Bluberi?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [20]

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Well, technically...

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [21]

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I guess what's in Q4 and what's in Q1? Are there provisions and yield enhancements related to Bluberi in Q4? And are we expecting...

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [22]

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The numbers are as we reported them.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [23]

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I'll follow up after the call. Another question's related to the -- to an impairment. It looks like on Wabash and Altair in the quarter looks like there's an impairment, a sizable impairment. I was just wondering if you could give a little bit of color around what's going on with those businesses acquired and the charge taken in Q4.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [24]

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Sure. Sure. So if you remember earlier, we said that about 1/3 of the provisions are related to scrap and about 1/3 are related to enterprise value issues -- or I mean, I'm sorry, about 20%. Both Wabash and Altair would fall into the bucket of enterprise value and in one case it may have some contributing impact on the scrap side because one of the businesses is in a natural resource-related business, and some of its collateral relates to scrap and/or equipment. They're both examples of where we would expect extraordinary -- potentially extraordinary volatility going forward. So for example, Wabash is in the automotive parts business. It is -- I don't know if it's public, which with our clients are, so I'm not going to say. But if President Trump is successful in the made-in-America push, it is conceivable, in fact, probably likely that U.S.-based operations in that industry that have spare capacity would actually be valued at a premium going forward as either production from Mexico, in particular, but also possibly from Canada gets shifted to those businesses. Wabash is uniquely positioned to capitalize on that. Altair, and there are reasons for it that relate to the business structure, et cetera, Altair is a little bit different. It is in the natural resource business. It is in a section of the business that has suffered quite badly. The provisioning rules would require us to market -- to basically market that required a markdown on an enterprise value. We are in the process of evaluating, now that there has been a change in management, evaluating better alternative uses for those resources and for that business. And I would expect Callidus to have a plan, if I were you, of dealing with those assets, but probably not anything that can be done in the next week or 2 or even in the next quarter or 2. But since we have a decent track record of unlocking value of those businesses in which we become involved, let alone control, this is how we make money. When we end up with assets that are out of favor or countercyclical, the ability to help restructure a business, like Bluberi, and position it properly going forward is the way we can create extra value. Unfortunately, the prior management team did a very poor job with that business. That created a lot of work. It will take us some time and it will take the industry some time. We will do our best to position it to maximize the value. We're quite hopeful that we'll be successful in doing so.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [25]

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Okay. And so just to understand the accounting...

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [26]

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Sorry, one second. And that goes back to mismatch of timing. The IFRS rules would require us to take that provision immediately today. We won't be recognizing anything on the yield enhancement side in a situation like Altair until there is visibility and external third-party proof that there is an increase in value. So you take the provision today, you have to wait a while for the yield enhancement. That's the nature of the business and that's what the market is not fully understanding in our opinion, and Bluberi is a great example. We took it on the chin, we got criticized, there were lots of public comments, we put our heads down, we said we don't think you're right, we worked on Bluberi. It exited bankruptcy and it's now, frankly, quite a successful business.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [27]

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Right, so just want to clarify the accounting then. So because these are assets that have been assets or loans that have been acquired, these are otherwise provisions that would have been in PCLs, but because they're assets or loans acquired, they result as an impairment, is that correct?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [28]

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That's correct. And because it got consolidated, there's nothing you can recognize even when the businesses turn around until much, much later, often years later. Because once consolidated and under control, you can only recognize the increase in value subject to the yield enhancement upon an actual event as opposed to noncontrolled, nonconsolidated businesses, you recognize it immediately. So you get things like Bluberi where it's incredibly lumpy and you can have these massive numbers that all at one time are, at some point in the future, potentially going to hit the P&L and the balance sheet.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [29]

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Right. So just a last one on the provisions. You had guided to "cleaning the book" prior to a sale and this is obviously part of cleaning the book. We're basically through Q1 here. How would you characterize the book? Is it clean as of Q4 numbers?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [30]

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First of all, I take major offense with the phrase cleaning the book. There is absolutely no cleaning going on, there's no manipulation of the book, there's nothing like that going on. What I said we were doing was that we had stopped growth, used the proceeds to maximize the value for shareholders by, first, the NCIB, the dividend and then the SIB, that's clearly been the right mathematical decision. There's absolutely no way mathematically anybody can argue or say that's not true. In the course of not growing the book, we turned our attention to changing processes and approaches. So if you look at Q4 2015's disclosure, you'll see that as a result of Gray Aqua, we decided that we were going to improve internal processes. We listed 6 things. There are other things we did internally. If we weren't going to grow the book, we were going to set the business up, so that when we are going to restart growth, which is now, the business would be able to operate even more efficiently than it could before. The result of that is that our average loan size has gone up to $55 million. The number of loans in the book is 18. By definition, since we've been at as high as over 30, I think the highest number, David, was 30...

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David M. Reese, Callidus Capital Corporation - President and COO [31]

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Right around 30.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [32]

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Right around 30, the result of that is that by definition, we have spare capacity in the business now because our business is all about the number of loans. It's a bespoke business. We have the capacity now in the business at least for 12 because we've proven in the past we can manage 30, but, in fact, we have much more capacity than that and we have said publicly that we have the capacity in the business now for up to 60 loans. That's why we're giving you the data about the liquidity, which is, as of March 31, $600 million of liquidity for loans, but we also have the spare capacity internally. That's not "cleaning up a book." That's the result of normal loans being repaid in the normal course, other loans either being extended or restructured in the normal course, but under no circumstances have we ever used the phrase or would we ever use the phrase, because it's just not accurate, of cleaning up the book. We have focused our attention and used our resources that would otherwise have been used for growth to further improve the business going forward. But there's nothing about cleaning up a book. We liked our book, we like the book now, we're ecstatic that our largest loan was able to be mature enough to go and get conventional lending, that is absolutely the right thing that most of our borrowers we hope happens to. We help them do it, we position them for it, we stand by them and the same with, how many loans, 11 loans were [ repaid ] in the normal course?

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David M. Reese, Callidus Capital Corporation - President and COO [33]

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15 last year and 6 so far year to date.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [34]

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Right. That's not cleaning up the book, that's a company that is supposed to have a average term of 2, 2.5 years doing exactly what it's supposed to do. The loans, 11 last year and you said 6 this year already ?

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David M. Reese, Callidus Capital Corporation - President and COO [35]

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15 last year and 6 this year to date.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [36]

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15 last year and 6 this year being repaid.

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David M. Reese, Callidus Capital Corporation - President and COO [37]

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And actually, sorry, I have to apologize, Newton, I misspoke. The maximum number of loans we had was 39, so just a snick under 40 so...

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [38]

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Appreciate that answer. Just last one and then I'll let somebody else chime in here. The NCIB we should expect to see that restart as early as, I guess, maybe Monday. Do you expect it to be active? This is a bit of a decision based from management. Do you expect it to be active at these levels?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [39]

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So let's talk about the NCIB. We announced our intention for an NCIB at the end of the quarter under some very technical TSX and OSC rules because it was year-end, we were unaware that there would be a blackout period until this release. We had hoped to execute the NCIB at the termination of the SIB, which was in the fourth quarter. We're ecstatic that as a result of filing these financials, we're now capable under the rules to, because the blackout periods are lifted as a result of filing, to go forward with the NCIB. The rules require, I think it's a 2-day trading period to have the market absorb it. We said that the ASPP is or will be in place by the end of that 2-day period. My understanding is that the 2-day period does not include today. So it would mean today and Monday, which means that the NCIB would be in place by Tuesday and we expect to fully exercise the NCIB. And technically, it won't be us, it'll be automatically done by the broker-dealers within the rules. And there are some rules about the daily volume, et cetera, so you can't just go out and buy all the shares in one fell swoop. You have to do it under the ASPP with the rules and in accordance with the rules. I think the rules for the NCIB are from the TSX, not from the OSC. And there are specific rules about the percentage of volume per day, I think it's actually per day and per week. So you have to stay within both those rules. We hope that we pick up the full amount, otherwise, we wouldn't announce it.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Associate [40]

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Right. And bottom line, it will be active on Tuesday at these levels.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [41]

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I'm hoping it's active at 9:30:01 on Tuesday.

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Operator [42]

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Your next question comes from Scott Chan of Canaccord Genuity.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [43]

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Just on kind of one of Jaeme's last few questions, just on resumption of growth. Obviously you talked about slowing down the process and using it from the NCIB and SIB. When you're looking at new growth, or new originations, would you do anything or would you look at potential new loans differently than you have in the past, i.e., natural resource sector because of the volatility? Or is the process or the planned process the same as before?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [44]

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It's a very good -- Scott, it's a very good question. In terms of industries, no, we wouldn't look at it any differently. We like -- out of favor sectors. We like borrowers that are having problems within their sector, especially if the sector itself is either having a secular or a cyclical problem. Other investors obviously don't like that, but we do. Those are typically shunned by the conventional lenders for their own reasons, concentration and/or exposure reasons. So we don't really care. It may cause problems and it may be one of the reasons why this company has to go private because there's an emotional reaction to those companies. If you look in the MD&A, our collateral is still, even including those industries on average, I think 150-ish percent over-collateralized, I think it's 151%. So we don't really care about the sector. We care about the collateral, collateral is what's key to us. In terms, though, of structure, because of the history as a public company and it's been quite the learning experience for me, to say the least, the complexity of both the accounting as well as the mechanics of this business really do make it inappropriate for the public market. So as you can hear from this call, the complexity and the differences between treatments of provisions and yield enhancement and the effect on timing is quite dramatic on the GAAP reported numbers, so we've tried everything we can to give people as much data as we can, hence the table and hence quite intentionally showing people IFRS GAAP with and without and then non-GAAP measures preferably not with increased emphasis on the non-GAAP, but just to make sure that people have the information. But one of the issues that we would do differently going forward with growth is the structure of loans. So as a result of the short attack, which started the pressure on the stock, et cetera, we reduced our flexibility and creativity with respect to loans. So that has hurt, frankly, in my opinion and management's opinion the overall performance of the business. And now that we're headed back to being a private company, as the privatization process continues, I would expect our growth in the later stages of that process to start reflecting the return of some of the creativity that was the origins of the business. So that would include things like deferred fees, deferred interest, PIK interest, there would be probably some structures, just as an example, where instead of being, and we have historically said that we'll try to maintain a maximum split of 50% to term loan and 50% to revolvers, I expect that we would, as a private company and heading into being a private company, we would relax that. But like we did in the past, I would expect us that on the piece of the term loan that is greater than, equal to the receivables, that it would have separate and increased collateral attached to it in order to represent that. That's just not something that we've done as a public company for the last year and change. And as a private company, that will help us further accelerate its growth once we're out of the public markets.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [45]

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Can you -- okay, appreciate it. I just wanted to capture the potential views on privatization because it seems to me, compared to last quarter, that you're still very confident with your (inaudible) in terms of the valuations at that $18 to $22 level, but it might be slightly lower than what you talked about last call, not over $22 but within the range of $18 to $22. Is that a fair comment at this point?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [46]

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I don't think that it's a fair comment. We're -- we will run the process to maximize the value for the public shareholders. We will do everything within our power to maximize the value for them. We have, as we've said publicly and say in the filings, we're at the stage now where discussions regarding price structure documentation will start to be advanced. And we just haven't started it, so we have no better visibility today than we did in the past.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [47]

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Okay. And when you talk about the second stage, the first stage had 19 parties and you talked about this stage not exceeding 6, does that mean that there is at least 6 interested parties going on to the second stage?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [48]

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No, it doesn't. What it means is that we will not allow more then 6 and we frankly would prefer fewer than 6. It's a very complex transaction. It's a very complicated process as a result of Catalyst not participating in bidding, but remaining a shareholder and because of the participation agreement. We would prefer to have fewer bidders, all other things being equal, in order to be able to reduce the time required in order to negotiate those agreements. We think 6 is too many. But in order to ensure that it's a full-blown auction with as much deal tension as possible, at this stage, it will not be more than 6, it will be some number less than 6 that go forward. We would hope to actually refine that number even down further. Some of the factors, frankly, and probably one of the most important factors, is relationship-related as between the parties going forward. And that requires sitting down with people and building relationships and understanding and views on the business going forward. All in, the ROE is 30-ish percent for the year including the provisions as well as the yield enhancement. That, to me, along with the potential for growth and the pipeline being as big as it is, is a pretty spectacular business, but it requires the support of the shareholders, and frankly, the public market has not been as supportive as we would like hence we had to stop growing and we want to make sure it is the right partner going forward. It's not only about math. It's about ensuring what's best for all stakeholders, that includes employees, borrowers, lenders as well as the shareholders once it's private. And that's our duty.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [49]

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So just the ROE that you just stated, the 30%, does that, I haven't done the math, does that exclude yield enhancements and provisions?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [50]

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No.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [51]

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No.

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David M. Reese, Callidus Capital Corporation - President and COO [52]

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Scott, it's David. All that stuff's pretty clearly laid out in our press release and just have a quick spin through it and give us a shout if you have any questions. Happy to walk you through it.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [53]

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So, Newton, the potential of this business as (inaudible) your thoughts, I mean is this, just kind of looking into '17, is this a high teen ROE business, still?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [54]

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I'm sorry, is this a what?

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [55]

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A high teen ROE business.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [56]

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God, no, it's way higher. The changes in the capital structure, which are outlined as a result of the new CLO structure plus the ability to continue in the future of generating yield enhancement, both IFRS and non-IFRS, plus the growth, in my opinion, the ROE of this business, as we've demonstrated over the last 3 or 4 quarters, is very high 20s and likely to go up as growth now gets restarted because of the capital structure. So I would consider high teens a failure, all in.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [57]

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All in, but this is excluding provisions and yield enhancements, right, like the (inaudible) deal?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [58]

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No, no, all-in means everything. So IFRS and non-IFRS, yield enhancements, at the end of the day, when you get to the end of the process when a company like Bluberi has been consolidated and we have to wait a year or 2 and then we sell it, all in, what are we going to make on that money. Unlike the public markets, we don't care quarter-to-quarter. We probably don't care year-to-year. We care over a 2-year period. Our average term is 2 to 2.5 years for a loan. That's the kind of time frame we have and that's probably one of the disconnects between us and the public market. It'll probably take us another 1.5 years to 2 years to see Bluberi get sold. It might not, it's a pretty interesting business, it's actually an incredibly interesting business. But our cycle is much, much, much longer than quarter-to-quarter or even year-to-year like in the public markets. For us, ROE, as we said in the press release and in our statements on this call, ROE at minimum has to be viewed yearly, if not longer. For us, all in, that would include as we generate and receive yield enhancement because that's capital that's been deployed. We care about what the return on that capital at the end of the day is. Like the return of the loan, the largest loan that got repaid, we care about how much money we put out and how much money we got back. Our yield on that loan was quite high, I'm not sure I can say publicly. It was very high. It was beyond satisfactory. It was a properly done loan. For the public markets, it's easily visible if it was on a stand-alone basis. What becomes more complicated are situations where the yield enhancement, because of the IFRS rules, end up being deferred in terms of recognition. The public market seems to not understand that. We don't care. We care about how much dollars we're going to get back at the end of the day. Period.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [59]

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So on that yield enhancement disclosure. If I recollect, the unrealized amount of 120 or so, I think a majority you did disclose related to Bluberi and then if I can remember you disclosed certain targets and ranges for achievement to kind of hit that years away, I guess. Is that, right?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [60]

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We haven't disclosed the breakdown in the yield enhancement. There are a number of events that are publicly available that if people want to go research, it's up to them. But for reasons that relate to protecting our borrowers and/or what now technically is our subsidiaries, we're not willing to disclose that. Suffice it to say that third parties have been involved in reviewing those. Catalyst itself has been involved in reviewing the business models, the projections, the customer base, et cetera. We're very comfortable at this stage with what we've disclosed. If there were to be a change, we would disclose it in due course.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [61]

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Okay. And just one last question, I guess, just to kind of recap everything. So in terms of valuing the business, I think what you're saying that we're missing is a higher ROE business reflecting probably a higher price-to-book multiple. And then the yield enhancements, too, as something that's not immediate, but something more medium term. Is that the way that you kind of look at the business and you kind of look at earnings in kind of at this juncture, is that kind of a good assessment or...

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [62]

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We and others look at the business multiple-fold. Number one, we do look at it on an ROE business and it is a very high, very high ROE business. Sooner or later, both IFRS and non-IFRS yield enhancement and provisions will be recognized. That's why we're giving everybody all the data before, after and people can decide what they want. But it's very clear that the ROE in this business is an extraordinarily high ROE. That's number one. Number two, it's a high-growth business. The business has a very large pipeline. It has a significant number of signed back term sheets. It has intentionally been not growing for the last few quarters. That is going to restart. There are all kinds of industry and economic factors that relate to creating a very large opportunity set for this business. We outlined most of them in the IPO prospectus. To the best of my recollection, all 5 growth areas and some new ones are available to the company. In the interim, we've improved the capital structure. My view is that the ROE, although very, very good, you should look at the comments in the disclosure regarding what the ROE would have been had the leverage been normalized because leverage was artificially low for a whole bunch of reasons and where ROE would likely be with the current cap structure of 60-plus percent leverage. It's just pure math. Anybody could do it. We're happy to talk to you about it off-line. But this is a business that has an incredible platform, enormous scalability, enormous internal capacity to meet that growth, because we're only at 18 loans and we've been as high as 39 and we have capacity for 60, and not withstanding not growing a poor capital structure that now is fixed, the ROE was still as good as I've seen in a financial services business. This is a spread business. Our cost of capital has come down. Our availability has gone up. That means that the spread will ultimately, if we execute on growth, will ultimately start hitting the bottom line at the same time, we hope, as the yield enhancements. That's likely to generate a significant amount of cash in the future, but not today. Because of the IFRS rules, we won't see that cash, and we won't see it on the P&L until a very specific event defined in IFRS rules has triggered it. But it'll be lumpy and it'll be very large when it starts hitting the balance sheet.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [63]

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One major component of ROE is provisions. And that leads to expected losses and that's assuming your previous guidance of 1% to 3% loss rate holds true, is that something that you're comfortable with to get to this ROE?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [64]

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Again, Scott, we've said that, that 1% to 3% is net of yield enhancement. So if you want to look at all of the -- in our opinion, the way we look at the business, if you want to look at a normalized provision rate, you have to look at a normalized yield enhancement rate. And that has a timing problem. So you have to actually look at the whole table. It is, in our opinion, foolish and costing shareholders money to look at the provision because of the rules under IFRS purely in isolation because it will overstate the actual net amount of the provisions. You'll end up with a gross number for provisions and in our opinion you should be looking at the business in its totality. If you're going to look at the provisions, you also need to look at the yield enhancement and it's on a net basis of the yield enhancement that you should look at the provisions. And it goes back to Bluberi. In a case like Bluberi where a company files into Chapter 11 or actually Esco is an even better example because it's currently live. We increased the provision in Esco because during the year it was fundamentally a dormant business, that is required under the IFRS rules. Subsequent to year-end, licensing was received, permitting was received, it's now about to become an ongoing business. The way one values an ongoing business and the way one values a dormant business are very different. One should reasonably expect that with a substantial amount of effort and restarting the business, either parts of the provision will be reversed as the business generates cash or the yield enhancement, probably non-IFRS because we have some control over the business, would go up. If one were to keep the provision where it was as a dormant business and not recognize either a change in that provision because the value of the business went up and/or an increase in the yield enhancement, one wouldn't be valuing that business properly. But that could be the result in the public markets if we didn't provide people the disclosure of non-IFRS yield enhancement. So we're providing it so that people can have as much transparency to decide on their own what to do. In my experience, which is unfortunately I'm getting pretty old, 26-and-change years in the business, in my experience, you need to look at it over the entire cycle and what you ultimately will recover on that business.

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David M. Reese, Callidus Capital Corporation - President and COO [65]

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I might also add, Newton, I think in the past we've talked that on a go-forward basis if we could equalize the timing, we would actually expect the yield enhancement gain to outpace loan loss provisions.

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [66]

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I think the language we've used is at least match and possibly outpace or equal to or greater than, and that's always been our view, which is why -- and it seems to have, at least so far, if you look at it carefully, proven out to be correct and results in 1% to 3% for the provisioning, net.

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Scott Chan, Canaccord Genuity Limited, Research Division - Financial Services Analyst [67]

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Okay. No, that makes sense -- maybe just one last question maybe just more of a -- just an understanding. You announced a pipeline of $1.4 billion, but then you suggested if you looked at the old way that you calculate a pipeline it was like 6 something, $631 million or something like that. What's the different change in how you get there?

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Newton Gershon Zev Glassman, Callidus Capital Corporation - Executive Chairman and CEO [68]

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So as I -- and David, you can chime in after I'm finished, but as I said earlier we've used the time since we stopped growing to review basically every process in the business. One of those is our proprietary tracking system. Our tracking system for the pipeline is not just like a listing. There's a waiting system, there's an aging system, there's a bucket system that moves loans from one area to another. Like most businesses, I hope, certainly most businesses Callidus or Catalyst are involved in, we believe in constant improvement processes. One of the issues around the pipeline is to ensure that our originators are not spending excessive amounts of time on low probability loans. Because we have, amongst other things, a programmer basically on staff, we constantly look for other ways to improve efficiency internally. One of those was a change in the ranking system within the pipeline. And to further evolve the pipeline rankings, so that the originators would be better directed on where to spend their time and resources so as to improve over time both the closure rate as well as the amount of resources and the yield, for lack of a better phrase, of the resources within the origination group to a rate of closure. That resulted in some changes in the way that we record it. We didn't want to mislead the market, so we provided the market with 2 numbers and 2 approaches. And apples-to-apples, this is the old way, if we did it the old way, it would look like this. If we do it the new way, it looks like this. David, anything to add to that?

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David M. Reese, Callidus Capital Corporation - President and COO [69]

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No, Newton, I have nothing to add to that.

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Operator [70]

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There are no further questions. I return the call to our presenters.

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David M. Reese, Callidus Capital Corporation - President and COO [71]

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Thanks very much, Chris. I'd like to thank everyone for participating. We ran over the time a bit and if there are folks that we didn't get to, obviously please give us a call directly and we're happy to chat with you. Again, thanks for everyone for participating and the questions. We look forward to seeing many of you over the coming weeks. Enjoy your day, and thanks again for your continued support of Callidus. We truly appreciate it.

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Operator [72]

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This concludes today's conference call. You may now disconnect.