Burford Capital Ltd Q1 FY2024 Earnings Call

Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Burford Capital First Quarter 2024 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the conference over to Christopher Bogart, Chief Executive Officer. Christopher, you may begin your conference.

Thank you very much, and hello, everybody. As usual, I'm joined by Jon Molot, Burford's Chief Investment Officer; and Jordan Licht, Burford's Chief Financial Officer. In fact, Jordan and I are delighted to be coming to you live from beautiful Copenhagen today, where we have spent the day with investors here, one of Burford's groupings of investors in Continental Europe, and it's a lovely day here. Quarterly results, as we've said before, we are going to do these calls in what is, at least for us, we hope a fairly short and efficient manner. The slides really do, on these quarters, speak for themselves. So we'll give you a little commentary on top of that and then we'll be happy to take your questions, but we'll try not to take too much of your time. And in general, when I think about quarters, while we're obviously happy to be talking to you at any time about the business, we just don't pay that much attention to individual quarters in this business. The timescale of the business operates in years, not in three-month intervals. You get a lot of period-to-period variability as you're seeing here, and we just don't, as a management team, read that much into it. And that's especially true in what we think of as what I'll call almost the dead-ish first and third quarters. Although, to be fair, last year the first quarter was extraordinary because of the YPF win late in the quarter, which obviously makes comparisons with any quarter that comes later essentially useless. So that's sort of how we think about it. But for those of you who do want to go quarter by quarter, I think, you know, obviously I would characterize this as being a mixed quarter. On the cash front, we had terrific cash performance, the highest level of cash receipts in the first quarter that we've ever reported. We had perfectly solid realized gains with realizations above average for the first quarter. When it comes to unrealized gains, there's a lot going on in the accounting there, including some headwinds from changes in the discount rate that Jordan will talk about. The important point to underline is that all is happening without any material negative case development. Our loss rate is still meaningfully below our historical average. While it's annoying, obviously for us to be printing an accounting loss, when I look at the business as I do on a cash basis, I fundamentally see that we brought in cash at a level well more than double the total of our operating expenses and financing costs. On a cash basis, I regard that as successful, even though, from an accounting perspective, this quarter doesn't look as great as some have historically. So that's sort of my overall take on Slide 4. With that, I'll move to Slide 5. Slide 5 really just expands on Slide 4 a little bit. I will largely leave you to read this on your own, except that I would note just a couple of things. First, we are swimming in liquidity right now, and that sets us up well to meet future interesting opportunities. Second, we are still sitting with this enormous portfolio, and we've been generating consistent returns as matters from that portfolio come to conclusion. Slide 6 shows you where we are in terms of new business. I sort of repeat what I said at the outset about the divergence between first and third quarters on the one hand and second and especially fourth quarters on the other. Nobody who can do a fourth quarter deal with us, either law firms with a calendar year-end or businesses with fiscal year ends, nobody who can get a fourth quarter deal done just sort of hangs around and waits until the first quarter. Historically, this has led to depressed levels of activity in the first quarter in this business. This has existed long before we started reporting on a quarterly basis. Deployments depend on lots of factors, not just on new business. Crazy as this sounds, deployments depend on whether law firms are efficient in their billing. Most law firms are calendar year entities. What they do in December is scramble to get every dollar billed and paid that they possibly can. Lawyers are notoriously bad and slow at billing. Then what happens, after they put forth that effort, is that they don't turn around in January and February necessarily and keep billing actively and robustly. That's just one of many factors that go into the level of deployments that you see here. Again, it's not something that I particularly focus on a quarter-by-quarter basis. Slide 7 is the good news slide, which shows you both the cash coming into the business at a very high level, displaying the level of portfolio activity. This is a high level not only on a group-wide basis, but also on a Burford-only basis. The bulk of that cash is coming in from high-returning assets. Realizations are right on top of where we were in the first quarter of last year, well above where we were in the first quarter of 2022. Fundamentally, we're seeing portfolio velocity continue. We had lots of activity in the cases that continued through into the second quarter, and we're pleased with how courts are dealing with not only newly filed cases, but working through COVID backlogs. People were in trial as recently as last week, and we're happy with the status of the portfolio and our ability to continue to see cash generating from it. So with that fairly quick tour through that, let me turn you over to Jon for a few slides.

Thanks, Chris, and thank you all for joining. As Chris mentioned, the portfolio is very active, and there’s a lot happening that makes it exciting for us as we manage our investments and see their progress through the system. Regarding the YPF cases, everyone is aware that a final judgment was entered in September. Although that judgment was stayed during part of the fourth quarter, the stay has now been lifted, making the judgment immediately enforceable. The enforcement process began in the first quarter and is ongoing. Additionally, Argentina has appealed its adverse ruling to the Court of Appeals for the Second Circuit, while the Plaintiffs have cross-appealed the exclusion of YPF as a defendant. As a reminder, Burford is entitled to approximately 35% of the proceeds from the Peterson case and 73% from the Eton Park case. Looking at our performance, it's crucial to focus on the fundamentals of the business, which remain strong. Our overall performance includes adjudication wins, losses, and settlements that reflect our investment results. Settlements represent the largest category, and for cases that reach final adjudication, our wins significantly surpass our losses, both in quantity and value. This leads to attractive returns on invested capital and internal rates of return. We continue to effectively manage our core business, and the matters are delivering encouraging results as time progresses. There’s also a visual showing the asymmetric return profile from the litigation process. While the loss rate is relatively low and contained, the wins can be substantial, making this a highly appealing asset class. A significant number of our cases are generating returns on invested capital greater than 200%. With that, I will hand it over to Jordan.

Thanks, Jon and Chris. Good morning and good afternoon to everyone on the call today. I'm on page 11, which shows a summary of the Burford-only financials. Chris mentioned that comparisons to 2023 for the same period will be difficult given that right at the end of March last year, we received the positive news regarding summary judgment on the YPF cases. So I'm going to touch on a couple of key numbers here and then go into greater detail on the following pages. We had $31 million of revenue for the period. The capital provision income and asset management income breakouts are shown on the right of the page. Net income per share for the quarter was negative $0.14. Tangible book value is just shy of $10, including the intangible, slightly above the $10 level at $10.34 per share. Overall, the loss was impacted, and I'll talk more about it, by various fair value movements that included many that had nothing to do directly with case development. As Chris mentioned, there were no material negative case developments in the portfolio. We'll talk more about expenses, but those start to normalize from some of the one-time items that we also saw in 2023. On the asset side, we're at approximately $3.4 billion of capital provision assets. Of that, we've got $1.6 billion in our deployed cost. The YPF assets are approximately $1.4 billion of the $3.4 billion, and we have $490 million of fair value gain embedded in that number, relative to the rest of the portfolio excluding YPF. This fair value represents only a 31% uplift to deployed cost of the assets, so in summary, there's a lot more room to run with respect to the assets. I'm going to move to page 12 now. This page breaks down capital provision income into all components. Gross realized gains in Q1 were $45 million, and that's a $6 million increase compared to last year's first quarter. However, we did have a partial loss in a subcase associated with a larger portfolio, which drove the net realized gains lower. Let's go a little deeper into that. As we've described our business, we look to do multi-case portfolios. When we do that, those are cross-collateralized, meaning when one subcase loses, our counterparty is required to make up that loss from other cases. From a cash basis, we look at the portfolio as one deal and measure cash inflows and cash outflows; that structure is very efficient and effective in preventing capital loss. However, we allocate some invested capital to each subcase in the portfolio. So when a subcase in the portfolio loses, we incur a loss for that amount, even though we don't actually suffer a loss on a portfolio-wide basis. In this first quarter, that's exactly what happened. A subcase in a large portfolio lost. We had allocated $15 million to that case from the portfolio, and we now book a realized loss for that amount. Still, the portfolio as a whole is and has been successful. We've already recovered all of our capital back on this asset and some profit, and we do anticipate additional profit going forward. Moving on, asset valuations are also impacted by duration and time value of money. I've talked about that before, and how the accounting movement here doesn't impact the ultimate resolution of any asset. In Q1, we saw an increase in discount rates across the portfolio by approximately 20 basis points, which represents a $22 million headwind to valuations. The discount rate generally follows market trends and rates, and we would expect to see volatility in quarters when there are broader rate movements for financial instruments. Of course, we focus on cash resolution of our assets and not this interim fluctuation. I'm going to move to Slide 13. This is the overview of our asset management business, which continues to perform. We enjoy the benefits of using the funds to augment the core balance sheet business. In quarters where we don't see significant movement with respect to our assets, we wouldn't anticipate seeing significant asset management income. This business is also cash-on-cash, meaning that while we book income with movements in the fair value of the assets, the actual payout is only when we see cash in the funds. We did, though, receive $4 million of cash receipts from the business. As we've discussed, the majority of this income is driven by our partnership with the Sovereign Wealth partner in BOFC. We think of that as a source of incremental liquidity for a balance sheet business that earns a performance fee. Reminder that BOFC takes approximately 25% of nearly all new commitments on a pure pro-rata basis. Now, moving to page 14, I'll shift from revenues to expenses for a moment. We've spent a lot of time last year talking about expenses and various movements in expenses, some of which are period-related, some accruals associated with accounting-driven fair value movements or other one-time items. Overall, first quarter expenses are down, and we're only at 55% of last year's total when looking at the same period. Main components like salary and benefits, the annual incentive comp, and share-based comp remain generally flat year-over-year. Annual incentive comp represents discretionary bonuses for our employees, finalized in the fourth quarter. One of the lines we have spoken about is the legacy asset recovery expense and the accrual related to the purchase of that business. There is only one asset left in that arrangement, so we've collapsed that line into the long-term incentive compensation line. Those expenses are accruals, so the long-term incentive comp or the legacy asset recovery line only pays out when we receive cash from the investor. You'll see case-related expenditures that are ineligible for inclusion in the asset have decreased significantly from last year, now down to close to $500,000 from approximately $1 million. We expect some volatility over time but this year so far has been just $500,000. Moving to page 15, which is our liquidity and leverage page. Chris pointed out we sit on a very strong liquidity position with over $500 million of cash and securities, as well as another $132 million due from settlement or receivables. I'll go a bit deeper on one point I raised earlier: The $138 million of cash receipts came from a breadth of individual assets, with five different assets producing over $10 million each. Earlier in the quarter, we took advantage of a robust high-yield market, issuing $275 million add-on to our June 2023 issuance. We did that at 120 basis points inside of the original issue yield just six months prior. With a laddered debt schedule, our next maturity doesn't come due until August 2025. As you can see, the rest of the debt is significantly back-end loaded. We often get asked about our debt capacity and how we think about leverage. Earlier this year, we put out what we believe is the prudent maximum leverage of 1.25 times debt to equity. Right now, we’re well within that covenant at 0.8 times and well within our threshold. But to be clear, that’s a maximum that I talked about, not necessarily a target. We’re always managing our liquidity levels, anticipated cash needs, as well as receipts and expenditures on the portfolio. So with that, I will stop there and hand it back to Chris.

Thanks, Jordan. Slide 16 is a slide you've seen before that just tries to pull together and sum up the key points about the business. To reemphasize, the driver of a lot of the value in this business is the core portfolio that we have, and that portfolio continues to perform robustly. The return levels are the same as they were when we last reported to you. Those are desirable uncorrelated returns that keep powering the business forward, as does our market-leading origination platform, which enables us to put meaningful capital out the door every year. We are by far the brand leader— the litigation finance firm that survey respondents identify first or only with the category. Lastly, we have additional value creation from our asset management business. Last but certainly not least, we have the YPF assets, which, as Jon described, are making their way through the litigation and enforcement process. So, if you look at this on a quarter-by-quarter basis, it’s a mixed quarter but a very strong cash performance this quarter. Generally, a first quarter that is just not all that busy or active for us. We appreciate your support and would welcome any questions you have.

Thank you. We will now begin the question-and-answer session. Your first question over the phone comes from Alex Bowers with Berenberg. Please go ahead.

Hi everyone. Just one from me. In terms of commitments looking forward for the kind of the rest of this year, what sort of level do you expect to achieve? Are you still aiming for similar levels we saw in 2023, around $1.2 billion group-wide and just under $700 million to Burford? Is that the level we'd expect this year, or have expectations changed?

Thanks. Well, we don't guide on future anything really, including future new business, but let me comment on a couple of things that drive the level of new business that we did. There are a couple of points here. You asked about that on a group-wide basis. While we do report group-wide, so people can get a sense of overall activity in the business, a portion of the group-wide business is not nearly as remunerative to us as our core balance sheet business. Thus, while group-wide is useful for showing overall activity, it’s not really useful in predicting future profitability. If you look at Burford-only capital provision direct business, that's the core balance sheet litigation finance business that drives the bulk of our profits. What we've said before continues to be the case: the level of business we will write in that category in any period really depends on whether we have zero, one, or two big chunky deals. We have a sustainable ongoing level of smaller deals that we do, period in, period out. Large corporations are doing significant monetization transactions with us. A recent example was a $325 million transaction with a Fortune 50 company. The question for any period is whether one of those lands; it will have a significant impact on the new business we write. It’s unpredictable since the sales cycle on those deals is long, and they usually start with smaller transactions with us. It’s a little like asking an investment banker to predict how many blockbuster M&A deals will occur for the rest of the year. I don’t have a good answer for you, except that I remain encouraged by the level of interest we have from corporates. In fact, you will see just in a couple of days from now, we regularly release commissioned research we conduct in the legal market. Another release of that research is coming out soon, and it’s interesting to see the level of interest in certain industry segments. Certain segments will show that half of industry participants are already using litigation finance or plan to do so in the near future.

Thank you.

We currently have no phone questions at this time. Rob, are there any web questions?

There are not. We have done a very good job of keeping to our promise of making quarters a brief check-in but not too big an event. So in the absence of any other questions, either on the webcast or on the phone lines, I think that's a wrap for us. Thank you all for your time and your support of Burford. We're always happy to talk offline and answer any other questions you may have. We look forward to speaking to you in a few months after the June 30th numbers arrive.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.