Burford Capital Ltd Q3 FY2024 Earnings Call

Thank you for standing by and welcome to the Burford Capital's Third Quarter 2024 Financial Results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I'd now like to turn the call over to Christopher Bogart, Chief Executive Officer. You may begin.

Thanks very much and hello everybody. Thank you for joining us today. As usual, with me on the call is: Jon Molot, Burford's Chief Investment Officer; and Jordan Licht, Burford's Chief Financial Officer. The three of us will take you through the slides that have been put up on the website. I'm going to start on Slide 4, and it's very nice when a strong quarter like this comes along and we can show you how the business is performing. Our business doesn't really fit neatly into quarters and the third quarter is often slow given the summer. So it's particularly nice to have this kind of result, even though we like to look at the business over a longer term than just on a quarter-by-quarter basis. But this slide is purely about the quarter. What you can see here are some real indications of activity, realizations more than doubled compared to the comparative quarter. Net realized gains almost doubled. We brought in a lot of cash during the quarter, decent income, and our deployments and commitment activity were certainly consistent with this kind of period. In fact, new commitments went up more than 5x over the comparative period. But because courts and lawyers are often slow in the summer, the third quarter is never what we look to for new business as some sort of bellwether of anything. I'm going to turn to Slide 5, which lets us talk a little bit more about the year-to-date. Just as we start going through these slides, we're going to try to do this at a reasonable pace for you because it was our intention on this call to give you a little bit more of an update when we come to talk about the YPF-Petersen cases. We prepared some material for that, including a new slide, and we're going to spend some time talking through that. While not giving short shrift to the quarter, I'm going to dwell on some of these points a little bit less than I might ordinarily. On Slide 5, which is really more about year-to-date, the fundamental message here is that we're having a very strong year. We're seeing real portfolio activity, and Jon's going to talk in some more detail about that. That's driving cases forward and creating realizations. You'll see record cases here; not only are the realizations on a record pace, but net realized gains just through three quarters are already basically hitting a record annual level. In addition to the cash that we brought in during the third quarter, we've now brought in, during the course of the year, well over $0.5 billion. So, we're sitting on some meaningful liquidity that Jordan will talk about in a moment. We continue to be able to write a nice amount of new business in the market, notwithstanding the fact that the team is certainly also occupied by the fairly significant level of portfolio activity that we've got going on. With those sort of opening remarks, let me turn you over to Jordan.

Thank you, Chris. Good morning and good afternoon to everyone on the call today. I'm on Page 6. This is just a quick summary of the financials for Burford-only. It's obviously difficult to make comparisons to the prior year periods. 2023, of course, included the positive news regarding summary judgment on the YPF cases that drove a good portion of the 23 years overall results. But let's start first by looking at the quarter and some of the totals. Overall, we had $136 million of net income for the second quarter, resulting in $0.61 per share. Net income was just over 60% of total revenues. On the asset side, we are slightly over $3.6 billion of capital provision assets. Of that, our non-YPF assets represent approximately $2.2 billion, in which there's approximately a 35% fair value uplift to deployed cost. Book value per share is over $11 now and tangible book value is just shy of $10.5. I'm going to go into more details about revenue, expense, and some of the other key metrics now. So why don't we switch to Page 7? On Page 7, breaking down the various components of capital provision income, a couple of headlines to focus. If you exclude YPF, our net realized and unrealized gains were up 200% quarter-over-quarter and 17% when looking at the year-to-date figures. I also want to highlight that the net realized gains in the third quarter, in particular, were close to double the same period last year. And as Chris mentioned, more importantly, the nine-month figure of $186 million is already in line with previous annual records. Inside the earnings, market interest rates did reverse course during the third quarter, impacting the discount rate we use in valuation. That dropped approximately 90 basis points, resulting in slightly less than $100 million of positive impact on fair value. As a point of comparison, we had seen rates rising through the first half of the year, which created a headwind for unrealized fair value gains. The discount rates generally follow market trends and broader market volatility. But as I always say, we focus on the cash resolution of our assets and not the interim fluctuations created by rate volatility. So that brings me back to the record results with respect to net realized gains on a year-to-date basis. I'm going to switch now to Page 8. As Chris mentioned, the third quarter can be slow given the summer, but it was a productive quarter to continue building the portfolio. Burford-only capital provision direct new commitments remain consistent with what we traditionally see in first and third quarters. As Chris mentioned, it significantly outpaced the third quarter of last year. From a Burford-only balance sheet perspective, the year-to-date figures are practically identical on new commitments between 2023 and 2024 at around $450 million. Deployments remained in line with our expectations for the quarter when comparing 2023. Recall that in Q2 of last year we had a large deal to support a Fortune 50 client, which resulted in a $325 million commitment, and $190 million of that was for the Burford-only capital provision direct commitments. It also had an immediately large deployment of $127 million by the balance sheet. Overall, Q3 looks good from that comparative perspective, and we expect deployments to continue to be robust, given that we've got approximately $700 million of definitive commitments to deploy on the existing portfolio. So with that, I will move to Page 9. Looking at Page 9, you'll see that we have Burford-only capital provision direct realizations of $380 million, representing a 39% increase over the same period last year. The bullet on the side of the slide highlights that this is driven from a diverse set of assets, not just one large item. We had 10 items that were greater than $10 million and five items that were greater than $20 million in realizations. Realizations, of course, are the critical component that turns into cash, and cash receipts have been consistent if you look at the previous eight quarters, hovering near over $100 million. Of course, if you look at the most recent quarter, we had a record of $310 million in cash receipts. If you look overall for the Burford-only capital provision direct, we're just shy of $0.5 billion coming back to the balance sheet. The bottom line is the portfolio continues to produce a lot of cash, and with that, I will turn it over to Jon for Slide 10.

Before we turn the slide, I just wanted to say thanks, Jordan, for that insight back on Slide 9, and thanks to you all for joining. I just want to give some context, my perspective on the two slides Jordan just spoke to. On one hand, commitments and deployments, and on the other hand, realized gains because that's the bread and butter of what our team does. On the commitments and deployments front, I would just observe, as Chris said early, generally the third quarter, two-thirds of it is summer, July and August. Lawyers often take their holidays during that period. It's slower; they try to get work done and deals done in June before going away. But this year, I felt like the pipelines were robust. The team was busy all the way through the summer into September, so we weren't playing that kind of September catch-up to make up for slower months before. The other thing is, it was active in a broad, diverse way geographically and by types of cases. It's been years since we were just a New York-based U.S. commercial litigation funder with satellite offices. We're now a global provider. When I think about how active the EMEA and Asia Pacific groups have been, how active our patent team in the U.S. has been with intellectual property litigation, it's been a lot going on consistently throughout the year, and that's really fantastic. Regarding the realizations point that Jordan just talked about on Slide 9, I've been saying on these calls for many years, particularly during COVID when things were slower and we weren't seeing the realizations, that I still saw that the portfolio was strong, and good things were happening. I was very bullish on it, and of course, that was me because I saw it. You are investors who supported us couldn't see those tangible results. I'm thrilled you're getting to see it now because it's a lot of money coming in. If we turn to Slide 10, you've seen this slide before, but I just want to emphasize that we've brought in $3 billion on $1.679 billion out, yielding an 84% return on invested capital. That's something I'm very proud of the team for. You see the breakdown of why we're able to do this with those kinds of returns, because the resolutions either go to adjudication or settle. The majority settle. We have attractive IRRs and returns on invested capital with that. In the adjudication gains, the gains far outpace the losses. And so it just leads to a very attractive diverse portfolio. You see the IRR ticked down to 26%. I wouldn't read anything into that. We've talked about how COVID slowed down some resolutions. Even though we're getting lots of cash now, it may be things that took a little longer. As we've said, our deals traditionally have some time-based component in the return profile. There'll be a preferred return with either an IRR, an interest rate, or a rising multiple, and there's also a percentage of net usually. So, it's not surprising there would be some effect on IRR for that period. I'm proud that it wasn't a market one, and I wouldn't read anything into it. We certainly haven't changed our underwriting approach or seen any change in the quality of things coming into the pipeline. Turning to Slide 11, you've seen this slide before too, but I just want to note one thing about it. This is another way to graphically demonstrate what the prior slide did about the return profiles and that we have these adjudication wins that are really high-end, very impressive returns on invested capital. It's important to note that our loss rate is below 10% lifetime. The breakdown of those losses shows that those dark shaded bars represent losses of less than $1 million. It means either it's kind of an ante where you put money in and there was a known gating issue at the beginning, and a motion dismissed, or they went along, and rather than going to trial and taking a risk, the parties decided to settle. So, looking at this profile, the spread of big wins along with limited losses is telling. Seeing the big realizations that Jordan talked about and what they consist of, it shows how attractive this asset class is, and we have the best team in the business doing it. With that, I'll hand it over to Chris for a little YPF explanation on Slide 12.

Thanks, Jon. Yes, it's been a little while since we talked at length about YPF, and we thought it was about time to give an update. We understand that there's a lot of shareholder interest in the YPF case, given its size and significance for the business. We know that investors find it frustrating not to be able to get detailed information from us about our strategies and their progress. Unfortunately, that is simply the reality of conflict litigation. No rational investor would want us to disclose publicly any information that would give Argentina an edge in that ongoing litigation. What we can do is provide information that is publicly available if you dig for it. What I'm about to say is already public; we're just making it easier for you than having to pour through court documents and media reports. We're also going to bring together some of what we said in the past about what we're doing here and how it relates to the end game. There are three buckets of activity going on right now in the case. The first bucket is the appeal. Argentina has an appeal from the trial court's judgment against it. That appeal is to the Second Circuit Court of Appeals, which is the federal appellate court covering New York and some other states. In addition to Argentina appealing its loss, the plaintiffs have also appealed the dismissal of YPF from the case. Those appeals are now fully briefed. The next step is oral argument before a 3-judge panel, and we are waiting for the court to give us an argument date, which we expect to be later this year or early next year. After oral argument, the court will go away and write its decision. There's no time limit for the release of that decision, but we expect it some months after oral argument. It's worth remembering that this is not a matter of first impression for the Second Circuit. This case was before the Appeals Court once already when it recognized that Argentina failed to comply with its obligation to make a tender offer for the remainder of YPF's outstanding shares. The Second Circuit characterized the minority shareholder protection for a compensated exit as undisputed. Although the new panel is bound by the decisions of the old panel, this is not the first time they are hearing this. After the decision is released from the Second Circuit, either party may seek leave from the U.S. Supreme Court to take further appeal. There is no right to such an appeal, and leave is granted less than 5% of the time on average. The second bucket of activity is around enforcement and recognition proceedings. Argentina didn't satisfy the conditions for a stay of the judgment, making the trial court judgment enforceable despite the appeal. This allows us to pursue post-judgment discovery from Argentina, YPF, and third parties in the New York Court actively. We're also seeking substantive enforcement assistance from the New York Court, having filed a motion to have Argentina's shares in YPF turned over to us. We are also engaged in global efforts. To enforce the judgment in other jurisdictions, we must have local courts recognize the judgment, adopting it as their own. We've filed for recognition in multiple non-U.S. jurisdictions, and those proceedings are progressing through preliminary stages in those courts. It's important to understand what enforcement is and isn't. The goal of enforcement campaigns is to apply pressure to create friction so that a rational negotiation can occur. It's not about trying to pick up an asset here and sell it at auction. The law around enforcing judgments against sovereigns is complex and often unclear. We will try many gambits that may not work as strictly legal matters; that should not concern anyone. Ultimately, Argentina is rebuilding its economy to rejoin global markets. Having a large unsatisfied U.S. court judgment presents challenges. It should ultimately lead to a commercial resolution. We are a problem that Argentina needs to solve. I want to address a couple of recent filings by the U.S. Department of Justice in the trial court, clarifying a somewhat technical legal matter that has not been well reported and has been misunderstood by the market. The DOJ filings relate only to the turnover motion I mentioned earlier and not to the case more broadly. The U.S. government has previously supported the pursuit of this breach of contract matter against Argentina and has yet to file anything on the appeal. Recently, we made a motion asking the U.S. court to require Argentina to bring its YPF shares into the U.S. for us to seize them. This request is out of the ordinary, and while we believe support from existing law exists, we knew that governments might see this differently. The DOJ has asked the court not to grant this order, citing disputed legal doctrines. Ultimately, the decision is up to the court, which can disregard the DOJ position. This is just one motion in a broad enforcement strategy. The goal is more about core negotiation than seizing and selling off assets. The third bucket relates to diplomatic and political efforts, where we can say the least because virtually nothing is public. However, it has been reported that Jon met in Buenos Aires with the Office of the Treasury Attorney General in charge of the case for Argentina. Again, we're just trying to distill public information for you. Beyond that, we can't say anything specific, but this is part of our approach as we believe this judgment will ultimately be resolved through negotiation rather than formal legal processes. Let’s turn to Slide 13.

Slide 13 is a reminder of the current economics and accounting for the YPF matter. The judgment continues to accrue post-judgment interest at a 5.42% rate, compounding annually. That amounts to more than $2 million a day being added. The judgment today stands at around $17 billion, up from the original $16.1 billion, although we've made it clear we don't expect full payment and instead seek a negotiated outcome that will include a discount. Burford is entitled to a minority of those ultimate proceeds, with the majority going to the Petersen estate, Eton Park, secondary buyers, and lawyers operating on risk. Burford's entitlement is around 35% from the Petersen case and around 73% from the Eton Park case, averaging around 40%. Burford fair values its assets, including this one for accounting purposes, and the carrying value of this asset today is around $1.5 billion. This is an effort to estimate what a third party would pay to assume Burford's position today, bearing all risks and rewards. This does not include entitlements beyond Burford's and reflects a substantial discount for continuing appellate risk, collection risk, and duration. It's not indicative of what the parties would accept in settlement. Regarding Argentina's ability and willingness to pay after the appellate process, we note that since President Milei began his term in December, Argentina's economy is experiencing growth. Inflation is significantly down, and the government has a budget surplus for the first time this decade. Argentina's country risk index has dropped under 1,000 points for the first time since August 2019. If this continues, Argentina could return to the international debt markets. The process we follow to turn a judgment into cash isn't size-dependent, and this process is unfolding largely as we expected. The only significant difference is that courts generally give Argentina more time due to its sovereign status, which it uses as a delaying tactic. We're content with the current posture; I believe that summarizes YPF well. I'll turn it back to Chris.

Thanks, Jordan. I'll close on Slide 17 and before we take your questions, you've all seen this slide before. It's a reminder of the overall value proposition, which comes with these four points. First, the value of the portfolio we've assembled. Jon talked about that earlier. Even if we did nothing else, that portfolio is going to throw off a lot of cash in the years to come. We pair that with a significant origination platform, a market leader, described as a truly global platform. An asset management business that provides ongoing leverage, although we prefer using our own balance sheet capital instead of relying on what we view as expensive fund management capital, and obviously, the YPF assets we've discussed today, which we believe will provide significant value to the business. We're excited about the business's current position and how the portfolio is progressing, and we invite your questions.

Your first question comes from Mark DeVries from Deutsche Bank. Your line is open.

Thanks, and I appreciate all the comments on YPF. That was really helpful. I have a couple of follow-ups, though. Chris, you may have answered this indirectly, but has Argentina indicated that they're not willing to come to the table until this appeal is fully adjudicated?

I think we're constrained in being able to discuss any of our discussions or our advisers' discussions with Argentina. But generally speaking, it's pretty unlikely that while there's ongoing active litigation, a government will find it easy to resolve it. The question becomes positioning yourself to be in as strong a position as possible by the end of that process.

Okay. Makes sense. Did you indicate when you would expect the oral arguments to be scheduled?

No, we don't have a date for oral argument yet. The case gets fully briefed first, which occurred towards the end of August, and then it becomes eligible for oral argument. We simply don't yet have a date from the court, but those updates suggest that an argument should happen, if not this year, then in early next year.

That's helpful. Just turning to your core business, could you talk about the recent environment for deployments and identifying new opportunities? Any color on the types of new commitments made in the quarter?

Yes, it's important to bear in mind that these numbers vary a bit depending on whether we do or do not complete a big deal. Last year, we did a significant deal in June, a $325 million commitment for a Fortune 50. We haven't done a comparable deal this year. The largest monetization in 2024 has been $100 million. This doesn't represent anything unsatisfactory for us. We are busy, and the volume of transactions is comparable and could even be higher, depending on individual client activities. We're seeing activity in the antitrust and competition space, given recent regulatory actions and inquiries, as well as in intellectual property and arbitration. This really ebbs and flows based on what clients are up to.

Your next question comes from the line of Alexander Bowers from Berenberg. Your line is open.

Just two questions for me. Firstly, starting with the core business. Commitments are tracking year-to-date, not far from what they did in 2023. Could you give us a bit of color on the competitive environment and what you're seeing in terms of new client wins this year?

There's no connection between the U.S. election and the timing of the DOJ filing. We made this motion some time ago, and the DOJ notified the court they needed to weigh in by November 6, which is the timeframe it had. The timing has nothing to do with the election, as decision-making would have involved career DOJ staff. Regarding new commitments – in 2024, we haven't done a large deal equivalent to last year’s $325 million for a Fortune 50 client. However, we're busy and sustaining a comparable volume of business. The nature of cases varies by the size and type of commitment.

There have been positive developments regarding group actions where groups affected by misconduct can take legal action. An EU directive requires member states to pass laws to facilitate these actions, which creates great opportunities for litigation finance.

So we’ve reached the hour. We hope you found this useful. We're delighted to speak with anyone offline as well. Thank you all for your time and support, and we look forward to talking to you again in a few months when we can report on the year-end results.

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