Earnings Call Transcript - BUR Q3 2023

Operator, Operator

Thank you all for joining and good morning. I would like to welcome you all to the Burford Capital Q3 2023 Results Call. My name is Brika and I'll be your moderator for today's call. All lines are on mute for the presentation portion of the call today with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host Christopher Bogart, CEO of Burford Capital to begin. So, Chris, please go ahead.

Christopher Bogart, CEO

Thanks very much, and hello, everybody. Thank you for joining us today. As usual, with me are Jon Molot, Burford's Chief Investment Officer, and Jordan Licht, Burford's Chief Financial Officer. Each of us will speak a little bit on this quarterly call and then we'll be happy to take your questions. I'm going to start on slide two, sorry, slide three, which is sort of an overview synopsis of what we have to tell you today. My fundamental message here is that we're having a blowout year. Things are just really going very, very well from our perspective. Just looking at the first number there on the slide, topline revenues are up five times. The thing that is really important to reflect on is that, while our success in the YPF cases is driving some of this, so too is the rest of the portfolio. While in YPF, we had an extraordinary win with a judgment for more than $16 billion, the largest in the history of the issuing court. Jon will talk some more about YPF when we get to a specific slide on it. So while that's a fantastic outcome, I really want to focus on cash and on what's going on in the rest of the portfolio as well because the portfolio really has been moving forward after its pandemic hiatus. Just in nine months, we've seen almost $400 million of cash come in, and again that's not a single dollar of that cash is coming from YPF. That's all coming from the rest of the portfolio, which has been sitting slightly dormant while courts coped with the pandemic and now we've seen a real resurgence in activity. More than half of our activity in the period is coming from matters that are pre-2020 in the portfolio, exactly as we have predicted. We had a delay for a while, but we did not have any substantive impact from that delay. That delay is now clearing itself and things are moving through the portfolio. Again you look at realized gains, basically doubling in the period; again no contribution there from YPF. In terms of performance, in terms of the portfolio's output and activity levels, and even looking at unrealized gains showing that things are moving, we're just very pleased with how things have been shaping up this year. The portfolio as a whole is also growing, as we see both continued new business coming into that portfolio as well as the continued development of the cases that are already in there. A couple of other key points as we move through this slide: one of them is our sovereign wealth fund partnership, which as we announced a little while ago has been extended and expanded. Sometimes it's not so easy, given the way that we account for this sovereign wealth fund arrangement, to see its leverage in the business because it's consolidated into our financial statements, but if you break that apart, we're now well over $100 million in income from doing that arrangement. We're very pleased with how that's going and with the asset management contribution to the overall profitability of the business. Of course, we ended the period with very substantial cash on hand, with very significant liquidity, just because of all of the cash that we have generated, augmented by the notes that we issued earlier this year. So all-in-all very happy with where we sit nine months into 2023.

Jordan Licht, CFO

Thank you, Chris. Good morning and good afternoon to everyone. I'm on page five. So here, as Chris mentioned, we break down our capital provision income into the various components for both the three and nine-month periods. The year-to-date comparisons of 2023 versus 2022 show nearly a doubling of all the income metrics. Realized gains this year to date are $125 million and unrealized gains excluding YPF are $85 million. With respect to YPF, we've had two milestones in the case so far this year and Jon will speak a little bit more to that shortly. The initial summary judgment and the subsequent award of damages resulted in unrealized gains of $460 million over the first nine months of 2023 from our YPF-related assets. Total capital provision income had a huge increase year-over-year from $676 million versus the $80 million last year. I'm going to switch now to page six and talk a little bit about asset management. Our asset management business continues to perform and we continue to reap the rewards of using the funds to augment our balance sheet efforts. In the first nine months of both 2022 and 2023, we earned $41 million of asset management income. On the bottom of the slide, we highlight the mutually beneficial relationship we have with our sovereign wealth fund partner. As we announced earlier this fall, the relationship extended through the end of 2024. Total income from BOF-C has been steadily increasing year-over-year. Before I turn away from asset management, our cash receipts from asset management have doubled through the first nine months compared to the same period last year at $29 million. Let me turn it over to Jon.

Jonathan Molot, Chief Investment Officer

Thanks, Jordan. Thanks to everybody for joining. If you turn to slide seven, it's a familiar slide, but it bears emphasis and we update the numbers with each period. It shows just how our portfolio has performed. When you're buying into Burford, part of what you're buying is this diverse portfolio of investments. If you look at how that portfolio has performed in the past based on realizations, you see there's a large number: $2.5 billion worth of realizations over roughly 14 years. That gives you a track record you can look at. You see a cumulative return on invested capital of 87%, you see an IRR of 27%. Of course, that's broken down into three categories. We have investments that resolve through adjudication and we win more than we lose. Where we win, the returns are really quite attractive. A large segment of our investments resolves through settlement, and those returns too are attractive. The ROICs and IRRs are not as large, which is what we understand when we go into them, but the numbers are quite attractive. This has led to consistently attractive performance, which is why we love this business so much. We see assets we can invest in, we can help our counterparties, and it's a win-win. You, our shareholders, bear the fruits of this and have in the past. If we turn the page, we turn to one particular asset that, of course, has the potential to generate considerable upside, actually outsized returns. Historically, I've not said very much about what to expect in the future of YPF. It was not in anybody's interest to do so. I can tell you what has happened so far and where we are. We had the trial in July and we won a final judgment, a complete win for the plaintiffs of a $16 billion judgment, at the high end of the possible range of damages. Argentina has filed a notice of appeal to the Second Circuit Court of Appeals. There was a prior interlocutory appeal years ago about sovereign immunity, but this will be a second appeal. They will have the right to seek discretionary review from the Supreme Court of the United States, which takes a very small portion of the cases that are petitioned for. Additionally, Argentina has asked the trial court to stay enforcement of the judgment pending the appeal. In the United States, a final judgment is immediately enforceable when it's issued, unless the defendant posts a bond to secure the judgment. Argentina has asked the court to relieve it of the bonding requirement and grant a stay without a bond. That is fully briefed before the judge in the Southern District, and we expect that to be decided soon. The appeal will take a bit longer. That is not fully briefed and includes a cross-appeal by the plaintiffs against YPF. You'll recall that the judgment issued by the court was against Argentina only; YPF was not held liable and the plaintiffs have cross-appealed, asking that the judgment extend to YPF as well. That would not change the damages amount, it would just include YPF as liable if it were to succeed. As a reminder, our net entitlement is roughly 35% of proceeds from the Petersen case and around 73% of proceeds from the Eton Park case. I've said a bit about how the portfolio has performed because when you buy Burford stock, you are buying a portfolio.

Jordan Licht, CFO

Thank you, Jon. On slide nine, as you can see, we're ahead of last year's pace with respect to both commitments and deployments on a year-over-year basis. 2023 has been a productive year. As the global leader in litigation finance, we have the ability to support clients with significant commitments and deployments of capital, using both our balance sheet capacity and third-party funds. We continue to deploy cash from the balance sheet into attractive assets, targeting returns north of 30%. The partnership with BOF-C on these assets is on a 75-25 split. With this continued deployment, our total deployed cost on the balance sheet has grown to over $1.6 billion. I'm switching to page 10 to outline some of the expenses for the first nine months of the year. At first glance, these seem a fair bit higher than the previous year, but we need to separate out the cash and non-cash expenses and some of the idiosyncratic movement in these line items. So, for example, while our salaries and benefits might appear to have grown by slightly over $10 million, a chunk of that net change is related to retirement plans. Our employees have the ability to invest their deferred compensation in Burford stock, and when the share price increases, we have an accrual expense. Another example relates to the positive events associated with YPF, resulting in a $21 million increase year-over-year in our carry plan, which is only paid when the cash is received. I want to remind folks that the legacy asset recovery accrual relates to a historical purchase of that business. Effectively, one could consider that an earn-out, and there is only one remaining asset left from that deal. I'll now switch to the next page to talk more about cash. On page 11, cash receipts were $380 million year-to-date, surpassing the total for all of 2022. Our liquidity and receivables are strong, highlighted by $347 million of cash and securities as well as $70 million of receivables. We still don't intend to hold cash quite near these levels; our goal is to put it to work. As Chris mentioned, we're digesting the bond issuance and cash realizations. Finally, we outlined the nine-month cash bridge for Burford only. We've had $380 million of cash against the cash spend of $159 million, which accounts for OpEx and interest expense. I'm moving to page 12 for a quick reminder on covenants and debt levels. We continue to enjoy a laddered debt schedule that extends out to 2031, and our next maturity is not until August 2025. Only 25% of our debt matures in the next four years, giving us ample runway. Our leverage levels remain well below covenant levels. To wrap it up, both Moody's and S&P have recently raised their outlook from stable to positive. With that, I turn it back to Chris.

Christopher Bogart, CEO

Great. Thanks, Jordan. I'm now on slide 13. You've seen the format of this slide before, but the content has been updated for our current results. The slide underlines Jon's earlier point. When you buy stock in Burford, you're buying four different things: an existing portfolio of litigation assets; we have provided a lot of detail about what's in that portfolio and its activity levels. We now have a long and substantial track record in generating desirable returns from that portfolio, making around $2.5 billion of cash recoveries. You're starting off by buying a large, diversified portfolio with a long track record of generating returns. You're adding to that the industry-leading origination platform, which has shown itself capable of generating new business regularly and reliably. Our sizable asset management is performing well, especially our BOF-C sovereign wealth fund arrangement, which has started to throw off income for us. Finally, with the YPF assets—those have the potential in the future to generate truly outsized returns for us. That's the package you get with an equity investment in Burford, and we're very pleased with where the business sits today. With that, we're happy to take your questions.

Operator, Operator

Thank you.

Christopher Bogart, CEO

I see that we have, go ahead, operator. Sorry.

Operator, Operator

nt is performing well, especially our BOF-C sovereign wealth fund arrangement, which has started to generate income for us. Additionally, the YPF assets have the potential to deliver significant returns in the future. This is the value of an equity investment in Burford, and we are very satisfied with the current state of the business. We are now ready to take your questions.

Christopher Bogart, CEO

And we'll start with a question from the webcast from Paul de Gruchy, which is basically, while it has always been Burford's policy to not talk about individual cases, are there any cases currently progressing that have the potential to produce returns of a similar size to YPF? You're right that we don't talk about individual cases, but I think it's fair to say that when we contemplate a case that has at least the potential to deliver billions of dollars—plural—to Burford, depending on the ultimate outcome of that case, I think that is an unusual case for us. Now I think we have a question on the phone.

Alexander Bowers, Analyst

Good afternoon, everyone. Can you hear me?

Christopher Bogart, CEO

Yes, we can.

Alexander Bowers, Analyst

Brilliant, I just had one question on the value of the YPF asset. We've seen the YPF asset shift up after the summary judgment and the final judgment rulings this year. I just wanted to ask about how you're thinking about the evolution of its valuation going forward in terms of factoring the remaining litigation risk from the appeal process, the expected duration of any payout, and then the other factors factoring into that process.

Christopher Bogart, CEO

I think probably all three of us have something to say about that. But let me just start by saying that, unlike most of our litigation finance assets, where we are calibrating model valuations to the investment terms that we're agreeing to, in the YPF case, we had a substantial and very profitable secondary sale of a portion of our interest in 2019. That sale served as the basis for calibrating the model, starting with a third-party validation. We then go through our usual process to adjust the value based on events that drive the litigation risk premium. Jon and Jordan, feel free to pick that up.

Jonathan Molot, Chief Investment Officer

In terms of the events, the most prominent or the only one you can think of that's significant at this point, would be the resolution of the appeal by the US Court of Appeals for the Second Circuit. There is also the discretionary cert petition to the Supreme Court, which is less significant but still in play. Those are the remaining US Court events. There is also the stay application that is pending and enforcement proceedings, discovery, and other matters, but those don't necessarily drive valuation under our approach as much as the litigation events we've experienced so far, like summary judgment and trial victory do. We don't change valuations based on sentiment; the discussions do not drive a valuation change.

Jordan Licht, CFO

Chris, I know you said all three of us might have a comment on it, but the two of you did well. As you mentioned, we have a model for this. If there are observable milestones in the court case, those could change value. Otherwise, I don't think there is much more to add.

Alexander Bowers, Analyst

Thank you.

Christopher Bogart, CEO

Thank you.

Operator, Operator

We now have Portia Patel of Canaccord. You may proceed with your question.

Portia Patel, Analyst

Thank you for taking my question. I'm just looking at the Burford only data in your release and I wondered if you could provide some color on why, in Q3, the commitments and deployments were materially lower than in previous quarters and year-over-year. Any comment on how we should expect those commitments and deployments to trend in Q4 and Q1 would be helpful. If you could provide an indication of what you would suggest as a reasonable expectation or objective for an annual commitment and deployment figure on a Burford-only basis, that would be very helpful.

Christopher Bogart, CEO

Sure. As I've said before, I think quarterly reporting is for the birds and I really pay absolutely no attention to it. It's something we have to do with our US presence, but I think it's roundly perceived as undesirable by lots of people with much more experience in the markets than I have. We closed a really big deal in June of 2023 and didn't close one in September; that says nothing about the overall state of the business. In general terms, we continue to put out a meaningful amount of capital against new investment matters. I really look at a longer scale, broader approach to capital deployment. Burford's first few years were fundamentally working with law firms, addressing legal fees through financing arrangements. That led to smaller deals with natural limits on spending. As the business has evolved, we see larger corporate portfolios, and the amount we will commit and deploy in any period is driven by a small number of those large corporate transactions. The second quarter of 2023 saw $325 million with a Fortune 50 company; I don't imagine that will repeat frequently. But I'm not particularly concerned about any specific period. I know we are understanding and growing the business and that there are enough opportunities for future growth.

Portia Patel, Analyst

Thank you very much. That's helpful.

Operator, Operator

Thank you. We now have the next question from the line of Matthew Howlett of B. Riley.

Matthew Howlett, Analyst

Thanks for taking my question. Just in the quarter, was there anything unique about milestones versus the other quarters? Any lumpy occurrences or something that was pushed out? Just wanted an update on where things are tracking milestone-wise, in aggregate?

Christopher Bogart, CEO

Jon can certainly speak to that in greater detail, but as a headline matter, I think the answer is probably no, other than the ebb and flow of litigation generally. Litigation rarely goes faster than planned or expected. You start the year with a bunch of things calendared and some of those events will occur as scheduled, while others will be delayed. Expecting litigation to speed up is not realistic. Currently, what you are seeing is some amount of supernormal portfolio activity due to courts pushing things through to catch up on a backlog created during COVID. More than half of our activity occurring in pre-2020 matters is an example of that. If we hadn't had COVID, we wouldn't expect those pre-2020 matters to be lingering like they are.

Jonathan Molot, Chief Investment Officer

I might add that our underwriting team is handling both underwriting new matters and cultivating relationships with law firms over large portfolios, as well as existing clients on existing matters. We have found that courts do sometimes pay attention to year-end, which motivates settlements and closings, but otherwise, quarters in between don't mark anything for our counterparties.

Matthew Howlett, Analyst

Great. So just in summary, the courts are back to business with no legacy overhang from COVID that you're seeing.

Jonathan Molot, Chief Investment Officer

Exactly. The courts are back to business in that all the courts we deal with are operating at full capacity.

Matthew Howlett, Analyst

Okay.

Jonathan Molot, Chief Investment Officer

That being said, significant backlogs still exist by court. Some courts have no COVID backlog left; others, like those in Brooklyn, are still experiencing multi-year delays. The court system is functioning completely, but there are still discrepancies in how quickly cases can progress.

Matthew Howlett, Analyst

Makes complete sense. Thank you for clarifying that. Last question, do you plan on updating the embedded realized gains of the portfolio ex-YPF? Will you do that annually for us, or when should we expect that time-wise? And the second question, with your cash build and the laddered maturities and the extension of the SWF arrangement, how do you think about capital return? Do you want to reinvest because you're getting 30% returns? Do you think about dividends or buybacks? Is that part of the equation with how well the balance sheet is positioned today?

Christopher Bogart, CEO

Jordan, do you want to take those?

Jordan Licht, CFO

Sure. For the first question about the overall portfolio value and expected cash flows, we mentioned this before, and as part of the revision to our valuation policy, it's not really appropriate to publish different metrics regarding potential value that differs from our fair value. So at this point, we aren't going to publish that summary view of total cash flows. On capital return, we've discussed this a lot regarding cash influx during 30% IRR assets, which we believe brings long-term growth to our shareholders and compounds continuously. If we gain clarity around the YPF capital return, we will have visibility at that moment, and all options will be on the table concerning capital return, reinvestment, and liability management.

Matthew Howlett, Analyst

No, you answered it perfectly, and I appreciate it. Thank you.

Christopher Bogart, CEO

Great, thank you. We have a webcast question from Trevor Griffiths. Legacy asset recovery incentive compensation appears to include a substantial cash component, with only one legacy asset remaining under this deal. Are you happy the individuals benefiting from this arrangement are sufficiently incentivized to continue their good work for Burford once this has paid out in full? Just to remind everyone, when we acquired the asset recovery business, we did so with a very small upfront cash payment, as Burford was much smaller then. We made a small cash payment for the business, then provided a backend based on case activity. The litigation process has meant some of those cases took longer to fruition. You're correct that there's only one left now, and that case has been quite successful, as indicated by accruals and increases in its fair value gain. With regards to the future of these individuals, I speculate that we have a strong asset recovery team, and Burford is delighted with its position in the business. We've moved to a place where I don't think Burford as an institution is dependent on any single human being, whether that's Jon, me, or anyone else. We have a deep bench of people and abundant resources to carry this business forward. Jon and I are not intending to leave; we really love what we're doing.

Operator, Operator

Thank you. We have a phone line question from Julian Roberts of Jefferies. You may proceed with your question, Julian.

Julian Roberts, Analyst

Hi. Thank you. I've got a couple if that's all right. One is, what kinds of things could we think about? How could you innovate more? One thing Burford has done that perhaps most competitors haven't is do novel things. Would you ever consider doing class actions? I think you once looked at one in Australia. I've noticed there are a couple in the American news that might possibly be of the right size. Or would you maybe go more directly into the practice of law or anything like that?

Christopher Bogart, CEO

I'll do them in reverse order. Winning cases is excellent and we love it, but only upon receiving the numbers do we truly know what has occurred. We had a very wide potential range of damages in the YPF case. With that level of unresolved uncertainty, we need to be prudent about how we take on values. So that's how it ended up happening. I'm happy to be given the opportunity to speculate about the future with your first question. Innovation occurs in a few categories. One is in the core business itself, where we have led the industry in developing offerings that started with basic products and have now turned into a multi-hundred-million-dollar traditional set of corporate finance tools. Another exciting area is data science. We've made significant investments over the past six years and believe we have the industry's largest dataset. We increasingly use machine learning and AI to add quantitative rigor into our investment process. Additionally, we consider insurance as a possible expansion, as it relates closely to litigation finance. We have a small insurance business and regularly assess whether there's more potential in the insurance space.

Jonathan Molot, Chief Investment Officer

As Chief Investment Officer, I’m guided by two overarching principles fueling our development of new products in new areas. The first is we are simply the best, and our unique abilities at the intersection of law and finance give us a broader array of opportunities. The second principle is we do not want to lose our shareholders' money on something we don’t understand. Those principles guide the way we create new offerings.

Julian Roberts, Analyst

Thanks very much. Very clear, very interesting.

Christopher Bogart, CEO

Thanks, Julian. We have a webcast question from Michael Bancroft. If Argentina aren't successful in getting a stay, when will they have to post a bond in order to appeal, and will this bond be the full amount of the award or a lesser amount? What is your best guess as to when we hear the outcome of the motion for a stay? The question misapprehends what is happening in the US a little bit, so let us step back. Argentina has appealed, as have the Petersen plaintiffs and Eaton Park cross-appealed. Those appeals are going forward regardless of bonding and regardless of any stay. There's an unqualified right to appeal, and that right is not affected by the underlying judgment, whether it is about the bond or not. The core question now is whether the court will grant a discretionary stay, considering Argentina's statement that they will not post a bond. As to timing, it's impossible to predict a judicial decision's timing in the US. The judge has been relatively prompt this year, but she could decide in 10 minutes or take weeks. We will just have to wait and see. We've received a final question from the webcast from Andrew Shepherd Barron. Your cumulative lifetime IRR to the end of June was 29%, and is reported as 27%. Is this linked to the slightly longer duration reported or is it a definitional change? It's linked to the slightly longer duration; it's not a definitional change. We've reported those numbers in exactly the same way for a very long time. It’s longer duration, but it's also the impact of some older vintage stuff resolving. These small fluctuations are not particularly concerning to us, given that we continue to produce very desirable overall returns. I'd like to thank all of you very much on behalf of Jon, Jordan, and the rest of the Burford team for attending this call, for your thoughtful questions, and for your ongoing support of Burford. Thank you all very much.

Operator, Operator

Thank you all for joining. I can confirm this does now conclude today's call. Please have a lovely rest of your day, and you may now disconnect your lines.