Argentina win could be game-changing for Burford Capital

Predictions that a company is at a “turning point” should always be taken with a pinch of salt, but for litigation funder Burford Capital (BUR) expectations that its roster of ongoing cases was about to deliver significant returns were fulfilled, pushing up realised gains by more than 250 per cent during the half to $94mn (£75mn). Combined with a $400mn issuance of senior notes in June, Burford currently sits on its strongest cash position in years.

There were already indications prior to the interims that Burford was enjoying a winning streak in the US courts. It recently won the latest legal round in the southern district court of New York over the nationalisation of Argentine oil producer YPF in 2012, when the populist Peronist government led by Cristina Fernandez de Kirchner seized a controlling interest in the long-privatised firm. The initial award totals $16bn, with Burford’s share estimated by analysts to be $6.2bn. This was at the top end of what analysts had been forecasting, although it is likely that the final settlement figure will be at a discount by the time Argentina exhausts all its options for appeal.

Burford’s business model has always turned on the premise that a judgment against a debtor confers rights of seizure that would not be available in the settlement of a conventional contractual debt situation. However, the sheer uncertainty of legal processes – a dyspeptic judge, a hostile jury – means that valuing Burford’s portfolio of cases accurately is exceptionally difficult. Indeed, depending on the circumstances, the company may apply a discount rate of anywhere between 8 per cent and 100 per cent to the fair value depending on the outcome. In these results, the company had level 3 case assets totalling $4.4bn across a range of classes of litigation.

Burford’s complex financial statements will tax the patience of even the most determined investor, with a myriad of adjustments, provisions and contingent liabilities all complicating the picture. In a sense, this is understandable as the company generates both costs and risk until its litigation ultimately succeeds or fails.

Broker Berenberg values the YPF award at 1,150p per share once a 50 per cent discount rate is applied, implying that investors pay only a small premium for the rest of the portfolio. Berenberg calculates a current forward price/earnings (PE) of 8 for 2023. The business model can generate either feast or famine and we believe the shares mirror that binary quality. Hold.

Last IC view: Hold, 1,102p, 17 May 2023