Burford: Argentina win helps vindicate valuation practices
Successful court case will not be enough to lure in investors wary of litigation as an asset
Argentine writer Jorge Luis Borges said that reality was not always what might seem probable or likely. Litigation financier Burford demurs from that view, investing in whichever side of a legal case it deems most likely to win.
A favourable recent ruling for plaintiffs against the renationalisation of Argentine energy group YPF in 2012 has given a flavour why. Burford shareholders could be in line for a multibillion-dollar payout. Shares have risen by two-thirds in response, taking them close to four-year highs.
That reflects the volatility of stocks in a field of financing that is fast growing but controversial. Shares in London-listed Burford halved in 2019 following an attack by short seller Muddy Waters.
The group now manages $5bn worth of assets. These are legal cases that it finances from its own balance sheet and investor funds. But valuations depend in part on Burford’s own expectations of success.
The YPF win provides some validation. But it will not be enough to lure in investors wary of the opacity and complexity of litigation as an asset. Financing conditions are getting tougher; spreads on Burford dollar bonds due in 2025 have widened by more than 100 basis points over the past year and now trade in line with junk.
Burford has invested about $60mn dollars in the YPF case. When a 20 per cent stake in the claim traded hands in 2019, it was worth about $1bn. Burford then valued the remainder at almost $800mn
Reduced legal risk following the recent court win makes it worth much more; between $3.2bn and $6.4bn to Burford, thinks Jefferies.
Burford could monetise further, by selling more of its share in the claim. Such a cash injection might be needed. Burford’s debt pile grew to $1.26bn last year.
The problem for all promoters of uncorrelated assets is that demand for risk remains correlated to wider conditions. The end of the cheap money era may make unconventional investments — litigation finance, for example — harder to fund.