What is the true value of Burford’s $773m claim against YPF?
EY highlights significance of litigation finance company’s action against Argentine oil group
Burford Capital, the Aim-listed litigation finance company, finally published its audited 2019 results on April 28, more than a month later than the originally promised date of March 24. Burford had delayed the release of its audited results even before the UK lockdown order.
It would appear Burford’s auditors at EY in London were asking the company for a great deal of help with their inquiries. At nine pages, EY’s opinion letter is extraordinarily long, but then it had to explain a challenging list of “key audit matters”.
On Burford’s earnings call, Christopher Bogart, chief executive, said “we are thrilled to be presenting our 2019 results”, adding “we’re feeling very good about how 2020 has started off”.
That could be a minority view. According to the slide deck sent before the call, “Burford-only results without third-party interests in consolidated entities, as adjusted” showed a 31 per cent decline in profit after tax to $226m.
The EY audited results cast interesting light on one part of Burford’s “capital provision assets”, which are its claims on YPF, the Argentine national oil company, and by extension the Argentine Republic. YPF claims account for $773m, or 38 per cent of Burford’s capital provision assets, and 53 per cent of the “capital provision income”.
Since July, Argentina has elected an aggressively populist government and is within weeks of formally defaulting on its sovereign debt. This would seem to be a serious challenge for Burford. As EY commented, Burford’s Argentine action “is the most significant of those the company is currently invested in”.
A number of people, myself included, have challenged whether that $773m should be denominated in dollars rather than Argentine pesos with an uncertain future value. On the call Jonathan Molot, Burford’s chief investment officer, sought to reassure investors on this point.
“Basically what would’ve had to happen is the holders of the ADRs would have had to break them apart, exchange them for peso-denominated shares traded in Argentina and then sold them in Argentina, which would be at odds with the bylaws.”
A couple of observations. First, I think the “ADRs” for YPF that Mr Molot is referring to are really ADS, for American Depository Shares, which in an earlier legal form were called American Depository Receipts. So my view is no. Those “holders”, such as Burford, hold ADS “tickets”, traded on the NYSE, that only represent actual YPF shares, which are traded in Buenos Aires in pesos. The YPF “bylaws” to which Mr Molot referred (specifically Section 7) are really translations from the actual bylaws which are based on Argentine law.
Since Burford’s case is filed in the US federal district court in Manhattan, whether it can ever be paid in dollars depends on the relevant precedent for foreign-law judgments. That would be “Die Deutsche Bank Filiale Nurnberg v Humphrey”, which says “the exchange rate from the date of domestic judgment should be used”. That is a lot of pesos to try to change to dollars sometime in the future.
Burford declared a “continuing rapid growth” in annual commitments for litigation. Its portfolio ranges from securities law or corporate claims (such as against YPF) to a German class action for VW owners to mega-divorces in London, between Tatiana and Farkhad Akhmedov.
However, things have not always worked out as Burford might have hoped. For example, in a 2010 opinion (Chevron Corp v Steven Donziger, et al) handed down from the US district court in Manhattan, the judge wrote that the “evidence at trial established that Donziger, a New York lawyer and resident, here formulated and conducted a scheme to victimise a US company through a pattern of racketeering . . . Much of the funding came principally from Kohn in Philadelphia and Burford, which operated at least part in the United States. Absent the US activity, there would have been no scheme.” That opinion was upheld by the New York-based Second Circuit Court of Appeals in 2016.
Burford got out of its funding arrangement with Donziger et al after it had already put up $4m. “Chevron” had been part of its portfolio.
Christopher Bogart and other Burford officers on the call expressed optimism about a post-coronavirus increase in litigation. Yet court backlogs and delays will almost certainly increase. So the present value of that portfolio might decline while the volume goes up.
A Burford April 27 blog note said: “Legal finance is smart money.” Can the same be said of its creditors and shareholders?