Burford Capital Ltd

LSE:BUR

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Burford Capital First Quarter 2024 Financial Results Conference Call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I will now turn the conference over to Christopher Bogart, Chief Executive Officer. Christopher, you may begin your conference.

[Christopher Bogart, executive]

Thank you very much, and hello, everybody. As usual, I'm joined by Jon Molot, Burford's Chief Investment Officer; and Jordan Licht, Burford's Chief Financial Officer. And in fact, Jordan and I are delighted to be coming to you live from beautiful Copenhagen today, where we have spent the day with investors here, one of Burford's groupings of investors in Continental Europe, and it's a lovely day here. Quarterly results, as we've said before, we're going to do these calls in what is, at least for us, we hope, a fairly short and efficient manner. The slides really do on these quarters speak for themselves. So, I'll give you a little commentary on top of that, and then we'll be happy to take your questions, but we'll try not to take too much of your time. And in general, when I think about quarters, while we're obviously happy to be talking to you at any time of the business, we just don't pay that much attention to individual quarters in this business. The time scale of the business operates in years, not in 3-month intervals. And so, you get a lot of period-to-period variability as you're seeing here. And we just don't, as a management team, read that much into it. And that's especially true in what we think of as what I'll call almost the dead ish first and third quarters. Although to be fair, last year, the first quarter was extraordinary because of the YPF win late in the quarter, which obviously makes comparisons with any quarter that comes later, essentially useless. So, that's sort of how we think about it. But for those of you who do want to go quarter-by-quarter, I think, obviously, I would characterize this as being a mixed quarter. On the cash front, we had terrific cash performance, the highest level of cash receipts in the first quarter that we've ever reported. We had perfectly solid realized gains realizations above average for the first quarter. When you come though, to unrealized gains, there's a lot going on in the accounting there, including some headwinds from changes in the discount rate that Jordan will talk about. But I think the important point to underline there is that, that all is happening without any material negative case development. So, our loss rate is actually still meaningfully below our historical average. So, while it's annoying obviously for us to be printing an accounting loss, when I look at the business as I do on a cash basis, what I fundamentally see is that we brought in cash that was at a level well more than double the total of our operating expenses and financing costs. And so, on a cash basis, I regard that as successful even though from an accounting perspective, this quarter doesn't look as great as some have historically. So, that's sort of my overall take on Slide 4. With that, I'll move to Slide 5. And Slide 5 really just expands on Slide 4 a little bit, and I will largely leave you to read this on your own, except that I would note just a couple of things. First, that we are swimming in liquidity right now. And that sets us up well to meet future interesting opportunities. And second, we're still sitting with this enormous portfolio, and we've been generating consistent returns as matters from that portfolio come through to conclusion. Slide 6 shows you where we are in terms of new business. And I sort of repeat what I said at the outset about the divergence between first and third quarters on the one hand and second, and especially fourth quarters on the other. And this is just sort of the common-sense reality of our business. Nobody who can do a fourth quarter deal with us, either law firms with a calendar year-end or businesses with fiscal year-end. Nobody who can get a fourth quarter deal done just hang around and wait until the first quarter. And that's why you see these historically depressed levels of activity in the first quarter in this business. And this has existed long before we started reporting on a quarterly basis. And when you get to deployments, deployments depend on lots of factors, not just on new business. And literally, crazy as the sound, the deployments are going to depend on whether law firms are efficient in their billing. So, because most low firms are calendar year entities, what they do in December is they scramble to get every dollar bill and pay that they possibly can. But lawyers are sort of notoriously bad and slow at billing. And so, then what happens after they put forth that effort is they don't turn around in January and February necessarily and keep on billing actively and robustly. So, that's just one of a number of factors that goes into the level of deployments that you see here. And again, it's not something that I particularly focus on, on a quarter-by-quarter basis. Slide 7 is the good news slide, and this shows you about the cash that's coming into the business, again, at a very high level, showing you the level of portfolio activity, and that's a high level, not only on a group-wide basis that you see there, but also on -- sorry, on a Burford-only basis that you see there. And the bulk of that cash is coming in high-returning assets. And again, realizations right on top of where we were in the first quarter of last year, well above where we were in the first quarter. And so, fundamentally, we're seeing portfolio velocity continue. We've had in the first half of this year, lots of activity in the cases that continued through into the second quarter. And we're pleased with how courts are dealing with not only newly filed cases but working through COVID backlogs. We've had people in trial as recently as last week. And we're happy with the status of the portfolio and our ability to continue to see cash generated from it. So, with that, a fairly quick tour through that. Let me turn it over to Jon for a few slides.

[Jonathan Molot, executive]

Thanks, Chris, and thanks to you all, as always, for joining. As Chris says, the portfolio is very active. There is tons going on. And so, it's very exciting to have our hands full with a lot going on in the investments we've made and we've seen them move through the system. If we turn to Slide 8, of course, there's the very large case that people pay a lot of attention to, the YPF cases, everybody knows that we had a final judgment entered in September, that judgment was stayed during part of the fourth quarter, but that stay with lifted and the judgment is immediately enforceable in the first quarter, that enforcement process has commenced and been ongoing. As there is an addition, a pellet briefing going on, Argentina has appealed it adverse signing to the Court of Appeals for the second circuit and the plaintiffs have crossed the field, the exclusion of Ypf as a defendant from the case. A reminder, we Burford, is entitled to roughly 35% of the proceeds from the Petersen case and 73% of the proceeds from the Eton Park case. Turning to Slide 9. I think as Chris said, when you look quarter-to-quarter, it's important not to miss the fundamentals of the business and those fundamentals continue, and you can look at our performance overall, where it's a combination of adjudication wins, adjudication losses, and settlements that produced the results of our investments. And you can see that the settlements are the largest category. And then for the cases that go to final adjudication, our wins far outstrip our losses, both in number and size. And this ends up producing very attractive returns on invested capital and IRRs. And we just continue to plug away at that core business and see the matters that are producing the sort of results within the litigation process as time goes on. If you turn to Slide 10, you also see kind of the other graphic we've showed you in the past that lays out the asymmetric return profile from what I showed on the prior slide, whereas the prior slide shows what it is about the litigation process that leads to lots of decent returns in settlements, but then also some asymmetric returns when cases go to adjudication, and you see those mapped out here that whereas the loss rate is relatively low and the losses are confined or contained, the wins can be quite outsized and that just makes for a very, very attractive asset class. And I don't know that I need to spend more time on it, but you can just see that we've got a large chunk of cases that are producing ROICs that are greater than 200%. So, with that, I will turn it over to Jordan.

[Jordan Licht, executive]

Thanks, Jon and Chris. Good morning, and good afternoon to everyone on the call today. I'm on Page 11, which shows a summary of the Burford-only financials. Chris mentioned comparisons to 2023 for the same period are going to be difficult given that right at the end of March last year, we received the positive news regarding summary judgment on the YPF cases. So, I'm going to touch on a couple of the key numbers here and then go into greater detail on the following pages. In total, we had $31 million of revenue for the period. The capital provision income and asset management income breakouts are shown on the right of the page. Net income per share for the quarter was a negative $0.14%. Tangible book value is just shy of $10, including the intangible were slightly above $10 level at $10.34 per share. Overall, the loss was impacted, and I'll talk more about it by various fair value movements, including lots that have nothing to do directly with case developments. And as Chris mentioned, there were no material negative case development in the portfolio. We'll talk more about expenses, but those start to normalize from some of the onetime items that we also saw in 2023. On the asset side, we're at approximately $3.4 billion of capital provision assets. Of that, we've got $1.6 billion in our deployed cost. Of that $3.4 billion, the YPF assets are approximately $1.4 billion. And we have $490 million of fair value gain relative -- embedded in that number relative to the rest of the portfolio, excluding IPS. This fair value represents only a 31% uplift to deployed cost of the assets. So, in summary, there's a lot more room to run with respect to the assets. I'm going to move to Page 12 now. This page breaks down capital provision income into all of the components. Gross realized gains in Q1 were $45 million. And looking at the details, that's a $6 million increase compared to last year's first quarter. We did, however, have a loss -- a partial loss in a sub case associated with a larger portfolio, which drove the net number associated with realized gains lower. Let me go a little deeper into that. So, as we've described our business, we look to do multi-case portfolios. When we do that, those are cross-collateralized so that when one subcase loses our counterparty is required to make up that loss from other cases. So, on a cash basis, we look at the portfolio as one deal, and we measure cash inflows and cash outflows. And that structures very efficient and effective in preventing capital loss. However, we do allocate some of that invested capital to each subcase in the portfolio. So, in this case, a sub case in the portfolio loses, we could incur a loss. And we did, even though we don't actually suffer a loss on a portfolio-wide basis. In particular, in this first quarter, that's exactly what happened. A subcase in a large portfolio lost, we had allocated $15 million to that case from the portfolio and now book a realized loss for that amount, but the portfolio as a whole is and has been successful. We've already recovered all of our capital back on this asset and some profit, and we do anticipate additional profit going forward from the asset. Moving on asset valuations are also impacted by duration and time value of money. I know I've talked about that before, and I've also talked about how the accounting movement here doesn't impact the ultimate resolution of any asset. In the first quarter, we saw an increase in discount rates across the portfolio. This increase was approximately 20 basis points, and that represents a $22 million headwind to valuations. The discount rate generally follows market trends and rates, and we would expect to see volatility in quarters when there are broader rate movements for financial instruments. Of course, we focus on cash resolution of our assets and not this interim fluctuation. I'm going to move to Slide 13. This is the overview of our asset management business, which continues to perform and we enjoy the benefits and the awards of using the funds to augment the core balance sheet business. In quarters where we don't see significant movement with respect to our assets, we wouldn't anticipate seeing significant asset management income. This business is also a cash-on-cash business, meaning that while we book the income with movements of the fair value movement of the assets, the actual payout is only when we see cash in the funds. We did to receive $4 million of cash receipts from the business. As we've discussed, the overwhelming majority of this income is driven by our partnership with the sovereign wealth partner in BOF-C. We think about that as a source of incremental liquidity for our balance sheet business that earns a performance fee. As a reminder, that BOF-C takes approximately 25% of nearly all of the new commitments on a pure pro rata basis. Moving to Page 14, I'm going to shift from revenues to expenses for a moment. We spent a lot of time last year talking about expenses and the various movement in expenses, some which are that period, some of which are accruals associated with the accounting driven by different fair value movements or other onetime items. Overall, first quarter expenses are down, and we're only 55% of last year's total when looking at the same period. Main components like salary and benefits, the annual incentive comp, share-based comp remained generally flat year-over-year. Annual incentive comp represents -- this as a reminder, represents discretionary bonuses for our employees, and that gets finalized in the fourth quarter. One of the lines that we've historically spoken about is the legacy asset recovery expense and the accrual that was related to for all effective purposes and earn-outs for the purchase of that business. We had mentioned that there's only one asset left in that arrangement, and we thus collapsed that line item into the long-term incentive compensation line as we don't believe that there'll be any material changes associated with it in the future. Reminder again, those expenses are accruals. So, the long-term incentive comp or the legacy asset recovery line were only paid out and our only the cash only goes out the door when we receive the cash from the investment. You'll see case-related expenditures that are ineligible for inclusion in the asset, are down and have reduced significantly from last year, especially period-over-period. This trend -- if we looked at this in the fourth quarter, that was approximately $1 million. Now we're down close to half that figure. We would expect to see some volatility in that over time. But as of right now, this year, so far, only $500,000. I'm going to move to Page 15, which is our liquidity and leverage page. Chris pointed out that we sit on a very strong liquidity position at this point with over $500 million of cash and securities as well as another $132 million of due from settlement or receivables. Just to go a little bit deeper, though, on one of the points that pulling from previous slides, the $138 million of cash receipts that came in -- that came from a breadth of individual assets with 5 different assets producing more than $10 million each. So, like the depth and breadth in that number. Earlier in the quarter, we took advantage of a robust high-yield market, issuing $275 million add-on to our June 2023 issuance. And we had done that at 120 basis points inside of the original issue yield on just 6 months earlier. Focused on the latter debt schedule. You see that on the right-hand side and our next maturity doesn't come due until August of 2025. The rest of the debt, as you can see, is significantly back-end loaded. We get asked a lot about our debt capacity and how we think about leverage. Earlier this year, I guess, with the end of last year, we put out what we believe is the prudent maximum leverage of 1.25x debt to equity. Right now, you can see we're well within that covenant at 0.8x and well within our threshold. But to be clear, that's a maximum that I talked about, not necessarily a target, and we're always managing our liquidity levels, the anticipated cash needs, as well as receipts as well as our expenditures on the portfolio. So, with that, I'll stop there and hand it back to Chris.

[Christopher Bogart, executive]

Thanks, Jordan. Slide 16 is a slide you've seen before, that just tries to pull together and sum up the key points about the business. And really, just to reemphasize them, the driver of a lot of the value in this business is the core portfolio that we have. And that portfolio continues to perform robustly. The return levels are the same as they were when we last reported to you. Those are desirable, uncorrelated returns to keep powering the business forward as does our market-leading origination platform, which causes us to put meaningful capital out the door every year in a world where we are, by far, the brand leader. In other words, the brand of litigation finance firm, that survey respondents identified first or only as being associated with the category. Then, of course, we have additional value being created, as Jordan already discussed from our asset management business. And finally, last but by no means least, we have the YPF assets, which as Jon described, are making their way through the litigation and enforcement process. So, in sum, if you look at this on a quarter-by-quarter basis, a mixed quarter but a very strong cash performance for us this year -- this quarter. But generally, the first quarter that's just not all that busy and active for us. And with that, we appreciate your support, and would welcome any questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question over the phone comes from Alex Bowers with Berenberg.

[Alexander Bowers, analyst]

Just one for me. In terms of, I guess, commitments looking forward to the kind of the rest of this year, what sort of level, I guess, would you look to kind of achieve? Are you still kind of aiming for similar levels we saw into 2023, sort of $1.2 billion grew wide, just under $700 million, to be that sort of a similar level we expect this year or the expectations kind of moved?

[Christopher Bogart, executive]

Well, we don't guide on future anything, really, including future new business. But let me comment on a couple of things that go into driving the level of new business that we do. And so, there are a couple of points here. You asked about that on a group-wide basis. And while we do report group-wide so that people can get a sense of overall activity in the business, there are obviously a portion of the group-wide business that we do is not nearly as remunerative to us as our core balance sheet business is. So, I think group-wide is, again, useful for showing activity overall, but not really useful in terms of predicting future profitability. If you look at sort of the Burford-only capital provision direct business, that's the core balance sheet litigation finance business that drives the bulk of our profits. What we've said before and what continues to be the case is the level of business that will trend in that category in any period, whether it's a quarter or a year, really depends on whether we have sort of 0, 1 or 2 big chunky deals. In other words, we have a pretty sustainable ongoing level of smaller deals that we do. We sort of do period in, period out. And then as we continue to take especially large corporates and do significant monetization transactions with them, and you saw an example of that last year with a $325 million transaction with the Fortune 50 company. The question for sort of any period is whether one of those land? And that will have a fairly significant impact on the level of new business that we write in the period, and it's pretty unpredictable because the sales cycle on those deals is long, and they usually start a relationship by doing a smaller transaction with us. So, they're in the mix, but it's difficult. It's a little bit like asking an investment banker to predict how many blockbusters M&A deals that are going to be for the rest of the year. It's hard for us to do that. And so, I don't have a good answer for you, except that I remain encouraged by the level of interest that we have from corporates. In fact, you're going to see just in a couple of days from now, we, as you probably know, regularly release commission research that we do to the legal market. And another release of that research is coming out of just in the next couple of days, and it's pretty interesting when you look at the numbers to see just the level of interest in certain -- especially in certain industry segments. There are industry segments that you'll see there where either they are, half industry participants already say they're using litigation finance or plan to do so in the not-too-distant future.

[Operator]

We currently have no phone questions at this time. Rob, are there any web questions?

[Robert Bailhache, executive]

There is not. So, we have done, I think, a very good job of keeping to our promise of making quarters a brief check-in but not too big an event. So, in the absence of any other questions that have come in, either on the webcast and I see their entity there, or on the phone lines, I think that's a wrap for us. So, thank you very much for your -- thank you all very much for your time and your support of Burford. And as always, we're always happy to talk to you offline and answer any other questions that you may have with anything. And we look forward to talking to you in a few months. After, June here those numbers, right?

[Operator]

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