Burford Capital Bonds Now Yielding 14.9%

This was the headline in my inbox earlier in the week that suggested the Burford Capital 6.5% 2022 bond maybe offering good value in the current climate, and worthy of a closer look.

So, with plenty of time on my hands this weekend, I did take a closer look at the one time market darling, and largest litigation funder in the UK market.

Firstly, Burford’s share price has been hit very hard by the short seller attack from Muddy Waters. You may recall last summer there were numerous articles in both the mainstream media, and legal publications about the attack, along with counter attacks and denials from both parties. I’m quite sure there are ongoing legal actions still being pursued about who is right and who is wrong, but whatever the ultimate outcome, the fact is that the share price was hit hard, and had not recovered very much ground before the Coronavirus sell off also hit the share price.

In August 2018 Burford’s shares hit a high of ￡20.00+, by August 7th a year later they were worth ￡6.05 after a 70% decline.

As if that wasn’t bad enough, along comes the Coronavirus sell off that takes another 50%+ off from late February 2020 to a recent low of ￡2.80 on the 18th March 2020. There has been a slight recovery since the recent low, with the share price today standing at ￡3.96, giving the company a market cap of ￡866m, some way off the multi-billion dollar business it once was.

All in all, a pretty poor show for shareholders of late.

But what about opportunities for potential new bond holders?

I don’t hold any Burford bonds at this point in time, but some of my industry colleagues certainly do, and I can see why. The attraction of a 6.5% gross yield is appealing in the low return environment we have been in for a decade now, especially for income starved private investors.

All those reading this post will know what Burford do, so I won’t waste time explaining their business model.

But the key question for those considering purchasing their bonds at the current below par price is, will the business / business model survive the challenges and disruption caused by the Covid-19 pandemic?   

Clearly litigation funding is not a shop, café or restaurant, nor is it part of the travel or entertainment industry, so is it more insulated than these businesses, or does it foresee any other problems?

Let’s look at what their CEO Chris Bogart had to say in their Coronavirus update letter dated 12th March 2020. 

“Burford has closed its New York o?ce in response to the coronavirus outbreak following a number of locally relevant data points.

Virus notwithstanding, we remain open for business, signing two term sheets for new investments just yesterday and operating a standard full-capacity Commitment Committee calendar. Courts remain generally operational, and where delays occur, Burford often benefits economically from them. Burford is a global and geographically dispersed business built with remote operations in mind. All of our information systems are cloud-based. Our client base of lawyers is especially capable of working virtually and we are confident in our ability to keep engaging them. We do not believe that these disruptions will have any material negative impact on our business, and indeed we expect a heightened level of engagement as firms and their clients head into a potential downturn and also come to grips with the economic damage inflicted by the coronavirus. In addition, our management team is geographically dispersed and will remain so, mitigating any local impacts.

We anticipate a delay in the release of our fiscal year 2019 results. At present, we anticipate that delay to be two or three weeks, and we will announce a firm date for our results as soon as we are able; as things stand presently, we certainly do not expect the delay to extend beyond Easter”.

So, the CEO is clear that they “do not believe that these disruptions will have any material negative impact on our business”.

That said, this update was issued on the 12th March, and things have moved on since then. Certainly UK courts are not as active as they used to be, and lengthy complicated litigation is not easily conducted via numerous video links with all the usual technology shortfalls that we all know about well.

In simple terms, if Courts are not sitting, cases will not settle, or may not have the leveraged threat of Court in order to negotiate pre hearing settlements. Of course, a few months out of action in legal terms is not very long at all, but without any cash being recovered from settlements over an extended period of say 3 -9 months, thing’s may become more precarious.

Looking at the financials, Burford is incredibly profitable according to its published accounts (putting aside the Muddy Waters comments of profit recognition for now).

Its operating margin for the last 3 years is circa 80%, with a FY 2018 net profit of $318m from $425m revenue.

It has a strong cash balance of $343m (2018) 

H1 2019 Income was up 40% to $287 million and profit after tax was up 36% to $225 million versus H1 2018

$1.6 billion in new commitments were made to Burford in 2019, a 24% increase over 2018 and a new record

Turing now to the bonds on offer themselves, the 6.5% 2022 are the company’s earliest maturing bonds, due on 19th August 2022, with the coupon paid every 6 months. Moody’s have rated them Ba3, which is sub investment grade, known as junk bonds in the market.

Moody’s definition of a Ba bond: “it is judged to have speculative elements, and is subject to substantial credit risk”.

These bonds that usually trade at 100p par were discounted to 83.5p during the recent market sell off, thus producing the enticing 14.9% yield to maturity (as used in the email title to grab my attention).

I have to say I was tempted to have a little flutter at such a decent discount, as I personally do not think Burford will go to the wall during this pandemic, and of course bonds trump equity and dividends should the worst happen.

Unfortunately, by the time I got around to looking at the latest price on the retail bond market, it had jumped from 83.5p to 91p, thus reducing the yield to maturity down to 10.9%. Not quite enough upside to compensate the risks for me, but with more volatility ahead for sure, the price may yet revert back to a very compelling level.

For now, I will sit tight and wait for the delayed 2019 results which is usually a thumping good 100+ page read.  

The above is not investment advice, and should not be considered as such.

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Phil Bellamy FCII, Managing Director of Tibbington Consulting Ltd

Phil has been underwriting ATE and BTE legal expenses insurance for more than 30 years, and now provides help and assistance to senior figures in the insurance, legal and litigation funding industry. Click here to view Phil’s credentials document.