Valuation of Unpaid Judgments and Arbitration Awards: Key Takeaways

What is the right way to value a judgment or an arbitration award that has not yet been satisfied? Is there a correct approach or it is a case of allowing award and judgment creditors to do as they like? Over the past years, we have been regularly called upon by our clients to assist them in valuing these litigation receivables. Here are a couple of the key points to bear in mind.

Some companies either write down litigation receivables to zero or keep them off balance sheet. There are -- in all likelihood -- several reasons for doing so. First, it probably reflects the traditional approach to litigation, i.e. as a cost centre. Second, it takes some pressure off the management team, because they do not have to justify the evolution of a litigation receivable's value to a board or to shareholders. Third, it alleviates the need to actually carry out a rigorous and detailed valuation of something that is by definition unique (no two cases are ever the same). That said, we believe this approach is unsatisfactory. Whether we choose to admit it or not, litigation receivables clearly have some value. We know this because -- at Slaney Advisors -- we regularly help clients to buy or sell litigation receivables (court judgments or arbitral awards).

Companies such as Burford Capital -- the world's largest litigation funder -- appear to take a more modern view, one which we endorse. For example, Burford's share of the Petersen v Argentina judgment is valued at fair market value in its financial statements, which are filed with the SEC and subject to the scrutiny of regulators and, ultimately, the market. The markets clearly endorse this approach because the valuation of its share of the Petersen judgment accounts for roughly half of Burford's market capitalisation. Put another way, for investors wishing to gain some exposure to the Petersen judgment, they can see that buying shares in Burford is an easy, liquid, proxy.

Valuing claims can be difficult. For a start, as many of you will know, it is often a challenge to establish the current face value of a judgment or award. The first step is to build a model that incorporates all of the principal (which is sometimes awarded in more than one currency), costs & expenses, pre-award/judgment interest and post-award/judgment interest. Calculating the interest component can be time consuming, depending on whether it is simple or compound, and what the reference rate is. Combining all of these elements will get you to the starting gate, i.e. the current face value of the judgment or award.

The next part of valuation is far more difficult and subjective. In essence, the face value needs to be discounted to take into account future contingencies. By far the most important is the likelihood of recovery. If the prospects of recovery are zero, you can stop the exercise there. But if the prospects are more nuanced, it gets harder to calibrate. Is Spain more likely to pay its ECT awards than Argentina its ICSID awards? Is Venezuela more likely to pay than, say, Congo? There are a great many factors that we input to attribute a recoverability factor to any given judgment/award debtor.

There are, of course, more measurable discount factors as well. For example, if a judgment is subject to appeal, or if an award is subject to annulment, those "risks" can be valued to a high degree of accuracy.

Sometimes there are externalities that make the valuation exercise even more complicated. Earlier this year we were tasked with valuing 23 judgments and awards against Venezuela and PdVSA that were part of the Crystallex enforcement action in Delaware. Those 23 judgments and awards figured on the Priority List of creditors that the court ruled in principle might be entitled to a share in the proceeds of the court ordered sale of Citgo. However, because of the sale procedure adopted by the court, the creditors on the Priority List will be paid on a "first in time, first in line" basis and not pro rata. This, in turn, meant that the claims that will be paid out in full would have a relatively high valuation, whereas claims that will not get paid out will be much lower in value. Put another way, two contiguous claims on the Priority List could have been valued dramatically differently, depending on the level of the winning bid in the auction.The problem, however, was that we did not know where that dividing line would sit before the end of the Citgo auction. Our challenge was to develop a valuation model for our client that took this externality into account. We now have much more clarity because we know the level of the winning bid and, happily, our model was pretty accurate.

So why go to the effort and expense of valuation? There are many reasons. For some, who may have acquired a judgment or award when they acquired a company, it is good to know the value of what they bought. For others, they may want to monetise all or part of their judgment or award or at least know what it might be worth in a sale. Still others, like Burford, may want their balance sheet to reflect the fair value of these receivables.

We think that there is another group that could benefit from valuations: judgment/award debtors. Argentina, for example, is sophisticated enough to read Burford's financial statements and see from those how Burford values its claim. We believe that all debtors (sovereigns and corporations alike) would benefit from knowing the market value of the claim that they are facing. At a minimum, this could frame settlement discussions and put them on a more scientific basis. More broadly, they could help debtors to explore ways to re-finance this kind of litigation/arbitration debt.