Burford Capital Stock: The YPF Affair (NYSE:BUR)

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PICCA ARMY

The following segment is taken from this fund letter.


Capital of Burford (BUR)

The most significant event affecting Burford will be the outcome of their YPF lawsuit against Argentina. If Burford won, he could receive net proceeds of between $1.1 billion and $5.6 billion. This numbers are derived from a formula written in YPF’s prospectus and articles of association and depend on several assumptions, hence the wide range, but in all cases are significant relative to Burford’s current market capitalization of approximately $3 billion.

In a lengthy recent interview, an Argentinian legal expert concluded that based on what we know the case should be a home run for Burford, but “we don’t know 70% of what’s being said, we don’t We don’t know the private documents, we don’t know the private positions, we don’t know a lot of things, experts have testified on both sides, we don’t know what’s there.

Barely conclusive.

Nonetheless, I believe Burford remains an attractive investment regardless of the outcome of this case. To understand why it’s helpful to look at how Burford’s litigation funding works. Each case funded by Buford has one of three outcomes: a win, a loss, or a settlement. A loss generally results in the loss of its entire investment by Buford. Which historically has happened 10% of the time. Given this risk, Buford actively weighs the merits of a case and its potential return. A high payout on winnings, typically 5x, increases the expected payout of the entire portfolio.

In this way, litigation funding somewhat resembles venture capital investing, where VCs are just waiting for a handful of big wins to make up for lost investments while providing a reasonable return on the overall portfolio.

A key difference with venture capital is that most defendants decide to negotiate a settlement rather than risk heavy penalties at the hands of a judge and jury. Additionally, the legal system guarantees an eventual resolution of every case, and Burford’s cases have typically been resolved within 2-3 years. As a result, Burford’s portfolio generates a fairly reliable, albeit erratic, profit stream over time. Ex-YPF Burford produced IRRs of around 20% on deals that were done.

Based on existing ex-YPF cases alone, Burford predicts it could generate more than $3.2 billion in achievements. Further, suppose we assume that Burford is operating in liquidation mode, where it incurs operating expenses until it settles all outstanding issues in, say, five years. In this case, it could cumulatively generate $8 per share in pre-tax earnings, compared to a stock price of around $10. In other words, even in an unrealistic negative case, we should recover 80% of our investment in 5 years.

Of course, as the largest litigation funder with a strong brand in the market, Burford is in a dominant position to win more cases, so I expect it to do better than that in the practice.

If Burford wins the YPF case, our investment will be a home run. If he loses, I fully expect medium-term volatility in the stock price. Still, I expect his cases to be resolved and turn a profit, the stock price will continue to escalate.


Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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