Muddy Waters short seller report

Wednesday, Aug 07 2019 by

See link to Muddy Waters short seller report.

Burford short

I've held Burford all the way up from 180p, and think they've picked the wrong target. For instance Burford just announced that it has over $400 million of cash and cash equivalents on hand as of 5 August 2019.  Carson Block seems like a sound guy, very knowledge-able. Also Muddy Waters were very good at finding fraudulent Chinese companies listed in London and New York. So will read with interest. As I say, I'm long Burford and think they've picked the wrong target, but DYOR!

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Burford Capital Limited is a Guernsey-based finance and investment management company focused on law. The Company's businesses include litigation finance and risk management, asset recovery and a range of legal finance and advisory activities. It provides investment capital, investment management, financing and risk solutions with a focus on the legal sector. Its segments include provision of investment capital in connection with the underlying asset value of claims; investment management activities; provision of litigation insurance; and exploration of new initiatives related to application of capital to the legal sector until such time as those initiatives mature into full fledged independent segments. Its provision of litigation insurance segment reflects the United Kingdom and Channel Islands litigation insurance activities. more »

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134 Posts on this Thread show/hide all

dmjram 21st Aug 115 of 134

In reply to post #506761

I'm not sure you'd expect to be able to compare them like for like?
Berkshire as a diversified investment vehicle is a fundamentally different beast from Burford which provides capital for legal cases.

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Maddox 21st Aug 116 of 134

I'd like to pick holes in this concept of 'cost accounting' being preferable to 'fair value' accounting.  We are to believe that cost accounting  is a better valuation of Burford's assets, that is the money invested in in-flight court cases, being better than managements'  fair valuation.   

However, where money, hard cash, is spent on a  legal case - it hasn't been attributed to some tangible valuable asset - it has gone, sunk, never to be retrieved.  It's only value is the intangible likelihood or not of the case being won.  If the case is lost there is no value whatsoever - it is of zero value.  So how can the cash value spent on a legal case be conceived as an accurate valuation of its worth?

It is as if Burford's cash was spent solely on lottery tickets and that the balance sheet value reflected this 'investment' of the cash spent.  Would a sensible investor think that this was a reliable basis of balance sheet valuation?  The supporters of the cost accounting  would have you believe so.   

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dmjram 22nd Aug 117 of 134

In reply to post #506826

Issue is I think is that accounting just really isn't suited to assessing the value of litigation returns whether you use accruals, estimated fair values, cash basis etc. It's more a case of choosing the least worse.

The main benefit of cash accounting over fair value is that it is far less subjective than relying on managements estimates which with the best will in the world, auditors haven't really got a clue about the validity of, leaving aside the moral hazard which reliance on management estimates in the preparation of accounts introduces.

Provided the reward:risk profile for litigation investment remains positive, over time cash accounting should see a realisation of results in excess of carrying value of the case assets. 

With fair value accounts, you are exposed to a very large writedown risk on previously taken profits which reverse - per above for example, a Peronist government default would likely impair the Petersen case value.

Fair value may have been a reasonable estimate when booked, but the nature of the business makes outcomes volatile, and that is true even if you win the case. Basic bean counting backed by historic invoices it isn't!

EDITED to include section on reward:risk and impairment exposure in fair value accounts. 

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DaviStoVest 22nd Aug 118 of 134

In reply to post #506836

Less subjective, perhaps ... but quite meaningless.

EDIT: Whoops, reread your post ... and, actually, am more inclined to agree.  There is no simple answer.  Management are in the best position by far to estimate the value of the business.  Trust is therefore critical.  And trust will be engendered by good governance.  On which, I am happy to see Burford are taking steps in the right direction ... ...

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dmjram 22nd Aug 119 of 134

In reply to post #506851

Not quite - over time you would expect a stream of profits in excess of the carrying value of cases provided litigation finance retains a positive reward:risk profile.
Which allows investors to take a view on the premium (or not) they wish to give to book value, take a view on management effectiveness in selecting better cases, the impact of new capital entering the sector etc.

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DaviStoVest 22nd Aug 120 of 134

In reply to post #506866

Yes ... I edited my post while you were responding to it. I thought, on first reading, you were defending the notion that the investment made in cases was a valid method of valuation.

But you weren't.

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timarr 22nd Aug 121 of 134

In reply to post #506851

Trust is therefore critical.  And trust will be engendered by good governance.  On which, I am happy to see Burford are taking steps in the right direction ... ...

Correct. And they could do a lot to improve this by publishing the models they use to generate fair value pricing. Then investors could take a view on whether what they're sensible or not. 


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shipoffrogs 22nd Aug 122 of 134

In reply to post #506876

"On which, I am happy to see Burford are taking steps in the right direction ... ..."

I think it would be much more pertinent to say that they are reluctantly doing this under pressure.

And a comparison of the speed with which they appointed three firms of lawyers to look into the shorting attack and the time taken to make some of these changes looks very telling.

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pka 22nd Aug 123 of 134

In reply to post #506836

"The main benefit of cash accounting over fair value is that it is far less subjective than relying on managements estimates which with the best will in the world, auditors haven't really got a clue about the validity of, leaving aside the moral hazard which reliance on management estimates in the preparation of accounts introduces."

And relying on management estimates of fair value means one has to have great confidence in the integrity of management. Although I know very little about Burford's management, the following facts do not give me that great confidence:

The CEO and CFO are based in the US, but the company is registered in Guernsey and quoted on the British AIM market.

It has gone through several CFOs before that job was given to the CEO's wife.

The CEO is not on the board so his renumeration does not need to be revealed in the accounts.

It is in the company's interest (when trying to borrow money or raise cash from new investors, and to support its share price) to declare large profits based on managements estimates of the 'fair value' of ongoing cases before the cash is received.

Profits based on 'fair value' accounting have been growing steadily but so has debt and net cash received has been becoming more negative.

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abtan 27th Aug 124 of 134

For anyone interested in Edison's surprisingly high valuation of Jaguar Health (which came up in the MW report earlier this month):

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dmjram 29th Aug 125 of 134

Worth viewing if you missed it in May (I did). The bear case for Burford with somewhat less rhetorical flourish than the later Muddy Waters report. Interesting at around 5mins for view on cash vs fair value approach.

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Maddox 30th Aug 126 of 134

In reply to post #508476

Interesting that Canaccord's valuation on BUR is 1196p - which is a 73% premium to the sp as I write.  Portial Patel has based this on a far more conservative cost accounting basis using the Gordon Growth Model as she fully explains in the video.  

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Luthrin 30th Aug 127 of 134

In reply to post #508776

Canaccord cut its target price on Burford to 570p yesterday.

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Maddox 30th Aug 128 of 134

In reply to post #508811

Yep, one wonders how they got their financial modelling so badly wrong the first time?  

The only thing that has occurred since their initial detailed appraisal is a highly positive trading update and the Muddy Waters attack; which as it plagiarizes Canaccord's own critique, added no new insights.   The notion that they are cash constrained is somewhat bizarre - they reported having $400m in cash/cash equivalent on 8 Aug.   So it's difficult to envisage any need for BUR to slow-down their case funding  in the foreseeable future.   

It appears that having been up-staged by Muddy Waters Canaccord have felt it necessary to double-down and rip-up their first report in an effort to be lead bear on Burford.  A bit pathetic really.  

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willhampson 30th Aug 129 of 134

In reply to post #508846

I think one of their main arguments is that the uncertainty in Argentina and the increased chance of a return of Kirchner to power (i.e. a left-wing govt) means that the value of the Peterson claim should be discounted; in terms of the secondary market drying up and actually collecting on any favorable award in the future. Personally, I find this argument to be nonsense as the route to collecting on Argentinian debts - as history would show - would be the same regardless of the administration in power. If anything, Argentina defaulting and needing to seek a new round of IMF funding would likely put international creditors in a better position. 

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Bonitabeach 30th Aug 130 of 134

In reply to post #508866

So is the bottom line for Burford Capital LON:BUR the value of a judgement in a New York federal court, in favour of two bankrupt Spanish energy companies, against the Argentine state, over the nationalisation of YPF S.A. in 2012?

The image of two bald men fighting over a comb comes to mind!


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rhomboid1 30th Aug 131 of 134

In reply to post #508846

I’ve read the Cannacord note’s a highly persuasive & well researched note...arguably they are still too bullish as they’ve maintained their valuation of Petersen at the last sell down valuation that pre-dates the collapse in the value of Argentine bonds

I’ve no position long or short

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millen 30th Aug 132 of 134

I see Hargraves have recently sold out of Burford on grounds of uncertainty. Doesn't say how much they held in aggregate.

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Laughton 3rd Sep 133 of 134

Detailed note from Liberium today with target price unchanged at £26. Not sure if it's freely available but a helpful investor has posted it here:-

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Laughton 10th Sep 134 of 134

A very in depth, seemingly highly researched rebuttal posted yesterday here. It's long so time needed to get through it all:-

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