REG - Burford Capital Ltd - Update on 2021 Business Activity & Accounting

Burford CapitalAnnouncement

15/02/2022 07:00

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RNS Number : 6541B  Burford Capital Limited  14 February 2022

 

14 February 2022

 

Released via Form 6-K on February 14, 2022 and queued for release via RNS upon
its reopening on February 15, 2022.

 

 

BURFORD CAPITAL PROVIDES UPDATES ON 2021 BUSINESS ACTIVITY AND ACCOUNTING
MATTERS

 

Burford Capital Limited, the leading global finance and asset management firm
focused on law, today releases an update on its 2021 business activity. All
figures in this disclosure are preliminary and unaudited. Definitions,
reconciliations and further related information are available in Burford's
2021 Interim Report which is available on Burford's website at
www.burfordcapital.com/shareholders
(http://www.burfordcapital.com/shareholders) .

 

2021 business update

 

New business

 

 •            Group-wide new commitments of $1.1 billion (2020: $758 million)
              o                                 Burford-only new commitments of $607 million (2020: $361 million)
 •            Group-wide new deployments of $841 million (2020: $595 million)
              o                                 Burford-only new deployments of $448 million (2020: $252 million)

 

Burford had a strong year for new business. On a Group-wide basis, Burford
made $1.1 billion in total new commitments and deployed a total $841 million
in cash in 2021. Those levels represent significant increases over the prior
year - 48% and 41%, respectively - and demonstrate that the strong recovery in
new business activity in the first half of 2021 continued through the second
half.

 

The strong growth in new commitments and deployments was driven by growth in
our core capital provision-direct business. Capital provision-direct new
commitments, on a Burford-only basis, amounted to $602 million (2020: $335
million) and exceeded the 2019 level of $530 million, while Burford-only
capital provision-direct deployments essentially doubled to $447 million
(2020: $225 million), also well ahead of the $269 million achieved in 2019.
This record level of capital provision-direct deployments from our balance
sheet is particularly notable and represents assets capable of generating our
highest potential returns and profits.

 

Portfolio activity and returns

 

 •            Group-wide capital provision-direct realizations of $336 million (2020: $608
              million)
              o                                         Burford-only capital provision-direct realizations of $264 million (2020: $337
                                                        million)
 •            Group-wide capital provision-direct realized gains of $152 million (2020: $361
              million)
              o                                         Burford-only capital provision-direct realized gains of $128 million (2020:
                                                        $180 million)

 

Case realizations in our capital provision-direct business remained modest in
the second half of 2021, due in part to continuing court delays caused by the
pandemic impacting the pace and progression of matters in our portfolio.
Capital provision-direct realizations in our Burford-only portfolio were $264
million (2020: $337 million; 2019: $228 million), while the realized gains
from those concluded assets amounted to $128 million (2020: $180 million;
2019: $120 million). Given the unpredictability of the timing of case
resolutions, period-to-period volatility is a characteristic of our business.
It is important to note that we had very low losses in the year - only $9
million in realized losses in 2021, representing less than 1% of average
capital provision-direct assets at cost (2020: $20 million; 2%). Our portfolio
remains robust, and resolutions are simply a matter of timing subject to the
idiosyncrasies of our specific cases and the vagaries of the litigation
process.

 

As a result, our concluded case ROIC since inception remained largely steady
at 93% at December 31, 2021 (June 30, 2021: 95%; December 31, 2020: 92%) on
$1.9 billion of cumulative realizations, while our concluded portfolio's IRR
was unchanged at 30%.

 

Liquidity

 

Burford's liquidity position remained strong, with over $300 million of
Burford-only cash and marketable securities on hand at December 31, 2021 (June
30, 2021: $430 million; December 31, 2020: $336 million).

 

Financial results

 

Burford is in the process of preparing its 2021 financial statements,
including the fair value of the portfolio. Burford's 2021 financial statements
are subject to audit and, as a result, any figures are preliminary and subject
to adjustment. We do not anticipate significant fair value adjustments in the
second half of 2021, as slow case progress limited the incidence of the kind
of case milestones that would cause a change in the fair value of the related
legal finance assets. Given slow case progress in 2021 and the net loss
reported for the first half of 2021, we expect to recognize a net loss of
between $70 million and $80 million for 2021.

 

Christopher Bogart, Burford Capital's Chief Executive Officer, commented:

 

"We are delighted with the strong performance of new business in 2021. To
write more than $1.1 billion of new commitments during an ongoing pandemic is
a significant achievement and positions the business well for future potential
income. We would have preferred cases to move through the judicial system
faster than they have since the pandemic began, but the slow pace we are
experiencing is a timing issue, not one affecting our view of the ultimate
realizable value of the portfolio. No client has discontinued a single matter
due to these delays."

 

US GAAP conversion and prior financial presentation

 

As previously announced, commencing with its annual report for the 2021 fiscal
year, Burford will be preparing its financial statements for the 2021 fiscal
year and comparative periods in accordance with generally accepted accounting
principles in the United States ("US GAAP").

 

As we noted in our interim reporting, US GAAP will result in a change to our
historical approach to the consolidation of certain subsidiaries. We
previously disclosed that this change would result in an increase in both
assets and liabilities.

 

The most notable change is expected to be with respect to the subsidiary,
Colorado Investments Limited ("Colorado"), that was created for the secondary
sale of some of our entitlement in the Petersen matter. We have not
historically consolidated that subsidiary in our IFRS reporting, and thus we
have historically shown on our balance sheet only the 61.25% of the Petersen
asset (i.e., Burford's entitlement pursuant to its funding agreement) that we
continue to own. Colorado will, however, be consolidated under US GAAP. Once
Colorado is consolidated under US GAAP, we will report 100% of the value of
the Petersen asset as an asset on our balance sheet, and the 38.75% sold to
third parties will be reported as an offsetting liability. This change in
presentation will have no effect on our net assets. Similarly, to the extent
income from the Petersen investment flows through our P&L, we will record
100% of the income on a consolidated basis and then record a 38.75% reduction
to income as a third-party interest. Again, there is no effect on net income
from these changes.

 

On our balance sheet, this will result in an increase in our capital provision
assets of $383 million and a corresponding addition of $383 million in
third-party interests in consolidated entities at both June 30, 2021 and
December 31, 2021, resulting in no change in net assets. As to prior periods,
the corresponding amounts would be $387 million at each of December 31, 2019
and June 30, 2020, $386 million at December 31, 2020, and $230 million at
December 31, 2018. On our income statement, this will result in immaterial
changes in 2020 and 2021 relating solely to case expenses incurred and no
change in net income; in 2019 capital provision income will increase by $58
million and we will show a corresponding reduction to income of $58 million
for third-party interests in consolidated entities with no change in net
income and in 2018 capital provision income will increase by $98 million and
we will show a corresponding reduction to income of $98 million for
third-party interests in consolidated entities with no change in net income.

 

At the time of the formation of Colorado in 2017, we engaged an outside
accounting advisor with respect to the accounting treatment of Colorado under
IFRS and concluded that Colorado should not be consolidated but rather
reported as an equity investment, which is how it was reported on our
financial statements for the ensuing years that were accompanied by
unqualified opinions of our outside auditors. However, during the course of
our work to convert our financial statements to US GAAP, the question of
whether Colorado should also have been consolidated under IFRS has been
revisited. This is an area of considerable accounting complexity and nuance
following the issuance of IFRS 10, the consolidation standard, in 2011, and
situations like Colorado often are not susceptible to bright line
determinations, especially since there is little accounting precedent for the
treatment of litigation finance assets. Nevertheless, and perhaps with the
benefit of hindsight, the conclusion has been reached that Colorado should
also have been consolidated under IFRS and that failure to do so was an
accounting error in the application of IFRS 10 despite the extensive
consideration of the issue at the time. The impact on our IFRS financial
statements will be the same as set out above for US GAAP. We will provide
restated financial statements for this correction, as well as the corrections
related to the legal finance non-cash accrual disclosed in our December 22,
2021 press release and Form 6-K report, around the time of the release of our
financial results for the 2021 fiscal year and, in the interim, our historical
financial statements should not be relied upon to the extent inconsistent with
this revised treatment despite it having no impact on net income or net assets
and to the extent set forth in the December 22, 2021 press release. The Audit
Committee of the Company's Board of Directors has taken this action which has
been discussed with the Company's independent registered public accounting
firm, Ernst & Young LLP.

 

Definitions and use of alternative performance measures

 

As previously announced, commencing with our annual report for the 2021 fiscal
year, we will report our financial results under US GAAP. US GAAP requires us
to present financial statements that consolidate some of the limited partner
interests in funds we manage as well as assets held on our balance sheet where
we have a partner or minority investor. We therefore refer to various
presentations of our financial results, and funding configuration, as:

 

 •            Consolidated refers to assets, liabilities and activities that include those
              third-party interests, partially owned subsidiaries and special purpose
              vehicles that we are required to consolidate under US GAAP accounting. This
              presentation conforms to the presentation of Burford on a consolidated basis
              in our financial statements. The major entities where there is also a
              third-party partner in, or owner of, those entities include the Burford
              Strategic Value fund, BOF-C, Colorado and several entities in which Burford
              holds investments where there is also a third-party partner in, or owner of,
              those entities.
 •            Burford-only or similar terms, including "balance sheet", refers to assets,
              liabilities and activities that pertain only to Burford on a proprietary
              basis, excluding any third-party interests and the portions of jointly owned
              entities owned by others.
 •            Group-wide refers to Burford and its managed funds taken together, including
              those portions of the funds owned by third parties and including funds that
              are not consolidated into Burford's consolidated financial statements. In
              addition to the consolidated funds, Group-wide includes the Partners funds,
              Burford Opportunity Fund and Burford Alternative Income Fund and its
              predecessor.

 

We refer to our capital provision assets in two categories:

 

 •            Direct, which includes all our legal finance assets (including those generated
              by asset recovery and legal risk management activities) that we have made
              directly (i.e., not through participation in a fund) from our balance sheet.
              We also include direct (not through a fund) complex strategies assets in this
              category.
 •            Indirect, which includes our balance sheet's participations in one of our
              funds.

 

We also use certain alternative performance measures ("APMs"), which are not
presented in accordance with US GAAP, to measure the performance of certain of
our assets including:

 

 •            Return on invested capital ("ROIC") means the absolute amount of realizations
              from a concluded asset divided by the amount of expenditure incurred in
              funding that asset, expressed as a percentage figure. ROIC is a measure of our
              ability to generate absolute returns on our assets. In this release, when we
              refer to our concluded case ROIC, we are referring to the ROIC on concluded
              and partially concluded capital provision direct assets on Burford's balance
              sheet since the inception of the company until the current date.
 •            Internal Rate of Return ("IRR") is a discount rate that makes the net present
              value of a series of cash flows equal to zero and is expressed as a percentage
              figure. We compute IRR on concluded (including partially concluded) legal
              finance assets by treating that entire portfolio (or, when noted, a subset
              thereof) as one undifferentiated pool of capital and measuring actual and, if
              necessary, estimated inflows and outflows from that pool, allocating
              investment cost appropriately. IRRs do not include unrealized gains.

 

Our business activities include:

 

 •            Legal finance, which includes our traditional core litigation finance
              activities in which we provide capital against the future value of legal
              claims. It also encompasses our asset recovery and legal risk management
              activities.
 •            Complex strategies encompasses our activities providing capital as a
              principal in legal-related assets, often securities, debt and other financial
              assets where a significant portion of the expected return arises from the
              outcome of legal or regulatory activity. Most of our complex strategies
              activities over the past several years have been conducted through the Burford
              Strategic Value fund.
 •            Post-settlement finance includes our financing of legal-related assets in
              situations where litigation has been resolved, such as financing of
              settlements and law firm receivables.
 •            Asset management includes our activities administering the funds we manage
              for third-party investors.

 

Other terms we use include:

 

 •            Commitment is the amount of financing we agree to provide for a legal finance
              asset. Commitments can be definitive (requiring us to provide funding on a
              schedule or, more often, when certain expenses are incurred) or discretionary
              (allowing us to provide funding after reviewing and approving a future
              matter). Unless otherwise indicated, commitments include deployed cost and
              undrawn commitments.
 •            Deployment refers to the funding provided for an asset, which adds to
              Burford's invested cost in that asset. We use the term interchangeably with
              addition.
 •            Portfolio refers to the total amount of our capital provision and
              post-settlement assets, valued at deployed cost plus any fair value
              adjustments and any undrawn commitments.
 •            Realization: A legal finance asset is realized when the asset is concluded
              (i.e., when litigation risk has been resolved). A realization will result in
              Burford receiving cash or, occasionally, some other asset or recognizing a due
              from settlement receivable, reflecting what Burford is owed on the asset. We
              use the term interchangeably with recovery.
 •            Realized gain / loss refers to the total amount of gain or loss generated by
              a legal finance asset when it is realized, calculated simply as realized
              proceeds less deployed funds, without regard for any previously recognized
              fair value adjustment.

 

 

For further information, please contact:

 

 Burford Capital Limited
 Robert Bailhache, Head of Investor Relations, EMEA and Asia - email  +44 (0)20 3530 2023
 (mailto:rbailhache@burfordcapital.com)
 Jim Ballan, Head of Investor Relations, Americas - email             +1 (646) 793 9176
 (mailto:JBallan@burfordcapital.com)

 Numis Securities Limited - NOMAD and Joint Broker                    +44 (0)20 7260 1000
 Giles Rolls
 Charlie Farquhar

 Jefferies International Limited - Joint Broker                       +44 (0)20 7029 8000
 Graham Davidson
 Tony White

 

 

About Burford Capital

Burford Capital is the leading global finance and asset management firm
focused on law. Its businesses include litigation finance
(https://www.burfordcapital.com/) and risk management, asset recovery and a
wide range of legal finance and advisory activities. Burford is publicly
traded on the New York Stock Exchange (NYSE: BUR) and the London Stock
Exchange (LSE: BUR), and it works with companies and law firms around the
world from its principal offices in New York, London, Chicago, Washington, DC,
Singapore and Sydney.

 

For more information, please visit www.burfordcapital.com
(http://www.burfordcapital.com) .

 

 

This communication shall not constitute an offer to sell or the solicitation
of an offer to buy any ordinary shares or other securities of Burford.

 

This release does not constitute an offer of any Burford fund. Burford Capital
Investment Management LLC ("BCIM"), which acts as the fund manager of all
Burford funds, is registered as an investment adviser with the U.S. Securities
and Exchange Commission. The information provided herein is for informational
purposes only. Past performance is not indicative of future results. The
information contained herein is not, and should not be construed as, an offer
to sell or the solicitation of an offer to buy any securities (including,
without limitation, interests or shares in the funds). Any such offer or
solicitation may be made only by means of a final confidential private
placement memorandum and other offering documents.

 

Forward-looking statements

This announcement contains "forward-looking statements" within the meaning of
Section 21E of the US Securities Exchange Act of 1934, as amended, regarding
assumptions, expectations, projections, intentions and beliefs about future
events. These statements are intended as "forward-looking statements". In some
cases, predictive, future-tense or forward-looking words such as "aim",
"anticipate", "believe", "continue", "could", "estimate", "expect",
"forecast", "guidance", "intend", "may", "plan", "potential", "predict",
"projected", "should" or "will" or the negative of such terms or other
comparable terminology are intended to identify forward-looking statements,
but are not the exclusive means of identifying such statements. In addition,
we and our representatives may from time to time make other oral or written
statements which are forward-looking statements, including in our periodic
reports that we file with the US Securities and Exchange Commission, other
information sent to our security holders and other written materials. By their
nature, forward-looking statements involve known and unknown risks,
uncertainties and other factors because they relate to events and depend on
circumstances that may or may not occur in the future. We caution you that
forward-looking statements are not guarantees of future performance and are
based on  numerous assumptions and that our actual results of operations,
including our financial condition and liquidity and the development of the
industry in which we operate, may differ materially from (and be more negative
than) those made in, or suggested by, the forward-looking statements contained
in this announcement. Significant factors that may cause actual results to
differ from those we expect include those discussed under "Risk Factors" in
our Annual Report on Form 20-F filed with the US Securities and Exchange
Commission on March 24, 2021. In addition, even if our results of operations,
including our financial condition and liquidity and the development of the
industry in which we operate, are consistent with the forward-looking
statements contained in this announcement, those results or developments may
not be indicative of results or developments in subsequent periods.

 

Except as required by law, we undertake no obligation to update or revise the
forward-looking statements contained in this announcement, whether as a result
of new information, future events, a change in our views or expectations or
otherwise.

 

 

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