Burford Capital Limited (NYSE:BUR) Q1 2023 Earnings Call Transcript

Burford Capital Limited (NYSE:BUR) Q1 2023 Earnings Call Transcript June 13, 2023

Burford Capital Limited beats earnings expectations. Reported EPS is $1.17, expectations were $0.26.

Operator: Hello, and welcome to the Burford Capital’s First Quarter 2023 Results Conference Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions]. I’ll now hand it over to your host, Chris Bogart, CEO, to begin. Please go ahead.

Christopher Bogart: Thanks very much, and hello, everybody. Thank you again for joining us. It feels like we’ve been talking to you a lot lately. I think this is our third call in three months. And welcome to our very first ever set of quarterly results, all part of the journey towards a full U.S. listing with the Stock Exchange. I’m joined as usual by Jon Molot, the Chief Investment Officer; and Jordan Licht, the Chief Financial Officer. We are going to adopt the process of having these calls be when we just do the quarterly numbers having these given our propensity to talk, we’ll try to be brisker for these quarterly calls than we have been for annual calls. And then happy to take whatever questions you all have. So, I’m going to start on Slide 3.

And I have to say the — this slide and our numbers in general really do speak for themselves. It was an extraordinary quarter, and it reflected the — exactly what we have been saying about what we’re seeing out there in the court system and in the market in which we operate. We have seen a return to normalcy in the court system. We’ve seen our backlog of cases moving through the courts, and that’s generating an increase in velocity, and that’s translating into revenue. We’ve got numbers on the slide here that are consolidated numbers. As you know, those numbers get a little bit diluted by the fact that they include some consolidated funds. So, let me just for the sake of simplicity, frame Burford-only numbers for you. In other words, the portion of these numbers that accrues to Burford’s equity shareholders like you and like me.

And on a Burford-only basis, our revenue went up 214% to $315 million or so. And significantly, $125 million of that was from our portfolio, just the general operation of our portfolio, the returns to normalcy. That’s almost double what it was in the first quarter last year and realized gains as part of that, we’re up more than 250%. So, setting aside YPF for a moment, just looking at the business ex YTF, we’re really pleased with what we’re seeing in terms of portfolio activity in terms of what we’re seeing in terms of revenue generation. And then, of course, on March 31, the last day of the quarter, we had the additional bonus of a strongly positive liability decision from the federal court in YPF case, that obviously caused an upward revaluation of that asset to some extent.

And so, in addition to that $125 million of Burford-only revenue, we’ve added about another $190 million from YPF, and that — those two numbers together resulted in that extraordinary outcome for the quarter. The portfolio at the same time is continuing to grow. That’s — and we’ll talk in a minute about what we’re seeing in terms of new business in the market. And Jordan will take you through liquidity and OpEx. But — but bottom line, we couldn’t be happier with how the first quarter — our first ever reporting quarter turned out, especially since the first quarter in this business can certainly have periods of historical slowness. We’re going to jump around with these slides a little bit. And with that, Jordan is going to take you through Slide 4.

Jordan Licht: Thank you, Chris. Good morning, good afternoon to everyone on the call. A little bit of housekeeping since this is our first time sharing quarterly results. So, I want to make sure everyone understands the comparative periods. So, on the income statement side, we’re going to be comparing first quarter of 2023 to the first quarter of 2022. However, with respect to the balance sheet information, we are comparing the closing balance sheet at March 31, 2023 to the year-end balance sheet of 2022. This page highlights — I’m on Slide 4. This page highlights results for Burford-only, and consolidated information can be found in the reconciliations in the appendix of the deck. And also note that all of the information for each quarter is presented under the revised fair value approach, which we’ve previously discussed.

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As Chris mentioned, this was a good first quarter, driven by significant progress across the portfolio and further bolstered by the YPF case and the related assets. Our business is episodic, but we hope to impress upon you today the momentum we’re seeing in addition to the progress from YPF. From a top-line perspective, total revenues were up more than 200% driven by higher capital provision income as well as improved asset management income. Realized gains were up more than 250%. But when you exclude YPF, unrealized gains were up 55%. Burford-only net income was nearly $260 million, $1.17 per share. That’s up more than $200 million or $0.92 per share compared to the first quarter of last year. And right now, we sit at total equity just shy of $2 billion and a book value of $9.10.

That’s a quick review of the numbers. We’ll go deeper on some other pages, and I’ll flip it back to Chris for Slide 5.

Christopher Bogart: Thanks, Jordan. So, Slide 5 talks about new business. And again, just to emphasize, the first quarter for us is often very, very sleepy in terms of new business. There is no good reason, frankly, for this business to be seasonal. But sometimes, I joke in the fourth quarter, it feels sometimes like I’m running a retailer. The simple fact of the matter is that lawyers are driven by deadlines. Many, many, many law firms have their fiscal year ending at the end of December. And so, since we’ve been in this business, December has historically been remarkably busy for us. And then having done that, which often includes closing a number of deals on the 31st of December itself, lawyers then tend to sort of go to sleep for a while.

So, I’m quite pleased with these trajectories that we see here. So, in terms of new commitments, overall, on a group-wide basis, we almost doubled new commitments first quarter over first quarter, even more significantly, Burford-only new commitments went up significantly more than that by about 130%. And that’s a function of the fact that the balance sheet is now taking 75% of the high octane deals and BOF-C is taking — the BOF-C and sovereign wealth fund is taking 25% and whereas previously, the balance sheet was at lower numbers, sometimes 42%, sometimes 50%. So, we’re pleased both with the overall trajectory and also with the relative share of that new business that the balance sheet was taking, which ultimately accrues to equity shareholders.

I think the fundamental factor that we’re seeing in play here is some economic stress and anxiety in the market. We’ve talked about this before, but just to recap, businesses tend to engage in difficult conduct when they are under economic stress. That economic stress is obviously caused by things like high-interest rates and uncertain economic environments. And that questionable conduct turns into both litigation and insolvency, both of which we benefit from. So not that we sit here wishing for a recession or a great economic downturn for all sorts of other obvious reasons, but there’s certainly no question that our business certainly does well in these kinds of times. So that’s where we are on the new business front. And Jon is going to talk a little bit more moving to Slide 6 about the portfolio activity itself.

Jon Molot: Sure. Thanks, Chris, and thanks to you all for joining. So, on Slide 6, you see sort of bearing out what I’ve been saying on the last few calls we’ve had, which is that the portfolio is quite active that we had a sleepy period during COVID after having grown the book significantly. And we were seeing tinges move through and with these numbers bear that out. So, you’re seeing growth on — in all metrics. So, in addition to, as Chris mentioned, the YPF success at the end of the first quarter, just putting that aside for a moment, there’s a growth in unrealized gains in the rest of the portfolio as well, and in realized gains. So unrealized gains were up significantly. Realized gains were triple what they were in the first quarter of ’22.

There is an impact. You’ll recall from how we walked you through the approach under the SEC’s valuation of litigation assets where interest rates, discount rates do factor in. And so, there was a decline in interest rates or in the discount rate by 52 basis points in the first quarter of ’22, a more modest decline of 28 basis points in the first quarter of ’23, those would have had an upward effect on fair value, though it would have been a more muted effect in the first quarter of this year because the move in interest rates was less. The other thing I wanted to mention is on the asset management income side, you really start to see the benefits of the relationship. Management fees and performance fees from other funds haven’t really moved much in part due to the European waterfall structure, which postpones the earnings performance fees.

But with BOF-C, as the portfolio performs and BOF-C makes money, so just the balance sheet, and you see that bear out with a significant increase inter asset management income from the BOF-C relationship. And with that, I will turn it back over to Jordan Licht on Slide 7.

Jordan Licht: Thanks, Jon. So, on Slide 7, I’m going to walk through our operating expenses for the year. An important point that we’ve talked about before but I want to reemphasize is that we pay people on cash profits. However, we do take accounting charges when capital provision asset values increase as they did this period. But none of those charges are paid in cash until we have the cash profit in hand. So, you’re seeing some — a lot of movement in the operating expense that is just an accrual and doesn’t necessarily reflect an outlay. As a result, looking at the income statement, then we thought it would be helpful to put some of the line items in context and discuss the reasons for differences quarter versus quarter.

So, looking at the slide, first, our deferred compensation plan expense, which is compensation that employees had previously elected to defer and invest in Burford’s stock. We routinely buy shares in the market to offset employee dilution, although it has varying degrees of P&L impact on the underlying programs. Second is the asset recovery business, which includes two remaining assets in which the original owners had a contingent interest tied to our purchase of the business. If you recall, back in 2021, we had an outsized expense on this line item related to the conclusion of the Acquinoff [ph] case and only two assets still remain in that deal. But again, this line only goes up when something positive has happened in the underlying asset that we own, and we only pay the cash when we receive the proceeds.

The third is our carry expense, which shows up in the long-term incentive compensation line. This is driven by fair value movements in our assets. But again, it’s not paid to employees until we actually see the cash realizations. And while we’re seeing a broad-based pickup in the portfolio, the majority of this change was driven in the markup to the YPF-related assets and it’s formulaic. I also want to point out then just understanding the annual incentive compensation line, which represents traditional discretionary corporate bonuses, these are determined in the fourth quarter based on a number of qualitative and quantitative targets for our employees. Thus, the quarterly expense is driven by an accrual percentage based on last year, and we’ll finalize that expense at year-end.

So, the last — and sorry, the last piece that I did want to remind folks of is that the construct of some of our capital provision assets end up then with litigation expense that we’re not able to capitalize into the asset and rather it runs into the P&L. And that’s going to vary over time. So overall, while the headline total of operating expenses might appear to be significantly higher, adjusting for some of the less routine items and particularly strong unrealized gains, this quarter is in line with how we anticipated it and it maps to the Q1 2022 expense total. I’m going to flip now to Slide 8. We already discussed our liquidity position at the end of the first quarter when we did our most recent call just a couple of weeks ago. But on the top end — the top left-hand side of the slide, we show the $183 million of cash and marketable securities, which consists of $53 million of cash and cash equivalents and $130 million of securities.

In addition, we mentioned $99 million of receivables due from case conclusions. Our group-wide realizations were $147 million compared to $34 million in the same period last year. And on a Burford-only basis, realizations more than tripled from $20 million to $62 million. Realizations in Q1 2023 stemmed predominantly from our 2019 vintage. And finally, down below on the covenant level, we’re well within the major covenants for both our U.K. and 144(a) bond issuances and continue to maintain significant debt capacity. As always, we’ll continue to balance our liquidity, anticipated realizations, and debt issuance with demand for our capital to fund new business. And with that, I will turn it to Chris for Slide 9.

Christopher Bogart: Thanks. And this is a slide that you’ve seen before, and I’m not going to go through it again since I did that just a few weeks ago. But it’s a nice way to close out the presentation. And just to sort of remind people that the business, from our perspective, is really firing on all cylinders. The core portfolio now over $6.5 billion is continuing to increase in velocity and throw off cash at desirable returns. The origination platform is doing its job. The asset management business, as we’ve discussed, is growing in terms of its fee load, and we’ve obviously had a successful period with YPF. So, with that, we are delighted to take your questions. And operator, we’re ready for you.

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Q&A Session

Operator: [Operator Instructions]. Our first question for today comes from James Hamilton of Numis. James your line is now open, please go ahead.

James Hamilton : Thank you for the presentation. You mentioned sort of portfolio activity, and obviously, Q1 was very busy. On Slide 3, you sort of talked about milestone events that occurred up to the 9th of June. I was just wondering if you could split that out, how many of those were actually in Q1, and how many dropped into Q2 sort of following on from that, in the sort of pipeline and milestone events, how many more do you have lined up for 2023? And finally, on this topic, could you tell us how much deployed capital has been allocated to cases that have milestone events this year to give us some sort of ability to scale what may or may not flow through the P&L? And I’ve got a fourth of apologies, I’ve got a fourth. Just curious if you use the — your previous valuation methodology, what would the adjustment in the carrying value of the YPF case have been?

Jordan Licht: A number of questions there. I’ll try and take some of them. And thank you. So first, we’re not going to — we’re not going to comment on the previous methodology. We’ve adopted the new approach, and I think it would be inappropriate for us to continue to kind of use numbers from the old methodology. So, I’ll leave that at that. With respect to the milestone question, in Q1, we had approximately 25 milestone factors that occurred. And then I think you also asked about what is our deployed cost relative to projected milestone factors. I can see why that information would be nice to have. But I don’t think we’re going to start tying specific milestone and giving out expectations of milestone events on a vintage basis.

We do give out vintage information. We have the large vintage table that we outlined in the annual. And for the quarterly, we do outline the incremental deployed costs and realizations by vintage. But I don’t think we’re going to start tracking or projecting out future milestone of them to a vintage level.

Christopher Bogart: I do think it’s worth pointing to that table because I think that table is new, if I’m not mistaken. So, on Page 48 of the 6-K, there is a table that shows vintage by vintage, what the deployed costs and the realized proceeds were with respect to our realized gains. And so, James, you may find that to be of some interest.

James Hamilton : Thank you. And the pipeline of milestone events for the rest of ’23, how many do you have in coming up?

Christopher Bogart: So, without wanting to be held to this number, since we haven’t — I don’t think that we’ve included it in the disclosures, I think we think the number is north of 50 possibly even larger than that. I should say something though about the concept of milestones. So, we provided this data to try — when we were trying to sit back and think about how to convey to people, the short-term information about what we saw happening in the courts and the return of velocity. We hit upon this idea of using milestone factors just to show people the sheer level of difference that we were feeling in the ’23 year as opposed to the ’21 and ’22 years. Jordan has only been here since the beginning of September last year. And he said — I’ve heard him say to people sometimes when he first got here, there was sort of one e-mail every once in a while, about something happening in a case.