Burford Capital Limited

Thanks very much, and hello, everybody. Thank you for taking some time in what is almost the middle of August to talk about Burford and our interim results. As usual, I'm joined by John Malo, the Chief Investment Officer, and Ken Brous, the Chief Financial Officer. The three of us will take turns going through our slides with you. We promise to do that somewhat more briskly than we did in our annual results call. and then we'll be happy to take any of your questions. Before we jump into the meat of the slides, I'm also happy to report, in addition to our earnings, on an announcement that we also made today about a new appointment to our board. As all of you know, we have been engaged in an overall refresh of the board, This is the last new appointment that we're making. So this will be the fifth new director that we've appointed in the last two years. And this is a particularly exciting appointment. It's Dr. Rukia Baroudi, who is an experienced arbitration practitioner and the Secretary General of the African Arbitration Association. So not only is Dr. Baroudi a very experienced and knowledgeable lawyer and arbitration specialist, Um, this represents not only another woman, but a, but a racially diverse candidate for our board. Um, and this is big news in the, in the legal sector. For example, this is already, um, you know, the breaking news story, the top news story on, on global arbitration review today, which is the leading, um, arbitration publication out there. Um, so in terms of, of Burford's corporate presence, um, she's a great addition to the board as a, as a non-executive director. And it's certainly also an appointment that has made some waves in the legal community that we serve. So moving to our results, I'm turning to slide three. Fundamentally, we're going to talk about two key issues, as we always do. The new business that we create, which ultimately sets the business up for future profitability, and then the progress of that business through the pipeline, through the investment process, and ultimately the creation of cash gains from it. On the new business side of the ledger, we were very pleased with the first half. We actually struck a new record for commitments on a Burford-only basis. And as a reminder, Burford-only commitments are the number that we watched the most closely because those are the commitments that will ultimately drive the largest volume of shareholder profit. We provide statistics for our overall level of activity, which includes the work that we do in some of our lower returning funds, for example, just as a measure of what the whole business is up to. But in terms of the things that are ultimately really going to drive future profit for shareholders, it's that Burford-only activity. that is the most significant. And so hitting a new record in new business, even while the legal industry is still recovering from the pandemic and figuring out how to work in a new way, made us very happy. And it wasn't just a first half record. It's also the fact that we've been able to keep up that new business at a strong pace throughout the pandemic, writing quite a lot of that new business. And part of the dynamic here, as some of you will recall, is that we tweaked our arrangement with our sovereign wealth fund partner so that now the Burford balance sheet is taking 75% of new deals instead of the prior 50%. And so that is driving as well the ability to retain more of those high potential profit deals for the balance sheet. So the other thing that we saw with great excitement, candidly, is that court activity really did start to resume during the period. Our consolidated income from doing litigation finance, our core business, grew 31% period over period. That, of course, flowed all the way through the income statement. But what that really represents for us is a sign of life in courts that in many instances have been somewhat more abound and affected by their ability to hold especially in-person trials during the pandemic. So we're very pleased with that. We're not anywhere close to being all the way back. There are still meaningful backlogs in courts. They vary widely by geography. In the text of the interim report, we gave just one example of how great that disparity can be. In the Eastern District of New York, which is the federal court district that serves um, Brooklyn and other parts of New York city, except Manhattan, you know, you you're, you're still at about a 55 month wait to get a case from filing to trial. Whereas in the Northern district of Florida, um, so the North part of Florida, that delay has really fallen sharply. Um, you know, you're down to, to not much more than a year. Um, so we look forward to continuing to see some, some increased velocity in the portfolio as court activity does resume generally. The other things I'd note just on the P&L side, in addition to the activity that we saw in the first half, we've also seen some post-June 30th activity. One of our larger matters had a level of activity that was effectively a partial resolution of some of what were invested in there. And that, even though none of this is in our June 30th numbers, we would expect all things remaining equal to generate more than $50 million in consolidated profit during the second half from that portfolio activity. And then we have a meaningful discussion in our interim report about some, like many other companies, some non-cash items that affected our bottom line profitability. For us, a combination of non-cash charges in foreign exchange, some interest rates, impact, again, non-cash and unrealized, and some tax peculiarities. And those together reduced our bottom line net income by about $25 or so million. The other thing is that we have this sort of unusual split of foreign exchange where we actually had negative foreign exchange activity in the top of the PML, so above the net income line. And then we had quite positive foreign exchange activity because of our sterling debt in the bottom part of the P&L below net income hitting just comprehensive income. If that bottom line stuff had been above the line, that would have added another $35 million or so to net income. So there was a fair bit of foreign exchange activity, again, all of which is non-cash. And then in other developments, we've raised more than a billion dollars of external capital this year. between a combination of the new debt offering and two new funds that we closed. So both on the fund side, we have significant financial resources there, and on the balance sheet, we have meaningful liquidity available. And finally, the simple and somewhat unfortunate reality perhaps for the world at large is that economic distress tends to yield a lot of litigation. insolvency and other litigation, and we're going to, we believe, start to see the impacts of increased interest rates and the decline in government stimulus. Then turning to just slide four, this really just captures graphically the point that I was making earlier, that if you look on the left, this is the total portfolio that we have that's been growing Even during a pandemic, we've got about a five-year 20% CAGR there. And the thing that I think is particularly notable is the graph on the right. So even though we've been able to grow the business significantly, more than doubling the portfolio in size from 2017, we have been able to do so while maintaining those consistent returns that we've been very proud to be able to deliver. Turning to slide five, This, again, is just a graphic visualization of what I described earlier on the left with record new commitments for the Burford-only balance sheet. On the right, you see the cash deployments, and those are down a little bit. That shaded area is because we did a deal towards the end of June, a fairly large law firm deal that still has a couple of closing conditions left to satisfy before we actually put the cash out the door. But it will be that deployment, presuming that those closing conditions are satisfied soon. And then finally, I often, as you know, talk to slide six and seven together. And I'm not going to spend much time on them. We use these slides repeatedly to show what's going on in our business. I would just highlight for you. that when we talk about the returns that we've been able to generate and we talk about our track record and our performance of generating high and asymmetric returns, we're now doing that off of almost $2 billion of cash recoveries. So this is pretty clear evidence that this is an ongoing and repeatable model and that we are now demonstrating a very significant and long-term track record. And I would just emphasize that all of the numbers that we're providing here are cash-based numbers. There's no accounting for value in any of these. So that's almost $2 billion of cash that we've brought back in the door with the kinds of returns that you see there and that continuing asymmetric distribution in the portfolio that slide seven indicates. And with that, I'll turn you over to John Malo and go to slide eight.

Thanks, Chris, and thanks to you all for spending time with us today. On slide eight, we talk about the timing and process in the YPS matters. I won't talk about substance, as is our practice. If you're a lawyer or you have lawyers working with you, I'd encourage you to just read the brief. The substance is pretty clear. If you can wade through all of them, because the defendants threw in a lot, but I think it is clear. So if you look at the... At the timing, discovery is complete as of the end of March. That meant we went through fact discovery, expert reports, expert depositions. Summary judgment motions were filed in April by both sides. That is, defendants filed a motion asking the judge to enter judgment for the defendant without holding a trial. Plaintiffs filed a motion asking the judge to enter judgment for the plaintiffs without holding a trial. responses were filed to those motions in May, and then reply briefs were filed at the end of June, and that is complete now. The timing of when the judge will resolve them is up to the judge. She has been attentive and responsible in managing the case, and she will schedule presumably oral argument. Basically, she has the option. She could grant summary judgment in full. If she grants summary judgment in full, for the plaintiffs, although there'll be a right to appeal, the defendants, if they do not post a bond or obtain a stay of execution, will be subject to enforcement proceedings. Plaintiffs will be able to begin enforcement following the entry of a final judgment absent one of those things. If the judge enters summary judgment for the defendants there'll be a right to appeal and it is de novo review that is the the district court decides matters as a matter of law without considering facts or resolving factual disputes and therefore the the appeals court reviews that de novo that is again without any deference to the lower court um the court could decide instead either to deny summary judgment in full and hold a trial or to resolve some issues at summary judgment and hold a trial on the remaining issues. If there is a trial, the parties have stipulated that the trial shall happen 115 days after the issuance of the summary judgment decision. And that's pretty much the timing of the YPF matters. Turning to slide nine to give a little more granularity in what Chris described before about the rest of our portfolio, you can see in those red bars what percentage of each vintage of our investments has resolved. And not surprisingly, the older, earlier vintages have had a much larger percentage resolve. And the younger vintages, the more recent ones, have had a smaller percentage of their cases resolve. If you look at the black bars, this echoes what Chris talked about, the explosive growth that we enjoyed some years ago and the pace we've been able to continue to put out capital. The more recent vintages that happen to have a smaller percentage resolved also are larger than the earlier vintages. So it stands to reason that in the coming years, we will expect resolutions from vintages that are larger and have more outstanding the business has grown and the resolutions will grow as time goes on. And the weighted average life of our concluded portfolio, by realization at least, has remained relatively steady over the past few years. But we'll talk a bit more about delay. And if you turn to slide 10, Chris did talk about we're very pleased that the pace of case progress is starting to increase, that courts are working very hard to catch up. There still is the issue of criminal trials have to come first, and there are backlogs from before. And remember, whereas the rest of the world always wants to move forward and not have the legacy of COVID hold them back, defendants always have an incentive to delay matters. And therefore, to the extent that they can use backlogs or COVID or something as an excuse, they will use it. But courts have been much better about moving things along. Remember that none of these delays have impacted the merits. None of our cases have lost because of it. No plaintiff has given up a case. They've just affected the duration. And we also have mentioned in the past, sometimes the extension of timing can actually enhance our returns, that our deals may be structured to increase our percentage or our multiple as time goes on. Meanwhile, the fact that there are economic challenges and disruptions that Chris alluded to that were associated either with COVID or with the withdrawal of government subsidies in the aftermath of COVID, That does potentially lead to opportunity for us that we see because people don't sue each other when things are stable and going well and growing and deals succeed. They sue each other when something goes badly. And so a combination of insolvencies or disappointed expectations in deals or bad corporate conduct leads to litigation, and that litigation often needs financing, particularly in times of hardship. So we're poised right now with, as I mentioned, a very large portfolio of recent vintages that we've been able to continue to put out. Other than that blip in the first half of 2020 when the world shut down and we slowed down, we've continued to commit and deploy capital throughout the period. We have these vintages, and they're poised to move forward as the courts have continued to reopen and move along. And we see plenty of opportunity to put out new capital. We've worked on geographic expansion and expanding our product offerings. So it's a very good time at Burford, would be my feeling. And without qualitative discussion of the business, I'll then turn it over to Ken to go over the numbers.

Oh, thanks, John. And yes, I will now walk through our first half financial results. Good morning and good afternoon to everybody. And just before I get started, I just want to make it clear that all of the figures I'm going to discuss are on a Burford-only basis, unless I state otherwise. So I am on slide 11, where we have some key financial metrics. And starting with the income statement, revenue was strong. Capital provision income rose 11%. That was primarily driven by growth in net unrealized gains, which represented 71% of total capital provision income, and is indicative of the increase in court activity. And asset management income rose. I'm going to provide more detail on that topic shortly. Operating expenses declined from the first half of last year, which, as you may recall, included $34 million primarily related to the conclusion of an asset recovery matter. And these all contributed to a meaningful improvement in operating income, which was $27 million compared to a small loss in the first half of last year. Despite that strong revenue and expense performance, we had a few other items that went the other way. For one, finance costs increased, primarily as a result of having a full reporting period with the debt that was issued in April of last year. as well as running with temporarily higher debt balances this half given the timing between our new issue in April of this year and the repayment of the debt that was due this month that we repaid in May. And in what may seem like a bit of an anomaly, although we reported a pre-tax loss for the period, we reported income tax expense of $8 million as we maintain a full valuation allowance on the deferred tax asset That's related to disallowed interest expense for U.S. tax purposes. Our cash taxes paid in the period, though, were less than $1 million. And we are a global business, and while we do our best to minimize the economic impact of currency fluctuations, the strengthening U.S. dollar did have a negative impact on our bottom line, as it did for many other global companies, but had a benefit in comprehensive income. So our pre-tax income included non-cash foreign exchange costs of $10 million, $7 million that was within capital provision income that generally reflects investments in currencies other than the U.S. dollar or sterling, and the rest was in other expense, which represents cross-currency transactional items. Those above-the-line costs, however, were more than offset by a $35 million benefit from foreign exchange translation and other comprehensive income, OCI, largely related to our sterling denominated debt. And also the rise in interest rates that resulted in unrealized losses on our portfolio of marketable securities through which we manage our excess liquidity. So putting it all together, we reported a first half net loss attributable to Burford Capital Limited shareholders of $21.5 million or 10 cents per diluted share. both of which improved from last year. The balance sheet remained strong with an increase in capital provision assets and ample liquidity to support future growth. And despite the reported loss, tangible book value per share rose slightly from year end to $6.48. Moving to asset management, which is on slide 12. Continue to have success as an asset manager, both in terms of capital raising and income. We closed two funds in the first half, the $360 million Burford Advantage Fund, which focuses on pre-settlement matters, and the $350 million Burford Alternative Income Fund II, or BABE II as we refer to it, which is the successor to our previous post-settlement funds. And as Chris mentioned, we also extended to the end of next year the investment period for BOPSI, our pre-settlement strategy arrangement with our sovereign wealth fund partner. That agreement also shifted the asset allocation from an even split to one in which we now allocate 75% to our balance sheet, thereby increasing our portion of these highest returning assets. Asset management income for the period increased by 45% to $17 million, up from $12 million in the first half of last year. This increase was primarily driven by growth in income from POPC, as the core litigation finance assets in that fund continue to season. Management fees declined slightly from the prior year period. We continue to earn these fees from BAIF and BOF, but since BOF has now passed its investment period, our management fee rate on that fund has declined. And we recognize performance fee income of $2 million from BAIF, of which we had none in the first half of 21. Performance fees are somewhat variable period to period and reflect both the specific fee arrangement as well as the stage of the fund. So going forward, we continue to be in a position to earn management fees from BOF, BAFE II, and the Strategic Value Fund, performance fees from Partner Funds II and III, BOF, and BAFE I and II, and additional asset management income from BOFC and the Burford Advantage Fund. And as we mentioned on our call in March, our models at year end 21 indicated that performance fees could be as much as $400 million on a Burford-only basis. Moving to slide 13 to discuss expenses. Total operating expenses in the first half declined from the prior year period, primarily due to the large asset recovery charge last year. Most other operating expense categories were straightforward and largely unchanged. with the only notable increase, which was a modest one at that, in case-related expenditures that were ineligible for inclusion in asset costs. And these costs are the ones that represent case expenses that are outside of our entitlement. And we continue to see improvement from an operating efficiency perspective. Operating expenses as a percent of group-wide portfolio continue to decrease and are now less than 2 percent on an annualized basis. Slide 14 presents some information about our debt. We continue to actively manage our liabilities, and we maintain our long-held view that while our business should have some leverage, given the variability of our cash flows, it's prudent to maintain it at a relatively low level. I'd also mention that all of our debt is fixed rate, and that our maturities are well-laddered with our next debt maturity not until October of 2024. We issued $360 million of senior notes that had an eight-year maturity and a coupon of 6.78% in April, just before the fixed income markets became particularly challenging. We were pleased to have an oversubscribed deal, which enabled us to both upsize it and to price it at a spread meaningfully tighter than the debt we issued last year. We used a portion of those proceeds to take the positive economic action of redeeming the remaining 62 million sterling, or about 80 million U.S., of bonds that were maturing this month. We reduced interest costs and negative carry, but did report a small loss on debt extinguishment, reflecting the modest premium paid for the redemption. All in all, that 2020 bond proved to be a very attractive one for us, with an effective cost of less than 3%. We now have just under 1.3 billion in debt outstanding with a weighted average coupon of 6.2% and a weighted average life of 5.4 years. Our net debt to tangible asset ratio of 21% remains well below the 50% covenant level in our UK bonds. And for our US bond covenant, which is total debt to tangible equity, we are currently at 0.9 times, also well below the incurrence test levels between one and a half and two times, depending upon the type of incurrence. So wrapping up on slide 15 with liquidity, our liquidity position increased to $430 million at June 30th, up from $315 million at year end, and consists of just over $300 million of cash and equivalents with the remainder in marketable securities. The increase in liquidity was predominantly due to net proceeds from the debt transactions I just mentioned, offset by deployments that were in excess of realizations in the half. And we are positioned well to continue to deploy against new opportunities, including for the large commitment we made right at the end of the period that Chris addressed. And the yield on the marketable securities portfolio is now about 3.7%, which puts us in a position to earn attractive returns on this excess liquidity. And with that, I'll turn it back to Chris for some concluding remarks.