Despite declining profits, litigation finance firm Burford Capital has a positive outlook on the year ahead, expecting that the coronavirus pandemic will lead to more business opportunities.
Burford Capital’s share price increased 16.5 percent on Tuesday during London’s trading hours after the firm released its fiscal year 2019 results.
The firm, which finances lawsuits and charges fees for winning cases, has been the target of short-seller Carson Block’s Muddy Waters since August. Muddy Waters has alleged that Burford relies too heavily on a small subset of cases and that it “manipulates its performance metrics.”
According to Burford, although courts have changed how they do business as a result of coronavirus, they remain open, and some proceedings are going ahead as expected. As for the inevitable case delays? Burford’s report said that these amount to deferrals of income, rather than losses.
What’s more, according to the firm, the economic downturn triggered by the pandemic will likely result in more disputes over contractual agreements and other arrangements. Burford’s report said that after the 2008 financial crisis, it saw “considerable opportunity,” and it expects the same to happen this time around.
According to Burford, the firm is hearing “market intelligence” that some of its competitors could close or reduce operations because they only rely on a few sources of capital. Likewise, it expects fewer competitors to enter the market.
Burford reported a 24 percent decline year-over-year in pre-tax profit in 2019. The firm blamed this on the “lumpy” nature of litigation finance. “We have had cases resolve in less than a week, and we have matters from 2010 still going strong,” the results said.
The firm acknowledged that this makes it difficult to be a publicly-traded company, calling it a “difficult marriage between legal finance and the public markets.”
As for the ongoing battle between Muddy Waters and Burford? It continued Tuesday, as Muddy Waters tweeted reactions to the report.
Muddy Waters’ major point of consternation in its tweets is that Burford relied heavily on one case — the Petersen litigation — to fund its activities.
Burford acknowledged this in its report, noting that the Petersen case helped it to achieve “considerable success” and that it has used cash generated from the sale of its interest in that case to finance the growth of its business.
According to Muddy Waters: “In our initial [Burford report], we pointed out that BUR was overly dependent on just four cases for gains. These disclosures re Petersen affirm that, but also show how divorced from reality BUR's accounting and reported profits are.”
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Burford said in its report that Muddy Waters’ ongoing back-and-forth with the firm has had a negative effect on its share prices.
“Short attacks are corrosive; they injure innocent shareholders and they inspire panic selling,” its report said, adding that market and economic turmoil and slow-moving courts have made it hard for its share price to bounce back.
That is, of course, until Tuesday’s share price jump.