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KamiPhotos
Legal company Burford Capital (NYSE:BUR) takes on the rights to promising legal cases on behalf of third parties. They then use their expertise to hopefully win a settlement or prevail in court. The stock appears undervalued after a large legal ruling in their favor in 2023 on a marquee case against Argentina for expropriating the assets of energy company YPF from shareholders back in 2012.
A major catalyst could come for the stock if Burford get paid in the near future. Now Argentina is appealing the ruling in court, but the judge requires that Argentina pay the amount required under the ruling while the appeal is pending.
I wrote two pieces on Burford almost a year ago. In the first I argued there was upside after the market was slow to factor in the impact of the very favorable YPF ruling, (which appears correct in retrospect with the stock up roughly 30% since). In the second, I argued there was upside even without factoring in the YPF case, (I still believe this however, despite rising 12% or so since that second article, Burford has lagged the S&P 500). Hence, I'm taking another look now since there has been more relevant news and I believe Burford is still an attractive stock that trades around $14/share when $30-$40 is possible in the event of payment by Argentina.
However, I think I have to accept that even though I view Burford as inexpensive here, the market may not materially re-rate the company unless they see a cash payment from Argentina, and any payment may take some time. Asset seizures will not be easy and may not be successful.
Here's a quick overview of Burford's valuation. The accounting is complex given fair value adjustments, minority interests and the large value assigned to the YPF, Eton/Peterson case "YPF". Today, the implied equity valuation appears to be a little more conservative than the company's valuation of YPF outcomes. But the market still implicitly assumes that the company is worth some premium to the book value of its assets either via a reasonably positive YPF outcome or continued strong performance in other cases and the associated asset management business, where Burford offers basically a legal hedge fund to investors wanted to benefit from Burford's expertise in investing funds in legal cases.
To look at it another way if Burford doesn't receive a cent from Argentina, there is likely downside from here. But, in the event Burford sees something close to their internal assumptions or better, then there is likely upside.
Importantly, there's also an associated 'halo effect' for the business should they receive a material payment in the YPF case because it's a large part of their portfolio and may serve to validate the business model to some degree in the eyes of skeptics. Historical results have been strong, but if the YPF payment were to trend poorly from here, that would drag down returns.
| Scenario | Estimated Valuation |
| Zero value to YPF case but putting the asset management business on 20x earnings and applying Dec 2023 fair value to other assets, taking cash, marketable and debt at Dec 2023 book values. (a very conservative assumption) | $11/share |
| Memo: Current share price at time of writing | $14.49/share |
| As above with addition of company's current fair value of YPF case | $17/share |
| As above, but assuming Argentina pays in full (an aggressive assumption) | $40/share |
Hence, it's not unreasonable to view YPF as the main catalyst for Burford, both as it's a significant component of their portfolio today and something that could drive the stock higher if a significant payment were to occur. For reference, my Valuation of Burford last year was $31-$39/share depending on YPF outcome.
The new Argentine President, Javier Milei (elected in November 2023) is a radically passionate defender of free markets (see this World Economic Forum video for some of his beliefs). Therefore, you might think Milei would be inclined to accept the verdict of the courts on what is perhaps a violation of free market principles, but it's not that clear.
Based on news reports, Milei has stated in December that Argentina will have trouble paying, but in an incrementally positive step, suggested offering a perpetual bond to Burford. This proposal was not taken too seriously by analysts, according to Bloomberg. Note that Argentina has defaulted on its debt nine times. That includes defaulting on a 100-year bond just 3 years after issuance.
Still, the judgement is material for Argentina and it is maybe encouraging for Burford shareholders to, that Milei did not just over a flat refusal to pay. For context, total Argentine GDP is approximately $500B. Therefore, the ruling is roughly 3% of GDP and definitely not trivial for the country.
Argentina has also said it apparently has no intention of pledging YPF share and the Yacyreta hydroelectric plant as assets while it appeals the legal ruling. Nonetheless, Milei has indicated some "willingness to pay", or at least some up with some proposals, and cast the blame for the YPF issues on the previous governor of Buenos Aires, suggesting a tax in the governor's name to help fund any payment.
If Argentina refuses to pay, then theoretically, Burford can start seizing assets. However, the case of NML vs. Argentina shows that asset seizures are difficult to implement. This is a historic case, where certain hedge funds acquired Argentine defaulted debt at well below par and successfully argued that Argentina should pay the bonds back in full, serving as holdouts in restructuring negotiations.
However, after a favorable legal ruling, NML attempted to seize an Argentine military training tall ship in Ghana (ARA Libertad), but that was rejected after appeal to the International Tribunal for the Law of the Sea (ITLOS) because, as a warship, it had immunity from seizure.
Then subsequent attempts to seize embassy funds and central bank assets also failed due to sovereign immunity. Ultimately, NML did receive a 75% payout from Argentina after 6 years, but that may largely reflect their ability to delay the government debt restructuring process, and hence deprive the Argentine government of much needed funding than much success with asset seizures.
Thus, it's unclear what Burford might seize from the Argentine government. NML did not appear to have much success with the seizures given most Argentine assets may be subject to various forms of sovereign immunity. Also, it seems that Argentina may have issues accessing international debt markets today regardless of the outcome of the YPF case, so Burford may not currently enjoy the same leverage at NML had to reach resolution.
Argentina's appeal should not be central to the investment case as Argentina seems unlikely to win. I say that given the strength of the ruling in Burford's favor and should theoretically pay the required funds while the judgement is ongoing. Also, Burford has also lodged a cross appeal which could make their current claim even stronger.
However, it does not appear that Argentina is likely to pay soon. Plus, it is unclear whether Burford can make them do so quickly given asset seizures have historically been tricky to implement. That's because of the powers afforded to sovereign governments. Nonetheless, it does appear that Milei would like to put this issue behind him.
It does appear that Burford is both a robust business offering a strong track record of returns over the years, and an interesting call option on a successful resolution to the YPF case. Today the stock potentially underprices either scenario. For example, if Burford received a settlement at 25% of the face value of the claim or simple continued to post robust business results then the stock should re-rate.
However, a final payment from Argentina may still take years. Burford's current assumptions in valuing the YPF claim appear reasonable if not conservative. Ultimately validating the outcome of the largest single case by value in Burford's portfolio should help the market's confidence in the business model more broadly.
Burford is likely attractively priced today, but part of the reason for that is that resolution of the YPF case may still take some time and Burford is unlikely to be paid in full. Still even a partial payment would likely cause the stock to re-rate due to the incremental cashflow and validation of the broader business model. I also believe Burford may also offer some compounding while investors wait, because the track record of the business is strong.
Basically, I think it's not unreasonable to the stock to trade up to $30/share or higher with a reasonable payment from Argentina. If that happens within, say, 4 years that's almost a 20% IRR. That does not factor in that the business itself should continue to deliver attractive results over the coming years too. I believe Burford is a high quality business, and I'm happy to be patient in waiting for an outcome on the Argentina payment.