Burford Capital & YPF Risk-Reward

In Practise Weekly Analysis

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Since the 2019 Muddy Waters short report, we’ve been following Burford Capital (BUR) very closely as personal shareholders and have also published various pieces of content on the company:

  1. IP Interview with BUR Co Founder and CEO
  2. Our analysis on litigation finance return asymmetry
  3. IP Interview with Investment Manager from Omni Bridgeway
  4. IP BUR Investor Dialogue
  5. IP Interview with a BUR competitor
  6. Our analysis of BUR management team and liquidation value

We’ve explored all the reasons why we believe BUR is unique; the uncorrelated returns of legal assets, asymmetric return profile relative to other alts, the durability of BUR returns as the market leader, and the long growth runway for legal finance market.

However, one important thing we haven’t discussed is BUR’s largest case which amounts to ~50% of current book value: the expropriation of YPF by the Argentinian government.

The case started in April 2015 and in two weeks, on June 23rd, both parties will present final arguments and receive a summary judgment. We interviewed an Argentinian political and capital markets advisor to explore the history of the case to inform our estimation of BUR’s valuation in various scenarios for the conclusion of YPF.

It’s worth reading the interview in full for more context but in short, the Argentinian government privatized YPF, an Argentinian energy company, without abiding YPF’s Bylaws and launching a tender offer for all listed shares. This left Petersen and Eton Park, the two parties that Burford financed, without compensation for the US-listed shares they held in YPF.

On the surface, it seems that this case should be a simple breach of contract upon the change of control, especially as there is clear evidence that the government outright refused to pay for the expropriated shares:

As a matter of fact, we have Argentine politicians going to congress, saying on TV that we are not going to launch a tender offer because we don't want to pay those “stupid banks overseas”. They actually said that, that's the word they used and plaintiffs used those words in the case - In Practise Interview

However, Argentina has changed their core argument multiple times and has received five adverse rulings in an effort to drag out the case over the last 7 years. We’re now at the final stage where Argentina has a few main arguments which center around sovereign law trumping corporate law:

First of all, national law preempts corporate law. I was limited by congress from acquiring more than 51% of the shares outstanding in YPF; I was not allowed to launch a tender offer. Argentina also claims that only shareholders that had shares in April 2014 – when Argentina officialized the expropriation and when it paid Repsol $5 billion and it received the shares – were allowed to bring forward this case. Both Petersen and Eton had already either foreclosed their shares or sold them. Argentina says, these guys didn't have the shares on 2014; they cannot bring the case forward. Argentina is also saying look, there is no way I could actually go through this tender offer, because we are under Argentine law, not New York law. Argentine law says, as a sovereign, I am responsible for following local rules. Local rules say, you don't have to acquire YPF shares because sovereign law trumps local corporate law. - In Practise Interview

There is no doubt the judge can find a way to rule in favor of Argentina. However, if Argentina does win, this landmark ruling could set the precedent for future sovereign nations to expropriate any US-listed company without any consequences. This seems unlikely.

If you are a company or a sovereign nation that goes to the US capital markets to get financing, whether through an IPO or through debt – both Argentina and YPF have bonds issued overseas in Wall Street, and YPF has shared issued in Wall Street – you should be held accountable to the same standards as US corporates, as well as the government is currently. Argentina says look, I'm not going to be held accountable for doing something that was in my bylaws. Burford – as well as Petersen and Eton – is saying look, if you, Judge Preska, rule in favor of Argentina, you are setting a precedent to future sovereign nations that want to expropriate US listed companies without any consequences. This is a major landmark ruling responsibility for Judge Preska, because with her ruling, if she goes in favor of Argentina, you can have Mexico, Chile, Colombia, Venezuela, expropriating US listed companies, without any consequences, leaving investors empty handed, unprotected. - In Practise Interview

There are many ways to value the YPF-related claims, which could result in anything from $2.5bn to $15bn. According to the bylaws formulae, the court filings estimate the combined Petersen and Eton Park claims to be worth over $15bn including interest.

Source: YPF Court FilingsSource: YPF Court Filings

Given its stake in the claims, Burford’s reports potential net proceeds between $1.1bn and $5.6bn.

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