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Burford Capital offers 5% bond to fight more legal cases

Litigation finance provider liked by star fund managers Neil Woodford and Mark Barnett launches third bond at retail investors.

 
Burford Capital offers 5% bond to fight more legal cases

Burford Capital (BURF), the litigation finance provider backed by star fund managers Neil Woodford and Mark Barnett, has launched a bond paying 5% annual interest until December 2026.

The coupon on the nine-and-a-half year sterling bond will be paid twice a year. Although less than the 6.5% and 6.125% offered on Burford's existing bonds, the new bond will yield a better return to new investors given their current high price.

Burford says the 5% interest rate looks competitive against equity income funds which typically yield between 3-5% from investments in dividend paying shares.

Both earlier Burford bonds saw strong investor demand and were over subscribed with the 6.5% 2022 bond raising £90 million in 2014 and the 6.125% 2024 attracting £100 million last year.

Investors have until 26 May to apply for the new bond although broker Peel Hunt, which is leading the issue, may close the offer early if there is strong demand. Minimum investment is £2,000 and in multiples of £100 after that. 

Comparing the new bond with its predecessors is instructive. Superficially, the existing bonds at 110.25p and 109.4p yield 5.9% and 5.6% respectively, which is higher than the new bond's coupon.

However, that is a simple or 'flat' yield and does not take into account the fact that anyone buying the existing bonds today will suffer a capital loss if they hold them to maturity in 2022 and 2024 when they will receive back their 100p face value.

To get a sense of the actual yield, or annual total return, they will receive investors should look at the 'yield to maturity', sometimes known as gross redemption yield. This deducts the capital loss from the interest payments investors will receive. On this measure the 6.5% bond yields 4.3% and the 6.125% bond yields 4.6%, making the new bond and its 5% coupon worth buying.

Retail bonds are listed on the London Stock Exchange's Order Book for Retail Bonds which regulates the market but does not protect investors from losses. Its website has a series of guides on how bonds work and how they are priced. The Investing Answers website also has a free Yield to Maturity calculator to help investors compare bonds.

Burford has launched the bonds to diversify its source of funding. The AIM-listed company will use the money to finance corporate litigation with Burford taking a share of any payout if a case is successful. 

Burford's business has boomed in the past five years with the shares more than doubling in the past 12 months, buoyed by its acquisition of rival Gerchen Keller.

Invesco Perpetual, where Barnett is head of UK equities, is Burford's biggest shareholder with a 25% stake, followed by Woodford Investment Management with nearly 10%.

10 comments so far. Why not have your say?

John W

May 13, 2017 at 05:29

But the new bond is longer-dated, and the yield curve is upward-sloping, so 5% may not be all that it seems.

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Micawber

May 13, 2017 at 07:41

Remember Juridica....

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horshamtim

May 14, 2017 at 09:47

I have a holding in the 6.5% bonds which I bought at issue, so like everyone else in the same boat am still getting a GRY of 6.5%. The timeline on that bond also suits me in terms of age - I have constructed my own bond portfolio on ORB. While I agree with John W that interest rates should rise within the new bond's lifetime, it is a fact that the 10 year gilt curve has flattened again recently. However I am sticking to bonds with < 5 years to maturity.

I accept Micawber's point, and again it is true that Burford's earnings tend to be lumpy, and sooner or later there will be some big cases that go the wrong way. This is why I prefer Burford's bonds rather than their shares - I know the shares have done well, but they are risky, and bondholders are ahead of shareholders in the queue.

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dandigirl

May 14, 2017 at 12:41

My guess is that this will be oversubscribed and withdrawn early. There has been talk of imminent increases in interest rates for years now and we are still waiting. The latest is maybe next year - but that is what was predicted last year and the year before that. Instead we had the fool Carney reducing interest rates against a backdrop of a weakening currency and increasing inflation. I have subscribed for some of these.

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horshamtim

May 14, 2017 at 16:53

Hmmm - well Dandigirl, as we all have different financial objectives, appetite for risk etc. it's obviously your call as to how you invest your own money. Personally I won't be going for this one, although I am an active trader on ORB.

The logic for me was that 3 years ago when the 6.5% bond was issued, it was a much safer call that low interest rates would continue for several years, and that I could even make a capital appreciation on it - which I have. At present my annualised return is just over 9% on this bond. This gives me the choice of either selling at a profit or holding to maturity, which is 5 years off.

It is likely with UK rates at an even lower point, that the next move is upwards, and while I agree this has been foretold several times already, it will happen and it will happen well within the lifetime of these Burford bonds. When it does happen, inevitably prices will fall. This means that unless you are willing to hold this new bond until December 2026, you are at risk of making a capital loss, which will drag the GRY below the nominal 5%. At the moment I am willing to lock up my money until early 2022 for the 6.5%. I am not willing (particularly with inflation at 3%) to lock up my money for 9 years at a 5% nominal rate.

The issue may well indeed be oversubscribed as you say, because there are people desperate for income - so it may be possible to "stag" the issue. I would think about that if I were you unless you are planning to hold for the full 9 and half years.

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Mark Stringer

May 15, 2017 at 07:16

horshamtim, ' I know the shares have done well, but they are risky, and bondholders are ahead of shareholders in the queue.'

I'm a bit confused as what exactly apart from a registered address in Guernsey Burford actually have by way of assets?

Aren't they simply a revolving door for finance to sue people/organisations.

What would creditors claim against?

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horshamtim

May 15, 2017 at 09:46

Mark - assets do not have to have a physical presence to be worth money, and for many companies things like property will form a small part of what they are worth. Debts owed to the company are an asset - they can be sold on or called in, which is what a liquidator would do if a company goes belly up. The value of those debts will vary depending on whether it is worth suing the debtor.

Burford's business is in loaning money to other companies to help them pursue their legal cases, and they will be covered by contracts that pay them back (in differing amounts depending on the outcome of the case). Those contracts like other debts will have a value, and the liquidator would be able to sell those rights on or wait for the cases to be decided.

At any one time Burford will be involved with a number of cases, at various stages in the legal pipeline. This is the reason for their earnings being fairly volatile, as cases may be resolved sooner or later than expected. Their skill is in their screening process - which cases to support and with how much. Based on the last few years' performance they seem to be fairly good at this.

The same approach applies to individuals - even the family home if mortgaged is not really a physical asset - the asset is whatever share of the equity is left over. Anyone with a large mortgage can easily find that a forced sale and transaction costs may wipe this bit out. In negative equity situations the house owner will end up owing money to the lender - which they can pursue after the property is sold. Cash is not really a physical asset, except that small percentage actually in your hands - otherwise it is just a few pixels on a screen and a promise. Shares - unless you hold an old style share certificate - again have no corporeal existence. And so on.

If you are going to be an investor - particularly in an individual company - you really need to understand what assets a company has and whether they have been fairly valued. I always do this including for the investment trusts I use. As Buffett says - only invest in things you understand.

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Mark Stringer

May 15, 2017 at 12:12

horshamtim, no, I do understand assets and can't disagree with anything in a theoretical scenario that you have posted. However I did dip my toe in Burford back around 220 mark ( have regretted not staying invested) and see they have backed an action against the Argentine Government (pretty sure it was them) for loan defaults. My point is that if you can't meet your loan payment and if the political will is in the country's favour then like the (in my opinion) misnamed credit crunch where there was sod all to actually chase on the loan books who pays and won't the admin get first bite as the 9 1/2 yr 5% bond term may look very attractive in that scenario.

I know they also backed the Volkswagen Dieselgate class action which should pay off.

I had assumed that if Burford got to the 'no pot to waz in' scenario then everyone is hitting the u-bend in a real sense.

Yes, it really is best not to invest in something that you don't fully understand.

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horshamtim

May 15, 2017 at 16:16

Mark, apologies if my last comment was a bit didactic, but your previous post suggested you might not understand what Burford's assets were. Their contracts are with commercial litigants and the income is not wholly dependent on cases being won - these are complex deals with companies which have an array of assets. They also lay off some of their risks with insurance. On liquidation all of the potential income flows would be in the mix.

Having just purchased a US competitor they are expanding their asset base. The new debt will rank alongside the previous bond issues, and there is a cap of 50% leverage. At present their total debt is well below that, so even a knocked down value on their assets gives a degree of protection, less to shareholders. As they are financing a lot of cases it is only if too many fail or take a longer time to resolve than allowed for, that there might be a problem.

Reasons for sitting this one out for me are as I set out above - a 2% real return with 9.5 years to maturity isn't a particularly good deal. Anyone who buys now and may want to sell before that date is reached is more likely to show a capital loss than a gain, which is different to the position at the previous bond launches. I have bought bonds with <6% coupon before, but they were secured bonds and with shorter dates to maturity - and I was able to sell those on at a profit well in advance. I think that will be difficult to do with this issue. To put another way, the risks appear to be much the same as with those previous issues, but they are now offering a lower reward for taking those risks.

NB The bonds are issued by a subsidiary but with a parent company guarantee, and at present there are no senior secured bondholders or other prior interests other than any salaries due on liquidation. They are of course an AIM registered company, which reduces their reporting obligations.

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Mark Stringer

May 15, 2017 at 18:30

horshamtim, I'm hoping that they are all they seem as the share price swings wildly at times and as you mentioned the recent takeover their shares took an upward swing.

I seriously considered their last retail bond offering at a higher % but felt that for me their shares offered me a more flexible, albeit riskier return, as I did not want to tie up my capital and wasn't too sure about the ORB market for these bonds.

I really want to buy in again especially knowing they are raising capital for further funding and as I only make a few fair sized trades a year (compared to a serious trader) am happy to take a punt as I am in with Lloyds again and hoping for this much feted upswing. Are they really past the worst?

I see one retail bond that I did consider; WASPS Rugby Club is already looking to re-finance it's debt as they can't meet their obligations according to reports .I did see in a retail bond review site that they mooted this possibility with sound reasoning and sadly it appears to be true.

Boohoo has been a diamond for me and again I sold out too soon (hindsight), but was told many years ago 'always leave something for the next person' which is what I have mostly used as my selling point not to be greedy.

I still can't believe I sold out at 260 ish and now it's up in the 700's.

I have to say that post Brexit and especially this year I have been so fortunate which has made me a little more confident in my purchases.

Good luck with your bond.

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