Artem Fokin's take on Burford's YPF summary judgement ruling $BUR (podcast #161)
Artem Fokin, Portfolio Manager at Caro-Kann Capital LLC, returns to the podcast (for the third time) to update his thesis on Burfurd (BUR) on the heels of their big YPF summary judgement ruling against Argentina. (You can find Artem’s prior appearance on BUR here and his research piece on Burford here).
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Transcript begins below
Andrew Walker: All right. Hello and welcome to Yet Another Value Podcast. I'm your host Andrew Walker. If you like this podcast, it would mean a lot If you could rate, subscribe, and review it wherever you're watching or listening to it. With me today, I'm excited to have on for-, it's the third time now. My friend Artem Fokin. Artem, how's it going?
Artem Fokin: Hi, Andrew It's nice to be back for the third time.
Andrew: Hey, I appreciate you coming on. This is I think, a week ago, we did not have plans to do a third podcast yet, but I appreciate you coming on quick notice. Just let me start this podcast. A quick disclaimer, remind everyone nothing on this podcast is investment advice, we're going to be talking about a somewhat controversial company.
I think a lot of the controversy has been put to bed here but keep in mind that investing involves risks, neither of us are lawyers, so everyone should keep all that in mind. Anyway, we wanted to return, about 2 years ago now we did our first podcast together, that was on Burford. I recently reviewed the podcast actually for different reasons than what we're going to talk about today, but I think a lot of it holds up very, very well.
The reason we're talking today is on Friday, kind of, you know, one of those things that completely change the company, the narrative, the story came through Burford's giant YPF Petersen case, the judge came out with a summary judgment ruling that I believe the quote from Burford was, "A complete win against Argentina" is what they got.
If you look at the headline numbers just in the press release that Burford put out, they said, "Hey, this could be $8 billion before pre-judgment interest which could number another $8 billion." So, this could be $16 billion on face value to Burford.
Now, $16 billion before they're sharing everything but it's a huge number. Burford is an under $3 billion market company. We were talking about just ginormous numbers. The stocks had a nice run in the past week. I'm rambling on.
I'll pause there. I want to ask you know, like, you've been invested in Burford for a long time, what are your thoughts on Burford on the heels of the YPF summary judgment ruling? And we can talk about all aspects of it.
Artem: Okay. Let me start this podcast the way I start every podcast when Andrew invites me by giving my disclaimer, which is Caro-Kann Capital LLC, and all its affiliates are long Burford chairs [crosstalk]...
Andrew: I've long Burford chairs as well, I can throw that system right to[inaudible]. There you go.
Artem: And also, maybe long other securities that are equivalent to being long Burford chairs or Burford, in general. So, do your own work, this is not investment advice. With that behind, let's dive into your question.
I think there are several big blocks there. So, big block No. 1 is pure YPF win on liability, and I'm happy to talk more about what win on liability means, what is remaining to be still decided by the court that is here in this case, etc., and that as you said correctly, this is potentially a multi-billion dollar, that's block No. 1.
Block No. 2, this, in my opinion, should be giving a lot of credibility to Burford's business model and management team. For several years, many naysayers were saying publicly that Petersen and Pater... when I say Petersen and YPF I use them interchangeably...
Artem: ...technically speaking, it's not correct. Argentina and YPF are defendants, the name of 2 cases technically, one case is Petersen, which is a bigger case and a smaller case which is based pretty much on the same facts is Eton Park against Argentina and against YPF.
But when I say YPF I really mean those two cases combined. Just want the listeners to be clear about the terminology here. So, many naysayers were saying publicly that either Burford will lose those cases and again technically, it's not Burford would lose them because Burford technically is not the plaintiff but again, I'm using that terminology very loosely, so be aware. Either Burford will lose those cases, that's number 1. Number 2, if Burford wins, they will not collect, number 3, if they win, they will win in pesos.
Artem: Because pesos unfortunately for people in Argentina depreciated substantially since 2012 when the contractual breach occurred according to the court decision. You know, it's currency massively devalued, even if you win a lot of money, you will get paid in pesos that depreciated what, 90% since then, 95%?
I don't have the chart in front of me, but it's a massive depreciation. So sure, you will get nothing. And most of those things have been so far proven, at least now and we'll talk about detail [inaudible] later incur. And that I think should be serving as a boost for Burford's credibility.
And then, before the narrative was, Burford will never win this case and will never get paid. And I think it's possible that the narrative could change over time to is it possible that within Burford's portfolio today, there may be another YPF, and I don't know, because first of all, we don't know their cases, all of them.
We know only very few. It's hard to speculate. Second, they may never have another YPF. It's also possible, but it's also possible that they may have, and to make sure we're talking about here probably a multi-bagger for Burford over those roughly eleven years.
Andrew: Just to add on to, we're going to talk a lot about the case today, but I think one of the things, a lot of people are going to look at the share price and see Burford stock went from 7 to 11 or 12 today in the past week on the heels of this news and I think a lot of people are going to look and say they missed it.
And I think the two things I would say is, we'll discuss analysis, but I think the market is under-appreciating how much Burford is going to get from this. But the second thing is to add on to what you said, I think this is a clearing event for Burford, not just because it puts- you know, a lot of people didn't want to step in front of a YPF ruling, but they just won this.
And to me, that is such validation of the business where going forward, Burford ring always includes slides that say, "Hey, our ROI on our investments to date are 30% or 40% or something, right? And I think a lot of people were hes- and that excludes YPF.
I think a lot of people were hesitant to underwrite that, but I think going forward, a lot of people are going to be looking at Burford and saying, hey, not only do they get these great pretty consistent uncorrelated returns but as you said, what if there's another YPF hiding in there, right?
What if they invested $2 million and, you know, they invested I think in total $20 million and they got $200 million in proceeds from selling pieces of this so far and they're going to get another billion $2, $5, whatever it is. People might start looking and say, what if the next Facebook is in there, right?
Because that's kind of what they just found here. I just think this is a clearing event and we're going to see the market going forward giving them more credit for the quality of the business because I think this proves out. Again, please continue.
Artem: I like your analogy very much about Facebook. The analogy that I use historically is this, saying that Burford will never get another YPF, which is totally possible, it's coming to a venture capital firm here in Silicon Valley and saying listen, you will never get another Instagram, another WhatsApp, another Facebook, another... you name one of those successful companies.
And to be true, they may not, or they may, we don't know future will tell. One thing that I just wanted to clarify so that we're on the same page- I believe that Burford IRR including YPF is around 30%, 3-0, and excluding YPF it's about 24%. If I remember the most recent presentations correctly. I just wanted to make sure that it's not 30, 40 on the aggregate of the portfolio.
Andrew: I will trust you. They throw out so many different numbers and some of them are excluding, and some of them are including it can be tough to remember what's excluding, and what's including. You are probably right, but that's the 30% that's realization so far if I remember correctly now that I'm thinking about it.
So, it doesn't include just how good the remaining pieces of the YPF are. So, the summary judgment ruling comes out, comes out on Friday. Burford calls it a complete win against Argentina. Maybe just talk through the high points of why this is a complete win against Argentina because I actually know some people who read it and instantly their thought was, Burford kind of lost this one because there wasn't an explicit damages number listed and YPF was dismissed as a claimant and then twenty minutes later, they read the whole thing and they're like, "Oh no this is great." But just walk us through what are the high points. Why is Burford saying this is such a complete win?
Artem: So first, I'm sure there will be some people who listen to this podcast who are Burford junkies like you and me. So, they know a lot about YPF, they know a lot about the liberal[?] rules and also suspect that some of your listeners may be hearing about YPF for the second time and for the first time and they may not know some of those things. So let me just explain what summary judgment is. Sounds good?
Artem: If two parties, plaintiff and defendant are in court, in face of the judge and at least some of the facts are not being disputed, both parties are pretty much agreeing on those facts. In that case, the judge- sorry, plaintiff and defendant, both of them can file a motion for summary judgment saying, "Dear court facts are pretty clear this is a matter of purely interpreting the applicable law. Could you please decide this faster in the summary judgment instead of us going through the full trial?"
And that was happening here. Both plaintiff Petersen and Eton Park and defendants, YPF and Argentina, filed motions for summary judgment saying, "Honorable judge, the facts are very clear. Could you please decide it in a fair expedited fashion?"
Because the case is more complex, expedited fashion here still meant a very long time. Again, it's a complex case and rules... Applicable law here is complex because it involves not only the rules of New York- New York law but also the law of Argentina etc.
So, it's a complex endeavor, and the judge issued... and also at that time, the court has an option. After analyzing the documents and testimony and everything, the judge, the court could say, I grant full summary judgment in favor of a plaintiff, who will win.
Or he can say, I will grant a full summary judgment in favor of the defendant who will win. Or it can be what is called partial summary judgment where the judge will say, this and this and this is very clear, I'm deciding on those matters.
However, there are some things that I need- that need to go into trial, but the scope of the trial is massively reduced. So, in this case, going back to YPF, the decision granted on Friday, March 31, was the following: Plaintiffs, Eton Park and Petersen have won against Argentina. That's done.
However, they lost against YPF. So YPF according to the summary judgment is- not using legal terminology, is off the hook. And simplifying the issue was the following: Did the YPF have an obligation to enforce Argentina to comply with its own bylaws?
Or, simplifying it a little bit, the Court said, "We don't believe that the corporation whose bylaws were violated and the legal obligation to force the Government of Argentina to comply with the bylaws. So, YPF is off the picture.
However, Argentina laws from pretty much every count, except the exact amount of damages, and the exact amount of damages boils down on the surface a very trivial issue however, from a monetary perspective it's not very trivial.
And the key point here was the following, once Argentina, the Republic of Argentina, takes control of YPF shares, not control of YPF as a company, but control of the shares. So, 50% plus. 51%, let's call it for the sake of simplicity.
This is a trigger according to the bylaws to tender for the shares. As a result, that date when 51%, again, I'm simplifying the number here, is taken over that's a critical date. And the question becomes when did happen?
And I believe on February 12, sorry, on April 12 I believe, correct me if I'm wrong on this date, Argentina effectively installed its own management who started running the company in a different way and the plaintiffs were saying this is the day.
However, it may not be the case because there is a difference or there may be a difference between control of the company and control of the shares. Those are 2 different issues potentially.
But then Argentinian Congress passed the law which was called Public Interest Law that expropriated shares owned by [inaudible], which is roughly 51%. That law was passed by May 7, and I believe it went into effect on either May 9 or May 10, something like this.
Andrew: Within several days of being correct, if I remember, yes.
Artem: That's probably, can be definitely considered as the date of acquisition of the shares. Importantly, the judge wrote in the summary judgment decision that Argentina made certain admissions in prior testimonies that mean that the latest date, the way I interpret the decision- the latest date when Argentina acquired the shares, control of the shares, is this date when the law went into effect.
So, the way I view it, we have a fairly narrow window of a couple of months. It's April 12th, roughly the number I'm quoting from my memory, up to May 9th. So, within the timeframe, this is probably the date when Argentina took control of the shares. So let me pause here.
Andrew: Sorry, I thought you were going to pause and continue. I was just flipping through the summary judgment. Your dates are almost spot on and then if I'm just going cut to the end, the differences are... people can read Burford- YPF bylaws had a formula, when not YPF, it was not lost on anyone that Argentina had a history of nationalizing companies.
YPFs bylaws had a formula that said, hey Argentina if you want to nationalize us, here's the formula, you know, it's basically a multiple of net income times the highest trailing price-earnings multiplied over the prior two years, if I remember correctly.
And the question is, if it happened in April use one number that gets you to about $10 billion in total damages. If it happened in May use a number another number that gets you to about $5 or $6 billion in total damages.
Obviously, these are a huge swing based on just one month, because what happens is the net income number, I believe YPFs filings get made in early May reduced their net income and reduced their trailing multiple.
Just a couple of days can have a massive, massive swing in value here. So, that is one of the outstanding arguments and we might come back to that. But overall, let's just continue talking about the complete win for Burford here.
Artem: The judge settled this issue. I cannot make some summary judgment on the date when it happened, I need more testimony, I need more arguments, and I need more steps to be completed before I do that. And without the date, I cannot calculate the amount of damages and because of that, you want Petersen and Eton Park, but we don't know yet how much you want.
A couple of other minor issues and it'll be probably too much legalese to talk about this because plaintiffs were also proposing the consequential damages is not a legal theory, but it seems to me that it probably was just a backup plan if the main plan doesn't go through.
It looks like the main plan went through just fine and a couple of smaller issues, but I don't think they matter at all. So, that's why I think it's a very clear win. Also, if you look at the decision pretty much all arguments proposed by the counsel for the defendants were dismissed.
Including... so, to me, it wasn't a surprise because I had to do a lot of legal analysis on the currency conversion issue because some of the variable respected media globally will publish an article saying, "Burford will get paid in pesos."
Artem: And it will not be very valuable, and they will quote in a particular legal case that on its surface if you take it and read it you would get scared. The problem is that they never mentioned that there is another case. Simplistically what happens is this, and this is pretty well-established jurisprudence in the United States.
It goes probably almost a hundred years back by now. Obviously, there were follow-ups, etc., but very simplistically, if there is a decision that involves a currency, years back, the question is, do you convert at that time or do you convert at this time?
And importantly here the obligation to tender for YPF shares was in US dollars because they were trading in the United States of America on the New York stock exchange, the legal currency here is US dollars, I'm not commenting right now on Bitcoin and other cryptocurrencies being used right now.
But you cannot go to a store in the United States of America and try to buy Coke using euros, it will be illegal. So, the tender- the medium of the tender must have been US dollars and then you carry that. So, again, it will be too much legalese but many people [crosstalk].
Andrew: Just your credit. I was nervous about the peso's argument. I thought it might even be a way for the judge to split the baby here. You know, I don't think the judge... if she found the rulings of law were against Petersen and Eton Park, I'm sure she would have.
But I don't think anybody wants to set the precedent where hey, companies can nationalize their assets willy-nilly with that trade on the US stock exchange without any liability, but she could've been also, this might bankrupt Argentina. Maybe I do it in pesos to make it less on them.
I was a little nervous about them. I specifically remember I reviewed the podcast we did 2 years ago. You were very firm, no, this is going to be in US dollars. This is coming in US dollars and look, that was the ruling. That's what happened here.
Artem: So that was very nice to see, definitely. And if you read the judgment, it feels to me... and to be clear, I've never walked as a US judge. So, I've never written a judicial decision, I never even clerked as a clerk to a judge.
I'm interpreting this from the outside not from the inside obviously, but to me, if you read the decision, it's very clear that pretty much every legal argument, proposed by the defendants failed on its face. When I read it, I felt it was a very, very clean win.
It wasn't, on the one hand, and the other hand and this is and that, and they're like, oh my God, it's going, how will the judge rule? Then you start seeing the logic like, yes, this is where it's going and that's what happens. So, a very, very clean win, so, that's good, that's a very, very good win.
Andrew: All right. So, we've got this clean win, we do still have- we'll come back to damages, and we'll come back to interest rate. But we've got this clean win at this point, right?
Andrew: We still need to go to actually like a pretty much a full trial to establish the damages, the interest rate is up in the air. I think the judge says hey, it's probably the Argentinian rate of 6% to 8%, but we need to talk about that. We've got this clean win at this point. Actually, let's do that, let's quickly talk about the... oh, did you want to say something?
Artem: Let's just first explain a couple of things.
Artem: Let's first explain, because you mentioned some numbers like in the billions, right? Million, billion dollars. So, let's just explain how the mechanics of the waterfall work. And I encourage anybody who is interested in this topic, to go and read the press release that Burford issued on Sunday, April 2nd. By the way, Andrew thanks God it was not April 1st when Burford issued the press release, right?
Andrew: Yes. I am with you. It is just so funny the summary judgment comes out March 31st, Burford is very smart to put out the press release April 2nd because there is a world where this comes out April 1st, and all of us are looking like, is this a joke?
This is the weirdest security fraud joke I've ever seen in my life, but I have the press release pulled up over here. You go ahead with the numbers, and I'll spot-check you if anything is off or anything.
Artem: So, this is what is important, at some point, I would think that the court would issue a final decision on damages and when you'd see that number, this is not the number which will be going eventually if collected and we'll talk about that. That's not the number that Burford is entitled to.
There is a fairly complex, but Burford really simplified it- a waterfall of payments where Burford eventually from Petersen, that's a bigger case because Petersen owned roughly 25% of the company. That's roughly 100 million shares, which roughly probably would be tendered somewhere between, call it 53 and 88, or something like that. So, you need- I will skip the intermittent steps, but I believe roughly Burford will be getting the entitlement of that number. What, of 35%?
Andrew: It's 35% from Petersen and then if you want me to skip ahead from the Eton Park claim, they get 73%.
Artem: Exactly, so it's 35% and 73%. So, when you see at some point, I will think we will. We will see those final numbers you multiply one number by 35, and another one by 73%. This is what Burford entitlement is, and the reason why we're saying entitlement is because it's not cash yet.
Cash needs to be collected. I'm sure we'll talk about that, so, that's what Burford will be getting, and those numbers- and you have pesos in front of you, why don't you mention what those numbers collectively convert to Burford [inaudible].
Andrew: Yes, so, if the April 16th date is used which I just consider the higher number date, Petersen would be $7.5 billion, and Eton Park would be $900 million. So, Burford on those numbers would be entitled to, if I'm doing the math in my head correctly about $1.1 billion.
And then if the May date is used, Petterson is $4.5, Eton Park is $5.50, that's a little over $5 billion in total and Burford would be entitled to about $650 million. I'm sorry. I was deducting for... I've got my little chart with the [inaudible] sorry. On the $5.5 billion Burford will be entitled to $1.6 billion. On the $8.5 billion, we'd be talking about $2.7, $2.8 billion is what they would be entitled to. Sorry about that everyone.
Artem: Yes, because I felt like the numbers were way too low.
Andrew: Yes, I've got my spreadsheet with everything listed and I was just looking at it, but I've got a different face and I was deducting for the face, those are the numbers. Yes.
Artem: Perfect. So, now, everybody most likely is familiar with the concept of the time value of money, $1... [crosstalk]
Andrew: You would think on this podcast everyone would be, at least.
Artem: Exactly. I would expect that. So, everyone would appreciate the fact that if Argentina indeed paid the money to the parties involved, Petersen and YPF in 2012, that would be very, very different than if they pay money tomorrow. The US legal system recognizes the time value of money and there is this concept called pre-judgment interest which means this: If Argentina needed to pay $100 to someone in 2012, but they would only do it for example in 2020, but the judgment will be rendered in 2023- I'm making this time up, July 1st, just to keep things very simple.
In that case, we would need to be talking about prejudgment interest for that period of time and unfortunately, it's not compounding. It's simple but, if you take a simple number, simple interest for eleven years pretty much, it still adds up. And the question is, what rate should be applied?
Generally, in a commercial matter in New York, that would be 9%. That's my understanding. However, Argentina made a proposal... made an argument as far as I understand the filings- that there should be a different rate applied, which is rate- which is used in administrative cases in Argentina. I don't know the exact number, but I suspect it's a lot lower. However, [crosstalk]
Andrew: It's... okay, go ahead.
Artem: However, Burford it sounds to me that the plaintiff counter-proposed, or counter-argued, and the judge seems to be leaning that way even though it's not final and not certain that it should be a rate that is normally used in an Argentinian commercial dispute, which would be between 6% and 8%.
The way I think about it, if you take 6% multiplied by eleven years, that's 66%, and if you take 8% and multiply by 11 years, it's almost 80%. Which means that you take those numbers that Andrew mentioned, and you should be adding if this plays out the way it seems to be going, which is not final.
The judge very clearly stated that it is her right to change her opinion and approach here. But right now, on the surface, it seems to me that we need to be increasing the amounts that Andrew mentioned by 66% to 88%, which is again several billion dollars more.
On top of that, once the judgment is issued and the damages are finalized, the prejudgment interest stops because guess what? It's called prejudgment, now there's judgment so it stops. But there is also post-judgment interest which obviously has not been decided and would not be decided in this trial right now, but the concept of post-judgment interest also recognizes the time value of money.
And the way it works is this if a plaintiff obtains the judgment against the defendant and the defendant is not paying the money and they will be trying to avoid collections and they will only pay five years from now, again the plaintiff is hurt. So, to compensate the plaintiff, there is a post-judgment interest which is generally the applicable federal rate used and that's lower and it fluctuates depending on the rate side, etc.
But the good news is that it'll not be 6% or 8%, most likely it'll be probably quite a bit lower, but even 3% a year being accrued it's still something and we'll get back to that. But also, it could be probably used as a little bit of a stick in negotiations later.
Andrew: And it will be applied to the total award amount. We mentioned roughly if it's the higher number it's roughly $8 billion prejudgment interest roughly $16 billion after you include the pre-judgment interest. Well, 3% on $16 billion per year, 4% whatever it is, is going to be a pretty hefty number.
So, it could be pretty hefty. The only thing I will add there is I talked to several people familiar with the case - experts - that type of stuff, and all of them were like 95% yes, this is probably simple interest.
But there is a small outside chance. Everything is a negotiation; everything is up for argument. There is a very small outside chance that somebody convinces them that this should be compounded interest, which would obviously add even more interest. [crosstalk]
Artem: I'll figure every day of the week and twice on Sunday.
Andrew: Yeah, I would too. You are almost certainly correct, but just throwing out there that you probably don't want to bet your life on it, but you could probably come pretty good. If we're just taking the high-end numbers and I'm looking, and I've got my spreadsheet properly adjusted.
Higher number is $5 billion in damage... sorry, lower numbers would be $5, that would be about $2 billion to Burford if that fell through. Higher number's $8 billion. That would be about $3.3 billion-plus to Burford if it went straight through. You could basically double those numbers to account for the simple interest if you want to start doing it.
So, I think one thing people might do is say, "Oh, Andrew and Artem have just said that there's this case." Oh, we're talking [inaudible] but, what are the things? There are two risks to Burford here now, the largest risk is going to be collection risk, and we'll talk about that in two- a second, but some people might say hey, the final ruling isn't here yet, Argentina has a history of appealing, there is some risk.
Argentina wins this and gets this overturned on appeal or something. I personally think that risk is extremely low, but I don't want to put words in your mouth, I'll ask you, what are the odds Argentina pulls a rabbit out of their hat, gets this overturned on appeal and you and I look very silly in hindsight talking about this big win on the podcast.
Artem: Okay, so, number one, regardless of what happens, we'll not look silly for a very simple reason, we recognize that there is a risk of appeal, and we recognize that Argentina has the right to appeal, and they very well may exercise the right. My expectation is that they would. So, there is uncertainty, and yes, some judgments can be overturned on appeal. It happens.
And by the way, there is also a possibility that even if Argentina loses this appeal, they could go to a supreme court to take the case. The chance of that is very likely because generally, the Supreme Court takes very important cases that could establish substantial legal precedent for the future, where the case law being established is so important that they feel compelled to take the case.
In this case, with no offense to Petersen, Eton Park, Argentina, YPF, and Burford, that's relatively- it's an incredibly complex case for the judge to decide and rule. That's why it took a lot of time and there were some fascinating issues about sovereign immunity involved earlier but that was decided a long time ago.
But even the Supreme Court said we're not going to take it. So, I doubt that will make it to Supreme Court. But yes, it would probably be appealed and there is almost a chance of losing in appeal. We need to be very cognizant of that.
Andrew: A 100% agree with everything you're saying, but I did talk to several lawyers and all of them said, Argentina has lost every decision in this case for 7 years. Supreme Court rejected their sovereign immunity argument as you said and the judge...
Artem: No. Supreme Court did not reject the argument they rejected to take the case [crosstalk].
Andrew: Exactly. The judge felt comfortable doing summary judgment here and in general, you do summary judgment because the law and merits are quite clear. If the judge felt comfortable doing summary judgment and you appeal the law and merits according to the judge were quite clear, it's extremely unlikely that the judge just misinterpreted the law and merits so badly that she's going to get overturned on appeal.
I have lawyers say things like appealing the summary judgment is like throwing good money after bad, not saying Argentina won't do it, it's a huge case, but everyone I talked to seemed extremely unlikely that anything productive for Argentina happened through appeal.
Artem: I think it's unlikely. Historically I was saying that probably winning in summary judgment will be a big win. It's unlikely that it'll be overturned on appeal, but it's possible, so I agree. My analysis is in agreement with what you just described. I agree with you. Also, let's talk about the mechanics of the appeal.
Because I think some people are confused about it. So, let's clarify the way I understand it. Again, to be clear, I'm not a practicing lawyer, so I can be wrong. Do your own work but this is my understanding of how the rules work. So, at some point, the court will render a decision on the damages.
And then both parties can appeal. Why Petersen and Eton Park may appeal, well remember they lost against YPF. They have the right to appeal that part of the decision and say, "We disagree." I don't know whether they will do it or not. I'm sure right now Burford and lawyers are strategizing about those things, but it's a possibility.
Then about Argentina, Argentina has the right to appeal. However, in order to appeal... one of the important legal consequences of appealing the judgment of the trial court, is that it will stop collection efforts. However, there is a caveat, in order to stop collection efforts, a defendant who lost the case must post a bond.
I would suspect that not many parties will be willing to post a bond for Argentina because then that bond will be used to pay down if the appeal is lost. If they post the bond that's in my opinion [inaudible].
Andrew: I hadn't thought of it that way, but you are 100% correct. That would be, hey we're getting some percent of base guaranteed for sure, let's go.
Artem: Yes. Let's assume that Argentina does not post a bond. They still have the right to appeal, however, if the appeal would not stop collection efforts, in other words, Burford can immediately start working on enforcing the judgment. Now, there is a caveat, the court has the right to put a stay on enforcement even without a vote.
It happens, and it's incredibly rare, it's a very rare situation but we cannot rule it out as well. So, I want to mention that. But that's the mechanics of the appeal. And the time that takes the appeal to go through varies. It varies from court to court in the US.
I took the bar exam in all 5, there's a lot of time as you can imagine, and I was not reviewing the legal textbook recently on a variety of legal issues only on Burford stuff. But my recollection is that there are 9 appellate courts in the US. And New York cases go to the second appellate court and right now, according to Burford's press release, the timing of appeal is about eighteen months.
The number I had in my head was actually a little bit lower, but again, fifteen, sixteen months but again, that number fluctuates, it can go up and down or sideways. So, that's on the appeal. So, let's pause here. Anything else?
Andrew: That's great. I think at this point we've talked about the likelihood of risk we've started talking a little bit about the appeal, just you know everything you said on the bond and the enforcement, everything completely consistent with what I was thinking.
On the low end, Burford- without any interest if you take the worst state for Burford, they just got a ruling that the gross ruling is $5 billion, the proceeds to them is about $2 billion. On the high end, you take the highest end number, you include the pre-judgment interest.
This is over $16 billion. This is... all of this is USD, right? Over $16 billion. We're talking about over $5 billion of proceeds. Roughly five... let me get my mouth out. Where is it? On the high end, we're talking about over $6 billion to Burford.
Burford is a $2.5 billion market [inaudible] company as we're talking today. The question- and what the market's trying to assess, we can talk about business valuation everything in a second there, but everyone knows Argentina is not exactly a good credit.
A $16 billion judgment would- they do not have $16 billion. So, everybody's starting to think about what is the haircut that Burford is going to need to take either because it takes so long and they have to go seize lots of assets and sell them or more likely, they and Argentina go to a table and say Argentina you've got this $16 billion judgment against you, it's going to accrue, we don't want to have to start seizing your warships, we don't want to have to seize Argentina Air Force One.
Argentina says, hey we'll pay you $ 1 billion, we'll pay you $2 billion, we'll pay you some percentage face value. People are starting to think, what is that percentage that Burford is actually going to collect?
Artem: So, we'll get there in a second. This is a small proposal that I would make, you mentioned some numbers in absolute what Burford entitlement could be.
Artem: Let's convert them into a per-share basis...
Artem: ...because I think it will help the listeners to relate because they could look up the share price of Burford, today I think it's worth $11.50, $11.30, $11.60?
Andrew: It's moving all the time, but it's somewhere in the mid-high 11s, yes.
Artem: Okay, so, based on the math and I'm here relying on the math that Burford offered in their press release, and I converted that into the per-share basis. If it's only damages with the bad date-, call it a bad date, low-value date, then it's roughly $9 per share.
Andrew: Got my thing here, a 100% agree.
Artem: And if you take the good date, great date, bull date, let's call it, and you put damages at 8%, then we're talking about $28 in change.
Andrew: Yes, that's about right to me.
Artem: So now, before we get there, and we'll get into collections. I'm not trying to avoid the question because it's a fascinating topic. A couple of other things, it'll be reasonable to expect that Burford team would get a bonus, once the money is either collected or at some point, they will get maybe some intermediate steps, or whatever.
Because that's a tremendous amount of work and tremendous as of right now because there is always an appeal but as of right now, that's a tremendous step towards shareholder [inaudible]. It's reasonable they expect that there will be some money, a substantial amount of money paid to the employees, to the management team as a bonus.
We don't know what the number would be I will speculate probably between 5% and 10%, maybe 4% to 10%, that will be my guesses.
Andrew: I have talked a little bit about this, if you go back to their old annual reports they disclosed the employee incentive fees by vintage, and when the YPF case was made I believe the vintage employee performance fee, incentive fee, whatever you want to call it was 4%.
So, 4% is what I've been nudged to maybe it's a little higher because look if you want a $16 billion award and you said this was a grand slam out of the park, I wouldn't be surprised if you were buying an extra watch or two for your employees that thing, but so far, I've been guided to 4% and that's how I've been thinking about it. Not saying it's right or wrong, just that's what I've been using.
Artem: That's fine. Again, I said 5% to 10%, mentioned that 4% because I also have the number in the back of my mind. So, it could be 4%. It's that range, but remember you need to account for that. And then there is more substantial and interesting question in my opinion is will this giant amount of money be taxed?
Artem: And at what rate? So, a couple of things. You need to remember that Burford is an international company, it's incorporated under the laws of Guernsey, if I'm not mistaken, and based on everything that I know about Burford, they structure things well. Also, another thing to disclose in my prior life before going into a business school at Stanford...[crosstalk]
Andrew: You were in taxes, right? Yes.
Artem: I was an international tax lawyer, so my expectations right now... and remember, here I am sharing educated guesses because without being inside the company ideally in the tax department, I would never know how exactly they do these things.
It's impossible. I can only be guessing here. So, my suspicion right now, the taxes will be next to zero. I know that some people are taxing it at the mid-teens[?] rate because Burford sat publicly that over time our rate would go to mid-teens[?] maybe their conservative, maybe not, time will tell.
Andrew: I believe it's low-teens from their 20th and I've been told low-teens that...
Artem: They started at mid-teens.
Artem: Some time ago they said, it's a very low rate right now but will go to mid-teens, and then they dropped it to low teens if I'm not mistaken.
Artem: But I think Petersen as a case of early vintage, we're talking about 2015 vintage. I actually suspect that the taxation would be next to nothing, but again I don't know, I'm just looking at the history, the commentary, and trying to figure out what's really happening.
Andrew: I think there's a very good chance you're correct. I do think ultimately, the haircut that they take actually is going to matter more than the tax rate and the employees' claims but obviously, you know, 20% of the [crosstalk].
Artem: Twenty percent is [crosstalk].
Andrew: I completely agree with everything you said and then the other thing you said, I don't know a lot, these are informed judgments. Do you know who knows? Absolutely no one because this is going to be a $5 billion, $6 billion, $2 billion, whatever is awarded, Burford is not even going to know until they file their taxes with the US government and then the US government... or further checks with currency and then everybody comes after it and says yes, this is good or not, you don't know because these are huge, huge claims. People are going to take a look at a $2 billion cash inflow.
Artem: Okay, so, look, now I'm really getting into complex things. So, that's risky. Okay, so generally Burford structures, and also Petersen is very unique, right? And remember, the Petersen estate is in Spain. Your separate company is in Gerson. And they have some subsidiaries either direct or indirect in the USA, but we probably have plenty of obligations for the UK.
They recently opened a Dubai office, and they got something going in Asia, etc. So, it's a complex thing, right? So, the situation is this, look, I think those things are either classified as interest income, or they will be classified as other income and other income... oh, boy.
Andrew: You know what, I think... [crosstalk].
Artem: I'm trying to remember exactly [inaudible]. But the bottom line is that it's a range. We don't know. The bull case is that at zero, the base case is 21. Right? That's how I think about it. But again, we will see.
Andrew: A 100% agree. Let's turn to I think, the most personal question. Burford says in their press release, hey, we can either try to enforce or talk enforcement strategies. I think Burford is well situated to enforce and knows the cost and what the outcome is.
We could try to enforce or negotiate an upfront settlement guaranteed money, but this is- it's either substantial... If we take that upfront and we negotiate a settlement, it's either substantial or significant, but it says it will be at a substantial discount if we take an upfront payment from Argentina basically.
So, that $8 billion, $5 billion, $10 billion, whatever number it is, everyone's wondering how much do you haircut it for whatever a substantial discount or settlement would be, so how do you think about, if they get- call it $10 billion to make the math really easy, what type of discount are they looking at? What kind of cash flow is actually going to come into the company?
Artem: I think it depends on when, first of all if that happens, right? But it also depends on when it happens. For example, if Argentina contacts and says, "Burford, let's make peace, let's do a settlement tomorrow" even before the trial court renders its decision on damages.
There's a lot more negotiation room because there is more of a lot more uncertainty. What if the judge thinks that it's a bear date, not a bull date? That's one. Number two let's say those negotiations- it's called that judgment settlement.
Let's say it happens after the decision was made on damages, but before the appeal. There is still some uncertainty on the appeal as you and I discussed with the flow. And here we're talking about billions of dollars, then the discount will be bigger.
If it's after appeal, then the discount will be shrinking. Because at that point. Again, assume that the Supreme Court says, no, we're not taking this case. Because at that point, there are zero legal obstacles to the [inaudible]. There are only practical obstacles to collection efforts and enforcement.
And those, in my opinion, will bring a lot low discount. Let us go and say again, Argentina does nothing to try to settle the case until Supreme Court says no, we're not taking this case. But what is canceled here? Remember, I don't know, and nobody knows. Including Burford right now doesn't know, and Argentina doesn't know.
And we don't have a big sample size of [inaudible] because, number one, judgment of that nature is rare. Number two, very often the terms will not be disclosed. It's not like we can go and get the full data set and say, hey, this is the median, this is average, this is two standard deviations to the left or to the right.
So, I don't know. If I want to guess, I will say between 35% and 55%. That will be the discount. So, call it. The collection would be anywhere between $0.45 to $0.65 on the dollar, that would be my guess...
Andrew: That's what you're saying. If Argentina takes it all the way to every appeal is done, Supreme Court's rejected this, but basically, it's up to the step where Burford is just trying to seize airplanes, warships, and whatever they can to get paid. That's where you would think the discount comes in.
Artem: So that's my guess right now, and this is in another case... To be clear, when I talk about, for example, the tax rate, I have some experience and some knowledge of the industry and the rules. I don't know the internal facts obviously, because they don't disclose them in their filings.
However, in this case, when we talk about the settlement, I'm a lot more guessing than in other matters. For example, when we were discussing foreign currency, I had a very strong view. Here your guess is as good as mine. But now, let's talk also about the structure of the settlement because it's also... here's the thing... if Argentina comes and says, listen, we owe you $10 billion, we pay you right now 4.5 and we are done, that's one situation.
In another situation, Burford, we don't have even $3 billion to give you right now. How about we give you a billion and then we'll be paying you $500 million for the next 10 years? That's a different situation. And in dollar amounts, it'll be larger than the upfront payment.
Andrew: I was just looking...
Artem: There's a lot of structuring here to be done.
Andrew: People can Google. So, if you look up international settlements and all of this stuff, every book will say, hey, there aren't tons of them. But there are, you know, in the dozens of cases, and like, half of them involve Argentina historically.
And when I was prepping for this podcast and doing work on Burford, one of the funniest things is last year, there was very similar to what you just said. a group called the Paris Club met and negotiated a payment plan with Argentina.
But what they were negotiating was they were renegotiating the last negotiation they had to renegotiate Argentina's plan because Argentina defaulted then defaulted on the next plan and was getting ready to default on this plan. So, Argentina and settlers are very familiar with the type of overtime, payout negotiations, all that type of stuff.
Artem: Okay. So couple of important things here. Number one, Paris Club is... I believe this is a group of major developed countries.
Artem: This is not a private organization. This is not a commercial consortium of hedge funds or investment banks.
Andrew: Correct. It's Germany and a few, yeah,
Artem: Exactly. Germany, the US, and probably some other countries. Again, I don't remember the whole list. So, they make decisions together, whether it's consensus or by vote, I don't know. But it's group decision-making wherein senses vary.
And also, it's a group of countries and there is a lot of international politics involved there. And different countries may have different incentives and making this numbers situation up. One country in continental Europe may be saying we want to have good relations with Argentina and will try to be more lenient.
Another country may be saying, "We don't really care about Argentina. Our trade with them is very, very small, but we want better settlements." Right? So, it's a different situation. And similar to when a sovereign nation defaults on a sovereign bond that is typically governed by the laws of New York or the laws of England.
There is a default, there is a trust- the bond trustee, who will be acting to enforce it, but the trustee typically acts based on the vote of the majority of the bondholders. And grossly always simplifying here, the way sovereign destructions were massively always simplifying...
So, don't try to buy bonds of every sovereign nation based on this 32nd Summary. And those investors vote based on the amount of percentage of the notional amount of the bond that they have, okay? And different bonds have different bond trustees.
Or at least, it can be the same entity, but the voting instructions will be different. And as you can imagine, people or institutions that own those bonds have different consensus. Someone bought them at a hundred and wrote all the way to, I don't know, 15 or 20, 25, depending on particular information, or some bond can be a hedge fund.
They bought them at [inaudible] cent on a dollar and they're like, hey, settle at 27 in a year [crosstalk]...
Artem: ...with a [inaudible] five IRR will get paid out here in 20. That's terrific. So, it's very, very difficult and a lot of negotiation happens not only with the bettor, which is the country but also within the group.
Artem: All of this has virtually nothing to do with enforcing the judgment. In the situation of the judgment, there is one defendant and there is one plaintiff again here will have two plaintiffs that will be two separate judgments, blah, blah, blah. Right?
So, and then you go and enforce that. You don't need to consult with a trustee, you don't need to get a vote. You don't do that. So, to me, all those parallels about boundary structuring are a very bad analogy. There is no bad analogy or almost no bad analogy, but it's still a bad analogy because the playing field here is radically different.
It's the same as you trying to go to England and you try to use the rules of football here in the US to understand that Chelsea versus Manchester United game on the track and field, right? It's not going to help you. It's different. They also have the ball and people running, but it's a different game.
So, it's the same. So, I think one of the biggest, one of the huge misunderstandings about Burford and YPF has historically been this, I've heard this from a number of people, some of them are very smart, some, you know, not as smart, but many are very, very smart. And they will be saying "Artem sovereign bonds of Argentina are trading at, you know, whatever they were trading.
Andrew: $0.25 on the dollar.
Artem: Right. Five at some point they were probably 50 or 60 or whatever. Hey, so this whole thing, Petersen should be haircut. I'm like, no, it's totally different. Remember, Burford has always had an option not to settle for anything and make the life of the bettor hell, whether it's a smart strategy financially, it's a separate conversation. Right? But they do not need to settle on the same terms that bondholders did. They don't have to.
Andrew: No, it's a great point. And, I think to your point, one plaintiff, one defendant. If Argentina doesn't do this settlement, they're just like kind of spitting their nose at the US courts and particularly the New York Fed court circuit, like that's the New York Fed Circuit might, you know, Burford one plane wanted to be defended, they can just go to the New York Fed and say, "Hey, we've got this judgment outstanding, Argentina refused to pay, $5 million, just popped up into their bank account and we want to seize it.
And the New York Fed says, these guys are giving us the finger absolutely frozen Cs like they can go like that just season assets. That takes us well into the next thing. You know, one thing I think it's easy to forget about, but Burford is, you know, at the core, they have a big group of lawyers.
They have an asset recovery business. They've historically never had an asset recovery like this. But these guys actually own an asset recovery business. These guys are very well-equipped. If they decide, if they do the math and they sit down and say, Argentina's offering us 30 cents on the dollar, we think we can get 35 cents on the dollar by going and seizing things.
And obviously, we need to discount that back for uncertainty and time and everything. They're very well equipped to make that decision and go execute that decision. So, I just want to pause there and talk about anything on the Burford asset recovery side that you want to talk about.
Artem: Okay. So, broadly speaking, and this is oversimplifying, many people I think are doing the wrong analysis here. They're thinking about like, oh, how many assets does Argentina has around the world outside of Argentina, which can be taken over. And also, let's explain to the listeners.
In Washington DC Argentina has an embassy. I got no clue whether they own that building or not or whether they're leasing, I don't know. But let's assume that they own the building. Can you take over the building? The answer is no. Why? Because that building is owned by a sovereign nation for the purposes of conducting its activities as a sovereign nation.
What you can only take over is the assets being used in commercial activities. So, over simplistically, if Argentina owns a vessel, which is used for commercial activities, let's say transport oil, again, I'm making this up completely just to illustrate the point- that can be arrested in a court in any place in the world that would be recognizing judgments rendered by US courts.
Which is, by the way, good news plenty of countries do that. So, and many people, this is why I think many people are wrong. They're doing an analysis like, oh, let's say $10 billion judgment. It's a lot of money. Does Argentina have enough property that can be taken over around the world?
And then they start counting like, oh, one vessel, two planes, this, this, and like, it's not that much money, right? So it's one of the strategies and if you collect, you know, $10 million there, $20 million day [inaudible] it's [inaudible].
However, there is another important, what is another important- second important lever and avenue, which is we can do something which may not bring us tremendous monetary benefits, but that would make a life of a sovereign nation that is a party to active international trade-in relations.
Very challenging. It's like, imagine, Andrew, you have only one bank account. Okay, let's not use you as an example. That's a bad idea. Imagine John, a random guy. John has only one bank account, only one, and he has only a hundred bucks there, and there is a judgment against John, and then the bank account is effectively taken over.
John is losing only a hundred bucks, which is not a big deal. However, living in the modern world without using, without having a bank account, without using credit cards, which, and then your Venmo is linked to your debit card and your PayPal link or debit card, etc., it's kind of challenging.
Like your app store payments will not work, etc. That's, in my opinion, a lot more promising venue for enforcing where effectively... sure, we only got a little bit of money out of these activities using our friend John is a hundred bucks only. But now John has all the incentives to come back to the negotiation table and say, okay uncle, let's sit down and figure something out.
Andrew: Exactly. So, I mean, I think the way it was described to me, and I'm no international [inaudible], but exactly what you're saying, is like Burford can basically- Argentina has shown an increasing commitment. They want to be part of the international financial system, the international order, if this judgment now is outstanding and they're refusing to pay it, Burford can basically, as you're saying, freeze their bank accounts.
And if Argentina ever wants to access the international financial system, they're going to have to deal with Burford at some point.
Artem: They will have to, it'll not disappear, right? Like it will not disappear. You need to, and also importantly, and this is an area where I have a very little handle on, it also depends on the situation in the internal politics of Argentina, which administration is that, what their plan is, etc. Right? So, I think elections in Argentina are coming up not too far from now.
Artem: And I don't know what happens. Again, I don't follow Argentina and politics we have enough in the US to follow. So, I don't know how it'll play out, but it's also a factor. It's at this point, if before we were fueling the legal end, how the, what the law, what the facts, what the applicable precedence, etc.
Now we are also in the world after the summary judgment is, is rendered and after at some point damages are determined and the appeal is behind us, etc., we're also in the practical world, and there are many, many variables and many people that- many stakeholders with varied interests.
Andrew: So, if I just did the math here, so if we, if I take some of the numbers we threw out, right? About a $10 billion award. I've been using a 17.5% discount... a $10 billion award, you said maybe 45 to 65% of the award values what they get. And I've been using 17.5% to cover taxes and bonus payments to employees.
We can adjust that. But if I just threw all of that into my little spreadsheet, you know, at about half of, at about half a face, we'd be talking about seven, somewhere been the 7 to $8 per share of cash flow coming into Burford. Burford is an $11 stock right now. You know, I guess the two questions I'm trying to go to are, if they get 7 to $8 per share or $20 per share, or $5 per share, what do you think they do with the cash? And then I quickly want to talk about the remaining Burford business before we wrap this up.
Artem: Look I don't know because there is no prior statement coming from the company about the use of the proceeds and which makes sense because why they would be talking about using the proceeds.
Enough people, enough naysays, as we discussed, were saying Petersen is zero. They will never win. They will never... they will get paid in pesos. They will never enforce it, etc. It's very logical for management not to be talking about, "This is our capital allocation plan once we get many, many billions of dollars", right?
Like it makes sense. Plus, you know, let's not... let's be superstitious a little bit on this issue. Let's not talk about it. It's like, I don't know whether they're superstitious by the way, but it makes sense to me. So, now let's say- and also remember, if they got 3 billion upfront right away, it's one story.
If they got 10 billion, but over 10 years, that's another story, right? So, now there are a few things Burford said publicly that they plan to deprioritize the asset management business, meaning they will not, this was the way I read it, interpret this, the management is unlikely to raise more funds for capital, for core litigation finance strategy.
This is the one that makes more money. Okay? Remember several years ago, management was saying we are capital constrained. That's why we figure out another way to get more capital without dilution of shareholders is to manage third-party funds.
And then we allocate, and we co-invest. 25% goes from the balance sheet, 25% goes from funds and 50% goes from Sovereign Wealth Fund, which they also raise, they have great terms like zero and 40 if anybody, like, if any national manager will be jealous of those fees.
So, then over time they changed that formula, made it more 50/50, then they changed it again. But there is a formula, so everybody's treated fairly, and it's set up in advance and everybody's signed up.
So, given that the management is saying, listen, we want to deprioritize third-party management business, it means to me that most likely they expect a lot of recoveries where they set publicly about their model from their core business. And I also think that if they get paid on YPF, and when they get paid on YPF some of the cash will just go to their core business.
And given the historical IRR of 24% on the core cases normalized, ROE, I think is 20% plus. That's a pretty good idea to do. Now remember that, unlike a hedge fund that invests in Facebook, and if someone, if there's a $10 billion hedge fund, invests in Facebook and Amazon, and tomorrow they get another 10, they can just go buy more Amazon, and Facebook. In warfare, in litigation, finance management in the litigation of finance business, it's different.
You cannot just go and say, hey, I like that case. I want to put $20 more million or $50 more million. Right. You need more cases. Some of those cases may not be similar or even the same legal theory. Sure. But you cannot just pile money. So, there are some limits on how much you can deploy.
Plus, the core business, in my opinion, is doing very well. We'll talk about it. So, I expect a summary return of capital to shareholders, either buyback or dividends. If I were to guess, I would guess on dividends. I would not guess on buyback. But that's my personal opinion, which is not informed by anything.
And the reason why I think it probably will not be a buyback is because, once they got stuck getting money, it's very possible that the multiple will be very different from what it is today.
Andrew: I think I agree with everything you just said. I do agree. I think once the money hits the account, I think the share price is different and the multiples are different. The only thing I would add there, I think if you listened to their recent calls and having talked to them a little bit, I think if the stock price stayed here, and they got $500 million in cash, or something come in, I think they would be very interested in doing buybacks.
I think all else equal, they would lean dividends. But I think they... they even said in their recent calls, we think the stocks undervalued. They've talked about the value of the thing. I think if it came to it and they could buy back 300 million of shares at this price, I think they'd love to. But I do think if they're like [crosstalk].
Artem: I think in this scenario, you're right. Like in this scenario, the way you described Andrew, we're on the same page. I'm, [crosstalk].
Andrew: But if you and I were having a conversation, we were like, oh, we think the stock is at 90% of fair value, it'd be great if they would buy back shares. I think they're going to lean dividends there. It's only if it's massively undervalued. I think they're going to lean toward buybacks.
Before we talk about the core business, and probably a little bit on the SEC fair value discussion, just one, they do- I believe they cannot monetize all of their Eton Park's stake if they want to, and they can still monetize 10 or 20% of their Petersen stake.
Do you think they're going to look to monetize a piece of their stake on the heels of the summary judgment win just to realize value, get some more cash in the door, and maybe get a mark on the remaining shares?
Artem: Okay. So, it's possible. Let me just put- again, for those who may not be familiar- we're not Burford junkies, and Burford [inaudible] I think a [inaudible] is a better term than a junkie. Yeah, I think so.
Andrew: Yeah, you're probably right. You're probably right.
Artem: So, let's clarify, not say clarify, just explain the background. So, we discussed that Burford has an entitlement of less than a hundred percent on Petersen. They have 75% of Eton Park, so they can sell bits and pieces. And again, it's like a waterfall.
In the case of Petersen, it's like 61.5% of the gross, let's call it. So, they can bring it down to 50. Below 50, they cannot take it while in Eton Park, they can sell anything and everything. And so far, they haven't sold anything. And Burford has a history of selling those things.
And the last time the sale was done was in July 2019, when the Supreme Court rejected- but Supreme Court said, we are not going to take the case to hear the case based on the sovereign immunity argument. So then immediately, literally I felt like within 48 hours the sale was announced.
Which makes me think that the sale was already prearranged, and the parties involved were only waiting for the Supreme Court to reject, and then they signed the deal by the money, closed the deal, done. Right? And that was done at a billion-dollar valuation.
Artem: And sorry, it's a billion-dollar valuation. And Burford sold like 10% and got $100 million. But remember, this is not from the number that you will be seeing in the court decision. It's a number below, which is only Burford's entitlement. So, it's a good valuation.
Andrew: And if anyone's looking at Burford's balance sheet, this is roughly the value that YPF is held on their balance sheet. They have added some legal expenses that have been ongoing, but this is roughly where it's marked on their balance sheet to everything, that June or July 2019 sales date is where it's marked at. Just for anybody who's wondering where, how it's on the balance sheet and everything.
Artem: So now, and subsequently, and Burford for a long time never disclosed the mark on Petersen on YPF. And the logic was that listen, it could break confidentiality rules, and it could work at [inaudible] product rules. We're not doing that. And then Marty Walter's report, which was largely based on eight or nine core points, and one of them involved the accounting and fair value adjustments that are very sizable at the time.
Burford actually released the exact mark on YPF, and they showed that their other five value adjustments are incredibly small. So, like, not even was talking about. And the question becomes, okay, [inaudible] just tell me that they didn't do it before because of legal limitations, and now they did it. This is how they did it.
They said, listen, we will mark YPF not based on our internal evaluation, or based on the case progress. We're going to mark it based on the valuation that was obtained in an arm's length transaction on the size on the big amount- $100 million is a lot of money unrelated parties, blah, blah, blah. Let's do it.
One of the parties available was actually, I'm not sure, but I think it was one of the funds they managed, but I can be mistaken about that. But it was enough unrelated people, that's the mark. The audit is set, we like it, sign off, done. And that way Burford satisfied investors without putting in danger any confidentiality things.
So now, Burford-, and we should probably also talk about the new accounting thing, Burford now will probably be in front of this decision. Okay. We need, so first of all, the summary judgment was rendered on March 31.
Artem: What ends on March 31 at midnight? It means that Burford will need to mark up, in my opinion, based on the, I don't know the internal models, but I suspect that summary judgment is a pretty big milestone to change the valuation and they will need to do it.
And by the way, Burford will start reporting quarterly for the first time this year. So, they will need to do it. And then the question becomes, okay, we mark it up, and then all the investors will be coming to us and saying, so where is it marked? And by the way, did you mark other cases as well? Only YPF or what's happening?
And in this situation, Burford cannot, in my opinion, cannot tell you where the market is. However, if they sell small but sufficiently- but a sizeable piece where they say, listen, we made the sale at, I'm making this numbers up, at 5 billion valuation.
That's where we're going to market right now without disclosing anything and any of our views about future litigation, that's a win. So, will they monetize or not? I don't know, but I think there are a lot of reasons to do so. Number one, it's accounting. So, satisfying investors, in my opinion, should be the least of an issue.
But it could be a reason, more important reason is to show that the market and I don't talk right now about the stock market. I'm talking about sophisticated hedge funds that invest in this type of claim, valued at substantially higher than in 2019, and recognize the importance of summary judgment.
So, that's- and put a mark. So that's another reason. Plus, you get cash and then maybe you pay a special dividend or maybe do a share buyback as, Andrew, you were saying if share price stays, you know, at some level that management views as very undervalued.
Andrew: Yeah, no, I, I think all that was right. I just think even if you're wildly, wildly bullish on this, like, you know, if you sell 5% of your remaining claim and take in $100 million, $50, whatever the number's going to be, your mark cap's 2.6 billion. Like I, I just think getting a little diversity, getting a little diversification, getting a little bit of the cash in the door, obviously don't sell it for a song, but getting that mark, being able to prove that I think that's pretty important. We've been running really long, but I do also [crosstalk]...
Artem: Okay, you're a hundred percent correct. Burford sold Petersen's stake several times.
Artem: The big reason for that was diversification.
Artem: [inaudible] Petersen, it's a great problem to have. It's like, imagine you invested most in [crosstalk]...
Andrew: In Facebook when it started up, right?
Artem: A few private investors, invested in Facebook when it was a $10 million valuation. Right? And sit round or whatever it was. So, they kept trimming and that's my chance. So, I would not be surprised if based on the same rationale, they will do another trim decision. I would not be surprised.
Andrew: And for them, they also were able to use this early sale to fund their core business, which obviously this claim has done better than their core business, but their core business, you know, 20, 30, 40, 50% IRSs are not too sharp either. We've been running long, but I do quickly want to go through 2 things. The other big thing that is on people's minds that cause a little bit of a selloff before the YP... yeah, go ahead.
Artem: Okay. There is another thing that I think is fascinating and I haven't seen anybody writing about or talking about this. Okay. As we discussed, Burford only has an entitlement to part of the claim in both cases. Okay. Question. How are other parties going to be collecting their own piece of their work? I think it's very, it's highly likely that those parties will come to Burford and say, Burford, you'll be collecting for yourself. Can we make a deal that you will help us with collection like party [crosstalk]
Andrew: Oh, interesting.
Artem: And then they will pay you. So, I actually think, as funny as it sounds, Burford will keep making more money.
Andrew: You know?
Artem: Well, that's recovery here,
Andrew: That's interesting. I don't know, I'd never asked, never thought if they, when they sold the stakes, if they agreed to cover the- you're probably right. Why would you cover that-, I don't know, because I think part of it is, the people they sold to agree to follow Burford. I'm going to put that on my follow-up. That's a really interesting question. That would be pretty crazy if they were getting, cause asset recovery fees on this would be pretty huge.
Artem: So, look, there are several situations here and they're different. So, let's start with Petersen, the Petersen stake.
Artem: That's one party. And I would be shocked if Burford is obligated to help them with collections. Like I would be shocked. Then there is a consortium of investors who invested, I assume some sort of SPV where Burford owns its percentage 61.5, I believe, and the rest is owned by outside parties. I would be, it's more possible, but I still will be surprised if Burford is obligated to pay enforcement.
Even if it's forced to pay, it'll be paying more likely, I think it'll be the SPB that will be paying Burford [crosstalk] some recovery fees, and effectively, 61.5% will be taking money from your left pocket, put it into the right, but the rest will be income in my opinion.
Again, I haven't seen those agreements. They're confidential, Burford never filed them. So, I'm purely speculating here, but my point is that I don't think the investors who invested will piggyback and get a free ride here. Like, I don't think so.
Andrew: As you say, I think you're right. I'm sure it's, I'm sure it's agreed that it has to be arm's length and, but I think you're going to be right anyway. But we do need to, there are two more. [crosstalk] Oh, Artem.
Artem: I'm sorry. I believe that one of the funds managed by Burford also owns a piece of Petersen.
Andrew: I think that is correct.
Artem: So, I assume that there will be also an incentive fee on another piece at some point. So, yeah, so long story short, a Petersen win is pretty nice.
Andrew: Let's quickly talk, look, earlier this month, the report earnings, I thought earnings were great. We can very quickly talk about core business for a second. But the thing that caught everyone's eye is they said, hey, we can't file our financials currently we're, it is not an SEC investigation.
They, they'll be very, they would be very mad if you called an SEC investigation. But they're having discussions with the SEC over their fair value reporting of all of these legal claims and assets that they own. And because of this, they can't file their 20F, their reporting is delayed.
They think it's going to be resolved in the near term, but they can't make any promises because you're dealing with a government agency. It's complex accounting. What are your thoughts on this SEC fair value discussion they're having?
Artem: In my opinion, that's a lot of money. And I think, so number one, given the history of Burford and how they reacted when there was a short report published in August 2019, and I went, as you know, Andrew, I went through point by point and published, [crosstalk]
Andrew: [inaudible] the share notes. We talked about it extensively on the last- absolutely.
Artem: And published a very lengthy rebuttal of why I disagree. Looking back, many of those points played out in a way that the short seller did not envision. For example, there was a particular recovery case against [inaudible] Madoff, it's the case called Madoff.
And the short seller was making an argument that Burford actually going to lose money as far as I remember. They will not be able to collect, and also, they've been countersued by the person from whom they're trying to take assets over, and eventually, Burford got paid.
So, I add examples like that. So, I think Burford by now in my eyes, always had and now continues to have a very high credibility. So, if they say this is a normal discussion, I tend to believe them until proven otherwise. Now I also believe that unfortunately, this is noise because even if even once some methodology that is different is established by the SEC, I still think most people will be looking at and ignoring unrealized games until they realized it.
Because there's a lot of discretion. I don't think people will be like, "Oh my God, SCC, bless this methodology. It must be great." So, that's why I know that it's not possible to do under the accounting rules, but if Burford was simply reporting the historical cost, and then only reporting when it's realized, I think investors would be a lot more lenient and not obsessed about fair-value accounting.
That's what I think. I think investors got such a big dose of rightful skepticism about fair-value accounting based on the [inaudible] days that post-traumatic syndrome is still with investors.
Andrew: A 100% agree.
Artem: I cannot blame any of us for that. Like, you know, like a cat that sits on the hot stove once will never sit on the hot stove again, but it will not sit on the cold stove either. So, that's a little bit like that. So, I think it's a lot of noise. I think it'll be resolved. And remember the language, there were two things that happened, right?
So first one of the analysts in the question asked about, so when the SEC saw this investigation, Burford never said there was an investigation. And that's number one. Number two Burford, go read the press release on Petersen Green published on April 2, there will be half a page, which sounds like the most pessimistic language in the world.
There will be an appeal, there will be collection ease, there will be this, and there will be that... Supreme Court may take the case. So, you read it like, oh my God, that's all horrible. And to be clear, the convention team, they just had the biggest victory in years, right?
They did the same in their press release about an update, about Q4 results when being lawyers, they put this massive disclaimer saying, we will try our best to fight financials, but we cannot guarantee that we will. And then we will not, then it can be in default. And then we have 60 days, I believe [inaudible] default and we don't queue, the default can make all that during payable and blah blah. And like, oh my God.
Andrew: The way someone put it to me is they're like, look, normally when you deal with the company, you know the CEO's always bullish, and the CEO always wants to sound optimistic.
And it's kind of the general counsel that's pulling them back and being like, hey, here's all this cautionary language, here's why you shouldn't be- here's why you shouldn't give seven-year out projections and stuff. And what you have to remember about Burford is the CEO here used to be the general counsel of Time Warner Cable.
Like this is a man who is a general counsel, he is a lawyer. So, when he goes out, he's going to caveat everything. He never wants to get, like he never wants to be the most bullish person on the thing. He's talking like a lawyer would. And investors might not quite be used to that in a CEO who's generally kind of going to lean more on the bullish side and not the exception side.
Anyway Artem, this has been fantastic. We have run very long. I did want to talk a little bit about the business. I'll let you go. I just want to say [crosstalk]...
Artem: You won't talk about the business. Okay, let's talk about the business.
Andrew: Well, I was going to say the business is doing very well. We covered the business pretty extensively in our prior podcast. If you want to do a minute on the business, we can, but then I'm really going to have to hop.
Artem: Okay, so this is the important thing. In the same release where Burford announced that they are looking into a new methodology to value their assets, they shared information about 4 cases that are either final and they've been resolved, or they are almost there.
Artem: And they only happened in the first 75 days of... 74, 73, 75 days of 2023. And those are all substantial wins or almost wins. One was a settlement paid that was paid to an entire group of 90 million. I don't know how much of that goes to Burford. It's not disclosed. I suspect that it's anywhere between 25% and 50%.
And then there was a trial if paid in full, it hasn't been paid in full, but if paid in full it'll be 67 million. Then there was an arbitration award. Arbitration award only goes through funds that Burford manages. But Burford will only [inaudible] fee, I assume on that.
And then there was another case for 400 million. That's a pretty nice big case. Again, it was not disclosed how much Burford has, but I might, if I get to guess, I will say 25% because that used to be a formula for a long time, 25, 25, 50. Then they change it.
But I guess it's an older case, but again, I can be wrong. I'm just explaining my logic here. You can adjust my assumptions. So, if you put those things together and then apply my 25% assumption where appropriate, it means that Burford should be getting cash proceeds of $139 million.
Artem: But that's proceeds, that's not gains or revenue. Remember Burford puts only gains as their revenue line item. But here's how to understand things, if you take an ROIC of 68% and you try to say, let's assume these cases got resolved with average ROIC, which by the way is a big assumption, it can be low, it can be high, we don't know.
Then it means that Burford should probably be reporting gains of over 82.9 million in the first quarter alone. For comparison, their first half of 2021 revenue was 81 million. The second half of 2021 revenue was 52, and the first half of 2022 was 79.9. So, that's a big number in one quarter.
And they also give a lot of little indicators such as 30 final trials being scheduled, which is great, like legend metric. So, I think the business is finally accelerating after COVID because COVID really put on pause many, many, many, many things and now we're having this acceleration. So, I think when you and I were talking back in I think it was November 2017, if I'm not mistaken, I had long hair. I remember that. So, I think [crosstalk].
Andrew: It was July because I was about to go to Spain. No, I hear you. But Artem, unfortunately, we've run so far over, I really have to hop. But this has been fantastic. You know what, once we get a settlement or something, maybe we'll have to come on and do a third podcast because the Burford business, we didn't keep it a lot of players, but as you're saying it's accelerating. It's really interesting.
I think it kind of covers all of today's share price and maybe you get YPF for free, but you know, people can go listen to the first podcast. Artem, this has been great. I'll include your link to the Muddy Waters defense that you published a few years ago in the show notes if anybody wants to refresh on that. And looking forward to having you on again.
Artem: Sounds good.
Andrew: Thanks again, man.