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" Deutsche Bank AG, Research Division

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Burford Capital's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Josh Wood, Head of Investor Relations. You may begin.

Thank you, Bella, and good morning, everyone. We appreciate you taking time to join us to discuss Burford's third quarter results. On the call, we have our Chief Executive Officer, Christopher Bogart; our Chief Investment Officer, Jonathan Molot; and our Chief Financial Officer, Jordan Licht. Earlier this morning, we posted a detailed earnings presentation, which we'll refer to during the call and also filed our Form 10-Q, both of which you can find on our Investor Relations website. Before we get started, just a reminder that today's call may contain forward-looking statements that involve certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed during the call. For more information regarding these risk factors, please refer to our earnings materials relating to this call posted on our website and our filings with the SEC. We'll also be referring to certain non-GAAP financial measures during the call. Please refer to today's earnings materials and our filings with the SEC for additional information, including reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I will turn the call over to Chris.

Thanks very much, Josh, and hello, everybody. Thank you again for joining us today. We're going to do this call today a little differently than usual. Before we turn to Jordan and the usual financial review, I would like to cover a few different topics with you. Let's start with YPF, given the market reaction to last week's oral argument. The YPF case was adjudicated in the Southern District of New York. That's the Federal Trial Court in Manhattan. It is one of the highest quality courts in the United States. Court-wide its reversal rate on appeal is 6.28% over the last 10 years. The YPF case was decided by Judge Preska, the former Chief Judge of the Southern District. Her individual reversal rate is 4.63% over the same period. So, the statistical reality is that a judgment from this court and especially from Judge Preska is likely to be affirmed on appeal. Because of some of the questions and comments from the panel at oral argument, the market seems to have freaked out a little bit about the risk of the case being dismissed on the legal doctrine known as Forum non conveniens, literally an inconvenient forum. Forum non, as it's called, is a discretionary doctrine. It allows the court only once it has determined that it has jurisdiction, which is settled law already here. It allows the court to send the case to another more convenient court for trial. This occurs most often when there is some logistical issue going on, for example, that witnesses can't travel to the U.S. courts for trial. A sort of hooky example of Forum non is for Jordan and me to go to a conference in Arizona and get into a fight and for Jordan to punch me in the nose and…

Thank you, Chris, and good morning, everyone. I'm going to take us through the 2 segments, Principal Finance, Asset Management. Jon will spend some time in the middle on the portfolio. Three things that I want to make sure to hit upon a little bit deeper and coincides directly with some of Chris' comments, which is to talk about capital provision income, discuss realizations and new business. When you look in overall at the financial results and you see that year-to-date, we're down in capital provision income revenue. A lot of that was driven by extension of fair model durations. And I'll unpack that even further when we get into the Principal Finance segment and the bridge. But before we get to that, I'd like to spend a little bit of time just commenting on the portfolio. Right now, ex YPF, I'm on Page 19. ex YPF, we're deployed cost of just under $1.7 billion. Chris already highlighted and it reflects in some earlier slides, the amount of fair value unrealized gains associated with that, which is around 32%. So as mentioned, there's significant upside to come in terms of future gains to the extent we hit our historical ROICs. I really do love the right side of the page, and it correlates with not just the historical portfolio, but the way in which the business is continuing to grow. You look at all the different colors and you can see the diversity. On the top, it's the diversity in geography and on the bottom, the diversity in the actual portfolio, whether it's arbitration, antitrust, contract cases or patents. We really have a diversified portfolio and a diversified team around the globe. Moving to Page 20, we can go through the capital provision income and the fair value bridge. I'm…

Thanks, Jordan. Thanks to you all for joining. And I'm going to turn to Slide 23, which you've seen before, but I want to talk to it in a way that emphasizes and fleshes out something Jordan said earlier, which is as a shareholder and running this business, I don't pay as much attention, as Chris said, to how we do in a particular period, except maybe to make sure that we are continuing to put out money. And why is that so important? Why is the growth in commitments and deployments are important. You kind of understand from Slide 23, it is a reminder that we have a really good asset class that when we are the ones managing that asset class and deploying capital into it. When you put out new money in a new deal, there's only 3 things that are going to happen. It's going to go to trial and win, it's going to go to trial and lose or it's going to settle. And over the course of our life, these numbers have stayed pretty steady. In any particular period, they could bump around because you could have one really large adjudication gain. Large adjudication losses are kind of harder, as Chris said, because I mean they don't happen in the same way because we've got these asymmetric returns, which I'll turn to on the next slide. So they're not as possible. But when you look at this is what we're putting the money into, that we know the majority of our matters are going to settle as long as we continue to pick good cases and our track record shows that we have been able to do that. And the adjudication gains outnumber the adjudication losses, both in number and size. And so you…

Thanks, Jon. So, coming back to the asset management part of our business, and I'm going to focus on Slide 27. To take a step back and remind folks where we are with asset management, we're continuing to deploy capital for the balance sheet. And we've been clear on the importance of doing that and enjoy the partnership that we do have with the sovereign wealth funds, which we also call the BOF-C portfolio. The rest of the other funds are in runoff. And so we wouldn't see management, continued management fees from those funds, and we'll see episodic performance fees from the fund. Overall, you'll see cash receipts from asset management was approximately flat year-to-date at $17 million between '25 and '24. If you isolate just to the quarter and you look at the negative in the asset management, the reason for that is simply put that when fair values move and we then book a corresponding adjustment to the future potential profit sharing income that we would receive. And so if you have a negative there in fair value movement, you'll have a negative with that. It doesn't impact our view necessarily of the future of the cases. So that gives you a little bit more color with respect to the quarter there. Switching to Page 29 now to go through some of the capital structure and expenses. We sit in a great cash position at $740 million. Obviously, that number has been impacted by 2 things. One, which is the recent issuance of the $500 million notes in July of 2025. And as a reminder, we do have a maturity coming due in December of 2026. And so part of that cash is sitting there to address that maturity. The bottom of the page shows the cash…

Great. Thanks, Jordan. And rather than doing yet more closing remarks, why don't we just go straight to questions, operator?

[Operator Instructions] Your first question comes from the line of Mark DeVries with Deutsche Bank.

I appreciate all that new perspective on the YPF case. Just had a related follow-up on that. Could you just give us a sense of potential timing of the appeal of the Second Circuit on the order for Argentina to turn over its YPF shares?

Sure. Although like everything in, as you've heard from us today, the timing of litigation is inscrutable to some extent. But that appeal is going to be fully briefed, if I'm not mistaken, Jon, correct me if I'm wrong with this, by sometime in December. And then after it's fully briefed, the court will schedule it for argument. There's no argument date for it at the moment. As you know, from the main appeal, that can take a long time. It doesn't always take a long time, but it can take a long time. And then after the oral argument of the appeal, there will be court will go out and write a decision about that again, that doesn't have any particularly fixed timing associated with it. So it's certainly not a 2025 event. It's likely, but not certainly a 2026 event.

Got it. And then just a question on realizations. How are you guys thinking about the trajectory of that over the coming years, particularly as we think about the impact from the pandemic on courts and the backlogs that created? Are you still getting, are you seeing elevated realizations as courts play catch-up? And what might the implications be for the next couple of years?

Well, you sort of, we tried to show the data on a few different metrics when we did some of these slides. So some of the slides that we put together had some new information because we know people are focused on this theme. And I think that looking at the rolling 3-year realization is kind of an interesting way to do it as opposed to having sort of quarter-by-quarter up and down shocks. And I don't know, Rob, if you want to put that back up again, that was Slide 10. And so what that slide is telling us is there's quite a lot of activity going on. You've seen 61 assets so far this year have realizations. And if you look forward to next year, and again, like I don't want to use these kinds of numbers as predictors because courts change their minds about schedules all the time. But if you look at where we stand today, we have more events, more trials, more hearings and so on scheduled for the next 12 months than we had for the 12-month period a year ago. So what that says is there's this continuing velocity in the portfolio. And the thing, of course, that drives settlement activity, cases really don't settle without a catalyst for them settle. And so when Jon was showing you the slide that we've used before that show really a very high level of settlement activity in the portfolio in the upper 70s percent. I think it might even be 79% now. So how do you get that settlement done? And the answer is you need some pressure on the defense usually to get there, and that pressure is a looming trial date. So, when cases get set for trial and when trial approaches, that's the most likely time for them to resolve by settlement. So I just think you're seeing, you're continuing to see forward momentum, at the same time, you have frustrating moments, like we had this quarter where we also saw courts, not do things as quickly as we would have otherwise expected. And when that happens, because of the relatively new valuation approach that we use, that can have a negative impact on our unrealized gain and loss line. So, it looks like Julian Roberts is joining us by webcast today. So, his question is, thanks for the presentation. Are you able to give us any more detail on the change of expected or modeled timing of the case whose duration has been extended. Jordan, do you want to try your hand off?

Sure. And thanks for the question. I'm going to answer that in a second and first, just to make sure everyone understands how we think about modeling. First and foremost, we look at all of our assets every quarter and the assets are constantly changing with a variety of different inputs, whether that's an observable milestone event, whether it's expected proceeds or duration discount rate that I've mentioned. With respect to this, Julien, I'm not going to answer the part of saying, hey, which case or cases it was, I think that would be inappropriate. But overall, if you looked at the impact of the duration change, it's somewhere in the $40 million to $50 million of impact when you look at that compared to the overall deployed cost fair value associated with the non-YPF book.

So, we've got another webcast question. This is from Jonathan Alexander at Evergreen, who says, on the buyback, the logic that you have laid out makes sense. But if we anticipate a positive YPF return, isn't it merely a short-term levering of the business when the stock is cheap that will then be paid off when the YPF result comes through and the overall risk to the business hasn't increased. So again, as I said, like we're not dogmatic and dug in on this point. It's something that we talk about a lot. I think, frankly, my partner, Jon Molot, would probably agree with you on that question. I think it all comes down to a question around the prudential management of the business. as we were just talking about in other contexts, we lack the ability to be able to accurately predict when cases are going to turn into cash. We have shown that we're pretty darn good at predicting whether they'll turn into cash. We've got a really long and successful track record of being able to do that. But that doesn't answer the “when” question. And of course, that sits somewhat uncomfortably beside a world where public debt does come with a “when”. And so, the interest on the debt has to be paid and the principal has to be repaid on agreed timing, obviously. And it doesn't work. The debt holders don't say, "Oh, well, the court delayed, so that's fine. We'll delay too.” Like that's just not how it works. And so that's really the dilemma that we have always had, not even just in the context of a buyback, but in the context of how much leverage to use in the business in general because you are not wanting to put the equity holders…

Your next question comes from the line of Mark DeVries with Deutsche Bank.

Just a follow-up question on kind of the recent commitments deployments, whether there's any kind of noticeable trend worth calling out on kind of the distribution of those among some of the shorter duration, lower ROIC versus some of the longer duration, higher ROIC.

Jon, do you want to comment on that?

Sure. I guess what I'd say is our approach is to be all things to all people. So, it depends what comes in the door, and we end up achieving diversification, not just of the sort that Jordan described geographically and by subject matter, but also in terms of duration and risk. I don't know, like I haven't, I don't have the numbers at hand as to the portion of new deployments that are on the shorter or longer, although I did would note, Jordan noted that a sizable chunk of the new business that was done is in deals that are, that have the capacity to generate higher returns and higher ROICs. Jordan, if you have the statistics more in hand than I do, I would just be talking anecdotally. We've put out, we've done some big deals that are that have very high profit potential. Of course, we do know is things can settle earlier and you can end up with lower returns earlier, but with attractive IRRs. But if they go as we would project, they are meatier investments with higher upside potential.

Okay. That's helpful. Just a follow-up then for Jordan, I guess, on Slide 9. Does the lack of kind of the larger north of $25 million commitment speak to the point that Jon just made. Are you less likely to put a lot of money out the door if you're not expecting a more immediate return? Or is that kind of unrelated?

I wouldn't necessarily correlate the 2. We do see opportunities that are smaller but can also be more towards the monetization in which we're putting more money out the door earlier. So I don't want to necessarily equate the two.

So we've had some more sort of capital allocation buyback-related questions and comments. And so if I sort of sum them up, like one perspective was will, over time, this dynamic change? If we're successful in meeting our objective of doubling the base portfolio by 2030, that obviously means we'll be doing a significantly larger number of cases. And one hopes at some point, the law of large numbers kicks in and you get more predictable, steadier returns. And I think that there's some truth in that. We have sort of not succeeded in achieving that thus far because of the way that the asset class has grown and the way we've been able to grow the asset class. And so we are doing much larger transactions than we were a decade ago. If we had stayed at our average ticket size a decade ago and had the business of the size it is today, then I think you would have that kind of greater predictability. But at the same time, you'd have such a volume of business that I think the OpEx and the business model would be slightly challenged. And so because we have more than quadrupled the average ticket size, that has led to us having this, still this dependence on pretty large cases for a significant portion of the returns, and we haven't yet reached or even frankly, come close to the sort of the law of large numbers point. Will that change in the future? And will that result in us having a greater sense of predictability of cash flow such that we would expand our capital return options. I think that's entirely possible. And of course, we also have the dynamic of YPF sitting out there because assuming a positive return from YPF, that…

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for joining, and you may now disconnect. Everyone, have a great day.