Burford has announced its second retail bond issue. Since 2009 it has quickly, but carefully, grown its book of litigation funding investments. With its 2015 full year results it announced a $100m investment with a major law firm. This is a step up in its investments, taking invested capital from 54% of equity a year ago to 77% now. While very positive for the company, this reduces the cash available on its balance sheet. Though Burford has adequate cash to fulfil its existing commitments, it still has plenty of new opportunities too and raising money to address those makes issuing the bond a sensible step.
The 2015 results were outstanding. Income grew to over $100m, boosted by a large positive investment result, and headline profit after tax grew 41% to $64.5m. The dividend for the year was increased by 14% to 8 cents per share. Return on book equity grew to 16%.
Burford has shown rapid organic growth in its litigation investment business, with very good results. Its approach to new businesses has been conservative, with only two small acquisitions. We expect the management to continue with a careful approach in the future.
Operating profit in 2015 covered coupon payments 8.3 times. A tripling of that at current exchange rates would still give 3.1 times cover, a comfortable margin. With substantial cash balances and ongoing cash income from realised investments we do not anticipate any cash flow issues.
Gearing is only 23% of total assets. Net indebtedness post the $100m investment is 7% of total assets. A covenant restricts the latter to 50% or less. The balance sheet has much more debt capacity and it would take an implausible impairment of assets to breach that covenant.
The new bond will rank pari passu with the existing issue and the two bonds are the only debts. Both rank ahead of the preference shares and equity. Burford’s assets are primarily cash and litigation investments. In the event of a wind up there would be a limited secondary market in the latter; in aggregate they provide strong protection for bondholders.