Correspondence 0001714174-23-000092 from Burford Capital Ltd (BUR) (CIK 0001714174) (BUR)
Burford Capital Ltd (BUR) (CIK 0001714174)
Date: Aug. 7, 2023 · CIK: 0001714174 · Accession: 0001714174-23-000092
AI Filing Summary & Sentiment
File numbers found in text: 001-39511
Referenced dates: July 7, 2023
Letter
Division of Corporation Finance Attention: Mark Brunhofer and Sharon Blume, Office of Finance Filed June 13, 2023 File No. 001-39511
Dear Mr. Brunhofer and Ms. Blume:
Burford Capital Limited (“Burford”, the “Company” or “we”) has today submitted to the U.S. Securities and Exchange Commission (the “SEC”), via EDGAR, this letter setting forth Burford’s responses to the comments of the staff of the SEC (the “Staff”) contained in your letter, dated July 7, 2023 (the “Comment Letter”), relating to Burford’s (i) Annual Report on Form 20-F for the fiscal year ended December 31, 2021 filed with the SEC on March 29, 2022, (ii) Annual Report on Form 20-F for the fiscal year ended December 31, 2022 filed with the SEC on May 16, 2023 and (iii) Report on Form 6-K for the three months ended March 31, 2023 filed with the SEC on June 13, 2023.
The numbered paragraphs and headings below correspond to those set forth in the Comment Letter. The Staff’s comments are set forth in bold, followed by Burford’s response to such comments.
Form 20-F for the Fiscal Year Ended December 31, 2022
Financial and operational review
Economic and market conditions
Inflation, page 27
1. Please tell us your consideration for disclosing the impact of higher interest rates associated with inflation on the fair value of your capital provision assets and related unrealized gains or losses.
We respectfully advise the Staff that our disclosure on inflation in the “Economic and market conditions” section was focused on the potential impacts inflation could have on the overall performance of the business, consistent with the focus of other topics in that
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section (e.g., Covid-19 and sanctions on Russian business and individuals). The disclosure in this section did not, and was not intended to, specifically address the potential impacts that higher interest rates driven by inflation could have in relation to unrealized fair value gains or losses in capital provision asset valuations, just as fair value is not specifically addressed in the other topics in that section. An interest rate sensitivity is currently disclosed and, to the extent it is relevant in future filings, will include commentary on the impact inflation has had on discount rates and capital provision income in the results of operations and financial position (refer to the proposed revised disclosure in Burford’s response to question 2 below).
Results of operations and financial position
Statement of operations for the year ended December 31, 2022 compared to the year ended
December 31, 2021
Capital provision income, page 29
2. Please provide us proposed revised disclosure to be included in future filings that provides a more robust and quantified explanation for the increase in your consolidated capital provision income from $194.6 million in 2021 to $319.1 million in 2022, consistent with the requirements in Item 303(b)(2) of Regulation S-K. In your proposed revised disclosure, at a minimum, address the following:
● Quantify the “higher volume of favorable case resolutions, which drove higher realized gains” in terms of number of cases and the realized gains. In this regard, from the tables on page 30 and Note 6 on page 109, realized gains relative to cost only contributed $8.1, or 6.5%, of the $124.6 million increase in capital provision income.
We acknowledge the Staff’s comment, and it is addressed in the proposed revised disclosure below. The number of favorable case resolutions was 45 and 32 in 2022 and 2021, respectively.
● Explain why the “higher volume of favorable case resolutions” resulted in slightly higher realized gains when it is apparent from disclosure in the tables at the bottom of page 59 and in Note 7 on page 109 that overall consolidated realizations declined from $455.1 million in 2021 to $426.7 million in 2022.
We acknowledge the Staff’s comment, and it is addressed in the proposed revised disclosure below.
● Quantify separately the number of cases with positive case milestones achieved and negative case milestones suffered during the year and the impact of each on your fair value adjustment during the year. In this regard and notwithstanding your Chief Executive Officer's (CEO) statement of intent in your June 13, 2023 earnings conference call to not provide case milestone information in the future we note, for example, discussion of the number of case milestones achieved in
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the first quarter of 2023 by your Chief Investment Officer during your May 16, 2023 conference call on Full-Year 2022 Results. Also in this regard, we note your CEO's statement from your May 16, 2023 conference call that the largest driver of value in your business is court decisions and that they will remain the key driver of your valuations. In addition, discuss any individually significant fair value gains or losses and any trends over time.
A milestone, as we use the term, is a step in the litigation process of sufficient significance to potentially affect fair value. However, we respectfully advise the Staff that different milestones can have different impacts on the underlying litigation and thus the fair value of related assets. For example, while a motion to dismiss is a milestone, we so rarely have commercial cases that lose at the motion to dismiss stage that we do not adjust fair value upwards simply for when we win a motion to dismiss (although a loss at the motion to dismiss stage would cause a write down). On the other end of the spectrum (with many points in-between), a trial result is a very significant result generally causing a meaningful change in fair value. Moreover, milestones are one of several factors that impact fair value. Other factors include discount rates as well as future spend and entitlement forecasts, inclusive of the duration of the underlying litigation. Milestone events can, and frequently do, also have indirect impacts on these other factors (e.g., the entitlement and duration can change as a result of a milestone).
Following discussions with the Staff in 2020, we have historically provided information about milestones and their aggregate impact on fair value in the form of an expanded table in the notes to our financial statements, found at pages 119-120 of our Annual Report on Form 20-F for the year ended December 31, 2022 filed with the SEC on May 16, 2023 (the “2022 Form 20-F”). We do not believe that it is meaningful or helpful to investors from a financial performance perspective to quantify milestones simpliciter given that the numbers are essentially financially meaningless without case details.
Our recent use of milestones in our commentary with investors was not to show financial performance, but to illustrate the macro trend of the reopening of courts since the Covid-19 pandemic. We did not previously discuss milestones in this way and we do not intend to continue to do so, as we made clear during our first quarter earnings call on June 13, 2023 (excerpt below from Chris Bogart’s commentary during the earnings call):
I should say something though about the concept of milestones.
So, we provided this data to try -- when we were trying to sit back and think about how to convey to people, the short-term information about what we saw happening in the courts and the return of velocity.
We hit upon this idea of using milestone factors just to show people the sheer level of difference that we were feeling in the '23 year as opposed to the '21 and '22 years. Jordan has only been here since the beginning of September last year. And he said -- I've heard him say to people
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www.burfordcapital.com
sometimes when he first got here, there was sort of one e-mail every once in a while, about something happening in a case.
And now there's like e-mails all the time. Like it was -- so it's that sort of feeling in the business that we were trying to convey in some sort of numerical way. And so, we came upon the -- because before I've been using just the aggregate court statistics, backlog, statistics, and so on. The problem with those is that they don't really capture accurately necessarily what's going on with complex cases. So, we came up with this concept of milestone factors just to try to convey to you the velocity, but I want to be clear that I don't think it's a financial metric.
So, I don't think that people should be all of a sudden trying to tie these milestone factors to other numbers in the business, and I don't intend to continue to provide them. We just did them as a way and the reason that we didn't disclose this 50 or 60 or whatever the number is for the rest of the year, is it's not something that we track. It's not a KPI that I look at on a weekly basis.
We just used it as a proxy because I think it was difficult for us to get all of you as investors to understand the dynamics of what was going on in the court system without having you actually be sitting inside the business. So that's where these came from, but don't think of them as something that you take to the analytical grail now.
(Emphasis added.)
We will continue to discuss any individually material case changes and plan to augment our discussion of the drivers of capital provision income with commentary on the data to be provided in our proposed expanded disclosure of the Level 3 inputs data as set out in Burford’s response to question 14 below. Specifically, the commentary will leverage the addition of the cost, unrealized fair value adjustment and fair value data that is to be provided for the key positive and negative milestone types.
● Quantify the impact of changes in market interest rates and the resulting changes in your discount rate included in your fair value adjustment. In this regard, for example, we note your discussion related to slide 12 in the presentation slide deck accompanying your May 16, 2023 conference call where you indicate that the increase in discount rates over the last four years resulted in about $400 million in foregone income from your portfolio.
We acknowledge the Staff’s comment, and it is addressed in part in the proposed revised disclosure below whereby in future filings we will include reference to the sensitivity analysis when discussing the impact changes in discount rates have on the fair value of capital provision assets. This disclosure will quantify how much higher or lower the valuation of the capital provision assets would have been at the end of the current period if the discount rate had not changed from the prior period end. The discount rate applied to the forecasted cash flows for our assets is intended to reflect a market-based cost of capital that excludes asset class-specific litigation risk. That is, the discount rate consists of a market-based cost of capital input and asset class-specific overlays. The market-based cost of capital is an observable market input which is impacted by changes in
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applicable benchmark interest rates. As discount rates across multiple currencies and tenors are applied in our portfolio, there is no clear single measure to quantify the impact that changes in market interest rates have had on the discount rate. That is, there is a different impact for each currency and for each tenor, and the relative significance of each tenor in each currency is also further impacted by the relative composition of the portfolio throughout the period.
We note your reference to slide 12 of the presentation slide deck accompanying the May 16, 2023 conference call. This illustration is simply showing the estimated impact on the portfolio at the end of each reporting period if you were to apply the weighted average discount rate from the prior period. It is intended to provide an alternative illustration of the sensitivity the portfolio has to the discount rate using the actual recent history.
● Quantify and discuss the impact of any other material items impacting capital provision income.
There are no other material items impacting capital provision income. Discussion of the ‘Foreign exchange’ and ‘Other’ income/(loss) items will be included in future periods to the extent they may be material to those future periods.
We have reviewed our disclosure of the explanation for the increase in capital provision income for the year ended December 31, 2022 as compared to the year ended December 31, 2021 and have included below a proposed revised disclosure for that historical period that will be used as a template for corresponding disclosures in future filings. As noted above, the fair value calculation is a bespoke multi-variable calculation for each asset. This also includes some interdependencies between those variables that make a quantitative disaggregation of separate drivers of the fair value adjustment during the period extremely complex. We are therefore unable to provide such a quantitative disaggregation of the fair value adjustment and, given the complexities that would be involved to provide a practical explanation of the basis of the calculations, we believe that the results would not be useful to investors. We have therefore provided a predominantly qualitative analysis in certain of the sections of the proposed revised disclosure below.
“Capital provision income increased 64% to $319.1 million for the year ended December 31, 2022 as compared to $194.6 million for the year ended December 31, 2021 driven largely by an increased resumption of court activity in 2022. The table below sets forth the components of our capital provision income for the years ended December 31, 2022 and 2021.
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Realized gains relative to cost were $161.7 million and consisted of $176.5 million of realized gains offset by realized losses of $14.8 million for the year ended December 31, 2022. Realized gains relative to cost were $153.6 million and consisted of $162.4 million of realized gains offset by realized losses of $8.8 million for the year ended December 31, 2021. This activity generated $426.7 million in realization proceeds in 2022 as compared to $455.1 million in realization proceeds in 2021. While the realization proceeds were lower in 2022, the relative return on the assets that resolved in 2022 was higher resulting in $8.1 million higher realized gains.
The fair value of capital provision assets is principally impacted by changes in the adjusted risk premium and discount rates. During 2022, the fair value adjustment was predominantly driven by the occurrence of a litigation milestone on an antitrust portfolio matter which accounted for $113.1 million of the $169.1 million total fair value adjustment for the period. In contrast, there were no individually significant fair value adjustments in 2021.
The weighted average risk premium adjustment applied to the forecasted cash inflows from capital provision assets increased to 38.1% at December 31, 2022 from 36.0% at December 31, 2021. This metric is a risk adjustment (haircut) applied to the potential proceeds due to Burford in the event of a successful litigation outcome due to the remaining litigation risk. While there have been significant net positive developments across the portfolio during 2022 driving the overall increase in fair valu
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CORRESP 1 filename1.htm August 7, 2023 Division of Corporation Finance U.S. Securities and Exchange Commission Washington, D.C. 20549 Attention: Mark Brunhofer and Sharon Blume, Office of Finance Re: Burford Capital Limited Forms 20-F for the Fiscal Years Ended December 31, 2021 and 2022 Filed March 29, 2022 and May 16, 2023, respectively Form 6-K dated June 13, 2023 Filed June 13, 2023 File No. 001-39511 Dear Mr. Brunhofer and Ms. Blume: Burford Capital Limited (“Burford”, the “Company” or “we”) has today submitted to the U.S. Securities and Exchange Commission (the “SEC”), via EDGAR, this letter setting forth Burford’s responses to the comments of the staff of the SEC (the “Staff”) contained in your letter, dated July 7, 2023 (the “Comment Letter”), relating to Burford’s (i) Annual Report on Form 20-F for the fiscal year ended December 31, 2021 filed with the SEC on March 29, 2022, (ii) Annual Report on Form 20-F for the fiscal year ended December 31, 2022 filed with the SEC on May 16, 2023 and (iii) Report on Form 6-K for the three months ended March 31, 2023 filed with the SEC on June 13, 2023. The numbered paragraphs and headings below correspond to those set forth in the Comment Letter. The Staff’s comments are set forth in bold, followed by Burford’s response to such comments. Form 20-F for the Fiscal Year Ended December 31, 2022 Financial and operational review Economic and market conditions Inflation, page 27 1. Please tell us your consideration for disclosing the impact of higher interest rates associated with inflation on the fair value of your capital provision assets and related unrealized gains or losses. We respectfully advise the Staff that our disclosure on inflation in the “Economic and market conditions” section was focused on the potential impacts inflation could have on the overall performance of the business, consistent with the focus of other topics in that 1 info@burfordcapital.com www.burfordcapital.com section (e.g., Covid-19 and sanctions on Russian business and individuals). The disclosure in this section did not, and was not intended to, specifically address the potential impacts that higher interest rates driven by inflation could have in relation to unrealized fair value gains or losses in capital provision asset valuations, just as fair value is not specifically addressed in the other topics in that section. An interest rate sensitivity is currently disclosed and, to the extent it is relevant in future filings, will include commentary on the impact inflation has had on discount rates and capital provision income in the results of operations and financial position (refer to the proposed revised disclosure in Burford’s response to question 2 below). Results of operations and financial position Statement of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 Capital provision income, page 29 2. Please provide us proposed revised disclosure to be included in future filings that provides a more robust and quantified explanation for the increase in your consolidated capital provision income from $194.6 million in 2021 to $319.1 million in 2022, consistent with the requirements in Item 303(b)(2) of Regulation S-K. In your proposed revised disclosure, at a minimum, address the following: ● Quantify the “higher volume of favorable case resolutions, which drove higher realized gains” in terms of number of cases and the realized gains. In this regard, from the tables on page 30 and Note 6 on page 109, realized gains relative to cost only contributed $8.1, or 6.5%, of the $124.6 million increase in capital provision income. We acknowledge the Staff’s comment, and it is addressed in the proposed revised disclosure below. The number of favorable case resolutions was 45 and 32 in 2022 and 2021, respectively. ● Explain why the “higher volume of favorable case resolutions” resulted in slightly higher realized gains when it is apparent from disclosure in the tables at the bottom of page 59 and in Note 7 on page 109 that overall consolidated realizations declined from $455.1 million in 2021 to $426.7 million in 2022. We acknowledge the Staff’s comment, and it is addressed in the proposed revised disclosure below. ● Quantify separately the number of cases with positive case milestones achieved and negative case milestones suffered during the year and the impact of each on your fair value adjustment during the year. In this regard and notwithstanding your Chief Executive Officer's (CEO) statement of intent in your June 13, 2023 earnings conference call to not provide case milestone information in the future we note, for example, discussion of the number of case milestones achieved in 2 info@burfordcapital.com www.burfordcapital.com the first quarter of 2023 by your Chief Investment Officer during your May 16, 2023 conference call on Full-Year 2022 Results. Also in this regard, we note your CEO's statement from your May 16, 2023 conference call that the largest driver of value in your business is court decisions and that they will remain the key driver of your valuations. In addition, discuss any individually significant fair value gains or losses and any trends over time. A milestone, as we use the term, is a step in the litigation process of sufficient significance to potentially affect fair value. However, we respectfully advise the Staff that different milestones can have different impacts on the underlying litigation and thus the fair value of related assets. For example, while a motion to dismiss is a milestone, we so rarely have commercial cases that lose at the motion to dismiss stage that we do not adjust fair value upwards simply for when we win a motion to dismiss (although a loss at the motion to dismiss stage would cause a write down). On the other end of the spectrum (with many points in-between), a trial result is a very significant result generally causing a meaningful change in fair value. Moreover, milestones are one of several factors that impact fair value. Other factors include discount rates as well as future spend and entitlement forecasts, inclusive of the duration of the underlying litigation. Milestone events can, and frequently do, also have indirect impacts on these other factors (e.g., the entitlement and duration can change as a result of a milestone). Following discussions with the Staff in 2020, we have historically provided information about milestones and their aggregate impact on fair value in the form of an expanded table in the notes to our financial statements, found at pages 119-120 of our Annual Report on Form 20-F for the year ended December 31, 2022 filed with the SEC on May 16, 2023 (the “2022 Form 20-F”). We do not believe that it is meaningful or helpful to investors from a financial performance perspective to quantify milestones simpliciter given that the numbers are essentially financially meaningless without case details. Our recent use of milestones in our commentary with investors was not to show financial performance, but to illustrate the macro trend of the reopening of courts since the Covid-19 pandemic. We did not previously discuss milestones in this way and we do not intend to continue to do so, as we made clear during our first quarter earnings call on June 13, 2023 (excerpt below from Chris Bogart’s commentary during the earnings call): I should say something though about the concept of milestones. So, we provided this data to try -- when we were trying to sit back and think about how to convey to people, the short-term information about what we saw happening in the courts and the return of velocity. We hit upon this idea of using milestone factors just to show people the sheer level of difference that we were feeling in the '23 year as opposed to the '21 and '22 years. Jordan has only been here since the beginning of September last year. And he said -- I've heard him say to people 3 info@burfordcapital.com www.burfordcapital.com sometimes when he first got here, there was sort of one e-mail every once in a while, about something happening in a case. And now there's like e-mails all the time. Like it was -- so it's that sort of feeling in the business that we were trying to convey in some sort of numerical way. And so, we came upon the -- because before I've been using just the aggregate court statistics, backlog, statistics, and so on. The problem with those is that they don't really capture accurately necessarily what's going on with complex cases. So, we came up with this concept of milestone factors just to try to convey to you the velocity, but I want to be clear that I don't think it's a financial metric. So, I don't think that people should be all of a sudden trying to tie these milestone factors to other numbers in the business, and I don't intend to continue to provide them. We just did them as a way and the reason that we didn't disclose this 50 or 60 or whatever the number is for the rest of the year, is it's not something that we track. It's not a KPI that I look at on a weekly basis. We just used it as a proxy because I think it was difficult for us to get all of you as investors to understand the dynamics of what was going on in the court system without having you actually be sitting inside the business. So that's where these came from, but don't think of them as something that you take to the analytical grail now. (Emphasis added.) We will continue to discuss any individually material case changes and plan to augment our discussion of the drivers of capital provision income with commentary on the data to be provided in our proposed expanded disclosure of the Level 3 inputs data as set out in Burford’s response to question 14 below. Specifically, the commentary will leverage the addition of the cost, unrealized fair value adjustment and fair value data that is to be provided for the key positive and negative milestone types. ● Quantify the impact of changes in market interest rates and the resulting changes in your discount rate included in your fair value adjustment. In this regard, for example, we note your discussion related to slide 12 in the presentation slide deck accompanying your May 16, 2023 conference call where you indicate that the increase in discount rates over the last four years resulted in about $400 million in foregone income from your portfolio. We acknowledge the Staff’s comment, and it is addressed in part in the proposed revised disclosure below whereby in future filings we will include reference to the sensitivity analysis when discussing the impact changes in discount rates have on the fair value of capital provision assets. This disclosure will quantify how much higher or lower the valuation of the capital provision assets would have been at the end of the current period if the discount rate had not changed from the prior period end. The discount rate applied to the forecasted cash flows for our assets is intended to reflect a market-based cost of capital that excludes asset class-specific litigation risk. That is, the discount rate consists of a market-based cost of capital input and asset class-specific overlays. The market-based cost of capital is an observable market input which is impacted by changes in 4 info@burfordcapital.com www.burfordcapital.com applicable benchmark interest rates. As discount rates across multiple currencies and tenors are applied in our portfolio, there is no clear single measure to quantify the impact that changes in market interest rates have had on the discount rate. That is, there is a different impact for each currency and for each tenor, and the relative significance of each tenor in each currency is also further impacted by the relative composition of the portfolio throughout the period. We note your reference to slide 12 of the presentation slide deck accompanying the May 16, 2023 conference call. This illustration is simply showing the estimated impact on the portfolio at the end of each reporting period if you were to apply the weighted average discount rate from the prior period. It is intended to provide an alternative illustration of the sensitivity the portfolio has to the discount rate using the actual recent history. ● Quantify and discuss the impact of any other material items impacting capital provision income. There are no other material items impacting capital provision income. Discussion of the ‘Foreign exchange’ and ‘Other’ income/(loss) items will be included in future periods to the extent they may be material to those future periods. We have reviewed our disclosure of the explanation for the increase in capital provision income for the year ended December 31, 2022 as compared to the year ended December 31, 2021 and have included below a proposed revised disclosure for that historical period that will be used as a template for corresponding disclosures in future filings. As noted above, the fair value calculation is a bespoke multi-variable calculation for each asset. This also includes some interdependencies between those variables that make a quantitative disaggregation of separate drivers of the fair value adjustment during the period extremely complex. We are therefore unable to provide such a quantitative disaggregation of the fair value adjustment and, given the complexities that would be involved to provide a practical explanation of the basis of the calculations, we believe that the results would not be useful to investors. We have therefore provided a predominantly qualitative analysis in certain of the sections of the proposed revised disclosure below. “Capital provision income increased 64% to $319.1 million for the year ended December 31, 2022 as compared to $194.6 million for the year ended December 31, 2021 driven largely by an increased resumption of court activity in 2022. The table below sets forth the components of our capital provision income for the years ended December 31, 2022 and 2021. 5 info@burfordcapital.com www.burfordcapital.com Realized gains relative to cost were $161.7 million and consisted of $176.5 million of realized gains offset by realized losses of $14.8 million for the year ended December 31, 2022. Realized gains relative to cost were $153.6 million and consisted of $162.4 million of realized gains offset by realized losses of $8.8 million for the year ended December 31, 2021. This activity generated $426.7 million in realization proceeds in 2022 as compared to $455.1 million in realization proceeds in 2021. While the realization proceeds were lower in 2022, the relative return on the assets that resolved in 2022 was higher resulting in $8.1 million higher realized gains. The fair value of capital provision assets is principally impacted by changes in the adjusted risk premium and discount rates. During 2022, the fair value adjustment was predominantly driven by the occurrence of a litigation milestone on an antitrust portfolio matter which accounted for $113.1 million of the $169.1 million total fair value adjustment for the period. In contrast, there were no individually significant fair value adjustments in 2021. The weighted average risk premium adjustment applied to the forecasted cash inflows from capital provision assets increased to 38.1% at December 31, 2022 from 36.0% at December 31, 2021. This metric is a risk adjustment (haircut) applied to the potential proceeds due to Burford in the event of a successful litigation outcome due to the remaining litigation risk. While there have been significant net positive developments across the portfolio during 2022 driving the overall increase in fair valu