Investors are being offered an annual return of 6.5% from a
new retail bond issued by Burford Capital, a company that provides litigation
finance.
The eight year bonds are issued on the London Stock
Exchange’s Order Book for Retail Bonds - therefore tradeable in the secondary market
- with interest payable twice a year and a minimum investment of £2,000 with
£100 increments thereafter.
Burford Capital provides finance to companies or law firms that
want to pursue litigation and the bonds are issued as ‘senior’ debt, which means
that bondholders are at or near the front of the queue for any available funds
in the event of insolvency; however they are not secured against the company's
assets and retail investors need to ensure that they are comfortable with the
level of risk they are exposed to before dipping their quills.
Potential investors in the bonds may be reassured to know
that ‘rock star’ fund manager Neil Woodford, holds around 7% of the equity in parent
company Burford via his new company
Woodford Investment Management.
Burford is incorporated in Guernsey and quoted
on LSE's junior AIM market – Woodford’s previous paymaster Invesco Perpetual,
has a stake of almost 30%.
Burford Capital is a company engaged in litigation finance,
whereby the business finances civil legal cases, primarily in the UK and US, in
exchange for a cut of any subsequent damages awarded, but the announcement of its
funding scheme has not been received with universal approval.
Head of fixed income at Rathbones, Bryn Jones believes that the
bond is only suitable for investors with
a higher than average risk profile, who commented that he is ‘not keen’ on the bond
for private investors, as it is ‘too risky'.
Jones identifies the sector in which Burford plies its trade
as being ‘high risk’ and he is further concerned that it is a ‘young company’
lacking diversification in terms of its sources of revenue. He is also worried
that likely competition from hedge funds may have a negative impact on the
margins the company can achieve on its investments.
Those investing in the bond will be dependent upon Burford’s
ability to select cases that they can win and there are concerns that a reverse
in its fortunes in that regard or any downturn in the economy could compromise
the performance of the business.
Peter Doherty, of Tideway’s Global Navigator Fund has not
invested ‘because I don't understand their business.'; however he believes that
investors seeking to build a diverse portfolio may be attracted on the basis
that ‘it's a very different company and one which is not necessarily correlated
to all other financial assets, so it could be a good diversifier away from
property or financial bonds.’
Christopher Bogart, CEO of Burford Capital countered by
pointing out that the company has 'no current gearing whatsoever' in its
capital structure and had committed to restrict all borrowing to no more than
half the company's total tangible assets. He added: 'Burford is a listed
company with transparent financial reporting, so investors can see for
themselves just how dramatically Burford’s performance would have to reverse
before it would not be able to honour its obligations under the bonds being issued.'
Interest rates remain at historically low levels and the
fact that Kent Reliance currently tops the best buy tables with a one-year
fixed rate Cash Nisa paying 1.75% the challenge for savers and investors
is clear.
The fact that Burford has added further diversity to the
range of investment opportunities on ORB is to be applauded and the coupon on
offer is bound to prove attractive in certain circles; however, the words of
caution emanating from the professionals should encourage the retail investor
to proceed carefully and as ever Mr Bond urges those thinking of participating
in the primary market should read all supporting documents thoroughly and
ensure they are comfortable with Burford’s business model and the risk profile
of the bond on offer before signing on the dotted.