13th May

It’s a Retail Bond M’lud: Burford Capital offers 5% p.a. until December 2026

Burford Capital, a company that provides litigation finance and in which rock star fund manager Neil Woodford holds a 10% stake has launched a  retail bond offering investors a coupon of 5% over nine and a half years.   

  The company provides funding for litigation claims and generates returns by taking a percentage of the proceeds or settlements in winning cases, which it said was a ‘high yielding’ strategy ‘uncorrelated to equity markets’; Woodford owns the stake in AIM-listed Burford via his CF Woodford Equity Income Fund.    

At 5% the coupon on Buford’s third issue is lower than the 6.5% offered by its 2022 bond (BUR 1), and the 6.125% by its 2024 (BUR 2) although new investors would receive a better ‘yield to maturity’ (see below) return by taking up the new offer because its previous issues would cost 110p and 109p respectively to buy in the secondary market on ORB   

Each of its first issues were oversubscribed, raising £90 million and £100 million respectively and there is no reason t o believe this issues will struggle to attract investors; Burford says the 5% interest rate looks competitive against equity income funds which typically yield between 3-5% from investments in dividend paying shares   

The bond has been launched on the London Stock Exchange’s Order Book of Retail Bonds (ORB), where it will be traded in the secondary market. Investors have until 26th May to subscribe although broker Peel Hunt reserves the right to end the offer early if it is oversubscribed.   A minimum £2,000 initial investment is required and bonds can be bought in multiples of £100 after this.    

Burford Capital finances civil legal cases, primarily in the UK and US, in exchange for a cut of any subsequent damages awarded.    

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.    

At the time of its original issue Burford chief executive Christopher Bogart said the company had talked to its shareholders about adding debt to its capital structure. ‘It is a classic financial business structure to have debt on the balance sheet,’ he said. ‘[All companies] have debt on their balance sheets. If we only have equity then the cost of capital is higher and we have to pass on that cost to clients.    

The cost is higher because equity holders look for higher returns than debt holders do.’ Following the 2014 bond issue he said Burford would ‘do what we have always been doing which is making investments and financing litigation’.      

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.  

Burford's business has boomed in the past five years with the shares more than doubling in the past 12 months, buoyed by its acquisition of rival Gerchen Keller.     

Flat Yield vs Yield to Maturity       

An investor buying BUR 1 at 110p or BUR 2 at 109p would seemingly do better because even at that purchase price, the existing bonds would yield 5.9% and 5.6% - higher than the new bond's coupon. 

However, this is what is known as a simple or 'flat' yield and does not take into account the fact that anyone buying an existing bonds for 110p will suffer a capital loss if they hold them to maturity in 2022 when they will get back100p; the amount of the original ‘loan’. 

The ‘actual yield’, or annual total return, investors receive is known as the ‘yield to maturity', or sometimes ‘gross redemption yield’ which deducts the capital loss from the interest payments investors will receive. By this measure the 6.5% bond yields 4.3% and the 6.125% bond yields 4.6%, making the new bond and its 5% coupon worth buying.  

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