{ "docId": "019dd923-622c-750b-8b96-e575525228a0", "docSlug": "57d3a0a64093", "documentTitle": "Burford Capital (BUR)", "authorId": "51_Muddy_Waters", "authorName": "Carson Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2019-08-13 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 10, "pageCount": 13, "prevPage": 9, "nextPage": 11, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 8, "notes": "The slide uses a combination of forensic accounting analysis and governance critique to build a case against the company's transparency.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-e575525228a0/10", "deckHref": "/decks/019dd923-622c-750b-8b96-e575525228a0", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-e575525228a0.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-e575525228a0#slide-10", "components": [ { "bbox": null, "kind": "callout", "text": "We call upon BUR to reconcile cash flows to the investment performance table for historical periods and going forward.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0930-77dc-94a2-c7f95083e187", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.1, "y": 0.72 }, "kind": "paragraph", "text": "If a company having a balance sheet loaded with Level 3 fair value assets and whose senior management owns a significant stake is to avoid giving into the temptation that, in our view, doomed Enron and Noble Group (among others), it would seemingly need real \"guardrails\" – i.e., at the least, a truly independent CFO and directors. With the CFO married to the CEO, and all of the directors no longer deemed independent under the UK Corporate Governance Code, we see no such guardrails in place. Management seemed unrepentant about that, and offered no concrete assurance of improving. Why might that be?", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6814498e-2eb1-4518-92b7-e620e3cfa3f0", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.35, "w": 0.8, "x": 0.1, "y": 0.33 }, "kind": "paragraph", "text": "We have a theory. We suspect that the cash flow statement is showing a significant amount of inflows and outflows from the sales and purchases of securities (Level 1 assets). Cash inflows come substantially from realizations, while cash outflows correspond to investment additions. To this point, in 2018, $232 million of net investment additions consisted of non-Level 3 assets: that is 31% of total investment additions. This 31% of total additions that was non-Level 3 compares with just 12% the year prior. Likewise, non-Level 3 realizations went from 0% of total 2017 realizations of $363 million to 14% of the $628 million in 2018 realizations. In this way, BUR realized Level 1 and Level 2 assets, which we suspect to be primarily level 1, to account for 34% of the year-on-year growth in realizations this past year. If we are correct, the cash inflows from Level 1 assets give a false impression of the amount of cash BUR generates during each period from its core litigation finance business. Even so, such activity would only account for about a quarter of the discrepancy between BUR's cash flows and its stated investment recoveries. We call upon BUR to reconcile cash flows to the investment performance table for historical periods and going forward.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b741eeaf-12ac-40be-a251-3020ac451ef2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.8, "x": 0.1, "y": 0.08 }, "kind": "paragraph", "text": "We call upon BUR to disclose all Gross Fair Value Gains by period since, and including, 2012; and, to continue to do so going forward. If BUR were to do this, it would go a long way toward disproving (or much more likely) proving our criticisms of BUR's accounting.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "bb82b143-7318-4fb8-86ef-a2a55709725c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.1, "y": 0.18 }, "kind": "paragraph", "text": "An analyst pointed out on the call that BUR's cash flows show far greater realizations than does the investment performance table BUR presents. BUR's cash flow statement shows 2018 net proceeds received of $596 million. The 2018 investment performance table, however shows investment recoveries to date of $1,027 million versus $773 million as of the year prior. This yields $254 million in 2018 recoveries, which amounts to less than half of BUR's net proceeds in that year. Management provided no detailed explanation for this discrepancy.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f5ffd742-794c-4aca-bf33-efe55083cede", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.88 }, "kind": "source-note", "text": "24-31: Citations from Bloomberg and Burford Capital Annual Reports.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "63566ea6-0938-4a71-874f-6bdd8391f62c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.8, "x": 0.1, "y": 0.68 }, "kind": "title", "text": "BUR Has No Guardrails", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6ab8a26b-3c9d-4d8f-964d-e60c007c4c00", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.8, "x": 0.1, "y": 0.15 }, "kind": "title", "text": "Why Do BUR's Cash Flows Not Tie to its Investment Performance Table?", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f9b5394a-aebe-4b02-b3dc-672ed2d9d13e", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "e1fed463-ec2b-47c8-bd23-666e299e7f6e", "evidence": "The slide explicitly links accounting discrepancies to governance failures, citing Enron and Noble Group as precedents for potential failure.", "confidence": 0.9 } ], "arcBeats": [], "loops": [ { "to": 10, "from": 9, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "7991bdd7-1c3e-456e-8471-05295c92bf94", "evidence": "The document highlights the consequences of Burford's accounting practices", "position": 1, "objective": "Highlight the consequences of not addressing the issues with Burford's accounting practices", "structure": "The Status Quo -> The Hidden Costs Accumulating -> The Future State of Inaction -> The Tipping Point", "confidence": 0.6, "description": "Quantify what happens if the audience does nothing" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }