Litigation Capital Manag... Share Discussion Threads

[johnwig] 02/10/2023 13:55

I think that was an excellent synopsis of what "the remarkably well-informed other posters" have been pondering and posting on this thread. This is quite an unusual thread in that there are four or five posters who really know what they are talking about specifically about this small company. I get so fed up with the 'guru' types all over ADVFN who might know a little bit about the generality of investment 'wisdom' and try to shoehorn LIT into their little compartments. LIT is a rare case of a company in an esoteric business which has a clever and very hard-headed chief and management. As, in all modesty, an ex-chief and manager I tend to apply additional criteria to the judgment. It's not just about IRR, ROCE etc important as all that is. Generally I've found lawyers are far sharper about the stuff that matters than accountants,or even MBAs. British companies now have a surfeit of the last two categories.

(I am prepared to believe that some/all of the classy posters here are actually accountants. In which case I exempt you all. Well done! LOL.)

[jackson83] 01/10/2023 22:55

HIGH RISK

opportunity to SELL / SHORT IT NOW


await 80p top up

[mtioc] 01/10/2023 08:41

LCM’s capital allocation decisions should be viewed in the context of its unusual ability to potentially compound incremental capital at a 70% IRR.

Debt
I am sure LCM did their best at the time. Credit providers probably deem litigation finance higher risk on the criteria that drive credit models: probability of default and loss given default. In the UK, a few litigation funders did not survive Covid (especially those with a more retail focused model). The underlying assets are esoteric and illiquid, with a limited secondary market. I am not surprised that in the difficult days of February 2021, LCM had to pay top of the market range. It appears to be SOFR (a US dollar overnight rate, currently 5.3% vs US$ LIBOR of 5.8%). LCM were smart enough to cap the total return to 13%. It appears LCM can redeem the loan (i.e. any call protection has expired). LCM are looking at a retail bond that may reduce the cost of debt, but may be a lot of hassle compared to private credit providers like Northleaf. The key point is that if you can compound at 70%, within reason, your debt interest rate is pretty irrelevant and, if LCM has investment opportunities, it should be increasing not reducing debt.

Dividend
I think the management acknowledge that the proposed dividend is not a logical allocation of capital. Their rationale appears to be that it is small (a few million AUS$), potentially encourages some institutional investors (for unexplained reasons) and is a “reward” for shareholders. The reward is not clear to me. If a higher rate tax payer, a UK shareholder receiving AUS$100 of dividend (paid out of LCM’s post tax earnings) may receive AUS$55. AUS$100 compounded at 70% over five years produces $1,420 (14x). For obvious reasons, I wish they would stop “rewardingR21; me with dividends. The management team realise this, which begs the question: if they are prepared to do something slightly stupid for “right” reasons, in different circumstances, will they be able to persuade themselves to do something bigger and even more stupid?

Share Buyback
I support this. For reasons discussed above, LCM appears far below any reasonable estimate of intrinsic value. That said, if a company introduces a buyback programme, it should state how it is valuing its purchase (of its own shares) with shareholders' capital. In other words: when would it buy its shares, and more importantly, when wouldn’t it? Particularly given LCM's ability to invest incremental capital at such high rates. Very few companies do this. Simon Wolfson, CEO at Next plc, does so very well.

This leads to my major issue with LCM is its market, rather than shareholder, communication. There are no forecasts and I appreciate it is very difficult business to forecast (realisations in particular). I have not seen any broker reports that attempt to explain or value the business by alternative methods (NAVx,DCF etc..). There is a “read across” to Burford but there are scale, size and return differences. When I looked at LCM, the best resource was this BB (again, many thanks to the remarkably well-informed other posters). The company needs to get better institutional quality market communications (e.g. kick its brokers to produce a proper note) if it wants to attract institutional shareholders and drive the share price.

[pigeonfeeder] 01/10/2023 02:36

I have just listened to the investor call (not on LCM website but found on YouTube). They are seriously considering a retail bond issue for refinancing to reduce cost of capital.

I trust management - they come across as very competent and are heavily invested in the company. However the dividend, although small does look like an odd decision.

[williamcooper104] 30/9/2023 12:17

Indeed you are right it's caped at 13 But was issued in 2021 in the cheapest credit market arguably ever and when Burford are now paying IIRC 9-10 then LITs debt is going to be very expensive to roll I can see the argument for taking the debt when they did; but now all cashed up there's no excuse not to pay it down

[tomtrudgian] 30/9/2023 11:31

Entirely agree WC104, however it is not at least 13%, but is capped at 13%. We are all aware that debt raising in 2023 has been unusually expensive for finance litigators.

Personally I am unsure of the reason, but it is far too high, for too short a duration, has onerous covenants and even includes a profit share for the debt issuers.

It takes a great discipline and business experience to refuse either fresh debt or extra business. Unimpressive.

[williamcooper104] 29/9/2023 21:32

This is so not a market to run balance sheet risks in; I'm not saying that the balance sheet is currently broken; but markets and litigation cashflows are both volatile You can disagree but let's see what we get out of the share buyback IMO; the mathematical beneifts of buying back will be negated by a more expensive cost of equity as the balance sheet is geared up

[williamcooper104] 29/9/2023 21:29

The $50m faculty matures in Feb 25 and costs LIBOR plus 800 - so at least 13% Unless they refinance it pretty soon they'll have to keep cash back to redeem it; if you want to see what happens when you don't check out DGI9 - so it'll be both expensive and a drag on growth

[pigeonfeeder] 29/9/2023 21:04

To me the balance sheet doesn't look like it needs repairing.

A previous poster gave the reason provided by management for buying back shares rather than paying down the debt and I am happy with the reason given by management.

Management have significant shareholdings and clearly have confidence in the company and believe buy backs offer better value than paying down debt - shows how undervalued they believe the company is.

[williamcooper104] 29/9/2023 16:25

More like prioritising buy backs over repairing balance sheet

[pigeonfeeder] 29/9/2023 15:34

Any evidence of manipulation? I see a lot of posters claim manipulation when they see a share go down in price when they think it deserves to go up but rarely see any evidence.

It does seem odd that the price is going down, but I see it as an opportunity. If I had to guess I suspect people are selling because they were expecting a bigger increase following the results (I was) and so have decided to get out. Perhaps they don't see a catalyst for further price appreciation - perhaps they aren't patient enough for positive news flow to come through.

But we won't know unless the sellers post explaining their reasons.

[solonic] 29/9/2023 15:23

Does anyone have any information as to when the buyback will begin? There's a lot to go through and I can't find anything. I'm also at a loss to explain recent price action. Surely there is some purposeful manipulation?

[someuwin] 29/9/2023 14:27

Hope they start the share buyback programme soon!

[bigalan3] 28/9/2023 08:18

Thank you. Sorry about the stutter!

[flagon] 28/9/2023 08:14

Yes ... xd today

[bigalan3] 28/9/2023 08:11

Are we ex div today?

[bigalan3] 28/9/2023 08:10

Are we ex div today?

[bigalan3] 28/9/2023 08:10

Are we ex div today?

[someuwin] 27/9/2023 19:43

Shares Investor Evening - Edinburgh - LIVE EVENT
Wednesday 25 October 2023

Come and join Shares and AJ Bell Media at their Edinburgh Investor Evening on Wednesday 25 October 2023 at the Radisson Blu Hotel, located in the heart of the historic Royal Mile.

Our Edinburgh Live evening event provides an opportunity for Board Directors to make presentations and talk about their company's business plans to existing & potential new investors.

During the event and afterwards over drinks and food, attendees will have the chance to get to know the companies better by talking one on one with the company directors.

Companies presenting:

Cohort (AIM: CHRT) is the parent company of six innovative, agile and responsive defence technology businesses providing a wide range of services and products for UK and international customers. It has headquarters in Reading, Berkshire and employs in total over 1,100 core staff there and at its other operating company sites across the UK, Germany, and Portugal. Cohort was admitted to London's Alternative Investment Market in March 2006.

Custodian Property Income REIT (CREI) offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund that seeks to provide an attractive level of income and the potential for capital growth.

Litigation Capital Management Limited (LIT) Established in 1998, we have assisted hundreds of companies and individuals in achieving significant recoveries from claims that, without us, would not have been pursued due to the associated costs and risks. LCM is one of the leading disputes funders globally, operating in a number of geographies.

[maddox] 27/9/2023 13:28

Great research Tom, and good discussion but still puzzled as why these cases are not fair-valued (if you have to go down this route).

However, the rns seems to throw some light on the 'legacy cases' it appears that is to do with them being 'contract assets'. [LIT has Litigation Assets at 30 Jun 2023 held at FV] of A$203m exclusive of third-party funds but inclusive of A$37m of legacy investments held as contract assets'

Note 12: 'There are a small number of legacy investments which are still being recorded under IFRS 15 due to the timing the contracts were entered into. These are expected to resolve in the short to medium term.'

Further explanation:

'Revenue from contracts with customers
The entity has a small number of legacy litigation service contracts where the service provided and accordingly the litigation funding contracts are within the scope of AASB 15 'Revenue from Contracts with Customers', and so are excluded from the scope of AASB 9 'Financial Instruments'. AASB 15 was adopted for these arrangements and reflected our legacy business model, which was to provide a bundle of financial and risk management services related to the resolution of disputes. This resulted in a litigation asset, or contract asset classification for all bundle of services under AASB 15. As the Group has evolved, the supporting rationale for AASB 15 has diminished with a significant reduction in the concept of a bundle of services. There remain a small number of legacy contracts where this bundle of services remains implicit in the contract and therefore AASB 15 been retained.'

[someuwin] 27/9/2023 13:12

Fund managers turn to lawyers as old ESG playbook falls flat

[maddox] 27/9/2023 13:08

The dividend will allow investment in LIT by funds that have this as an investment criteria - it is seen as an indicator of a firm's maturity. It will cost £2.7m so not a material hole in their investment capital and if it increases demand for LIT shares it will be worth the cash.

[74tom] 27/9/2023 12:01

If it was dealing 'in India' then I'd agree, the whole point in LIT funding the arbitration is to enable Panthera to take control of the narrative & timeline.

[makinbuks] 27/9/2023 11:40

Thanks and I bow to your superior knowledge. My bias over dealing in India is purely anecdotal. Excellent research on the old cases, appreciated