Burford Capital Limited (LSE:BUR) shares were searching for direction on Monday, after plunging over 40% on Friday afternoon after a US appeals court overturned a landmark judgment against Argentina, dealing a severe blow to what had been one of the litigation finance firm's most valuable assets.
The US Court of Appeals for the Second Circuit reversed a lower court ruling that had found in favour of Burford-backed claimants Petersen and Eton Park, who argued that Argentina violated its own commitments to minority shareholders when it renationalised oil company YPF in 2012.
The majority ruling held that Argentina's promise to make a tender offer to minority shareholders was not enforceable by those shareholders in a US court, and that any claims should instead have been pursued through Argentina's domestic legal system.
A dissenting judge took the opposite view, arguing the majority opinion "minimised if not forgot" the factual realities of the case and that the original judgment should have been upheld.
In a statement issued after hours on Friday, chief executive Christopher Bogart called the decision "a remarkable abandonment of the rights of minority NYSE shareholders".
However, he added in a new statement on Monday that investment treaty arbitration remained "an entirely viable prospect." This is a separate legal route available under bilateral agreements between Argentina and Spain and the US.
Burford added in a Q&A statement that it would expect to take a "substantial" non-cash write-down on the $1.7 billion YPF asset when it reports first-quarter results in early May, though it stressed the case had generated no cash since 2019 and that its core business of funding litigation in exchange for a share of proceeds was unaffected.
The company also pointed out today that it held more than $700 million in cash and expected its broader portfolio of hundreds of cases to generate more than $5 billion in proceeds over time.
The YPF case had carried a significant carrying value on Burford's balance sheet, and the write-down could limit the company's ability to raise new debt under its bond covenants.
That said, Bogart told investors Burford had no plans to increase borrowing and that operating the core business would be unaffected.
The next legal step is likely to be a request for the full Second Circuit bench to rehear the case, though Burford acknowledged such requests are rarely granted, with a potential further appeal to the Supreme Court beyond that.
Analysts at Jefferies said the reversal decision "essentially holds that the question of damages turns on expropriation rules in Argentina, which could be examined by an international arbitral body. This would effectively put the process back to square one."
They added that while some investors worried that some of Burford's debt may be linked directly to the YPF matter, "this is not that case".
"In the near term, there will be a large, negative, non-cash impact likely to restrict additional debt-raising, but not preventing refinancing. In the longer term, the YPF matter will probably now take years more to conclude. While the ruling does not affect any other part of Burford's portfolio, it has affected investor sentiment."