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Short Seller Gotham Says Burford Is ‘Inappropriately’ Financed

Lisa Pham

(Bloomberg) -- Short seller Gotham City Research LLC said Burford Capital Ltd. isn’t being financed appropriately because of the risks associated with litigation assets, in the wake of a recent report by Muddy Waters.

“We think Burford is inappropriately financed,” Gotham founder Daniel Yu said in an emailed statement. “Litigation assets -- whose associated cash flows’ size and timing are notoriously unpredictable -- should not be financed with debt. This poses a real risk of an eventual asset/liability mismatch nightmare.”

In response, Burford said it has a conservative asset-liability profile, with average concluded investment duration of less than two years and average debt maturity of almost six years, at a weighted average interest rate of 5.8%.

“Gearing is low with net debt more than three times covered by shareholders’ equity,” the New York-based company said in an email. “Burford has proven access to multiple external finance sources. We have strong organic cash generation with more than $1.6 billion generated since inception.”

Burford shares fell 46% on Wednesday after Muddy Waters, the research firm founded by Carson Block, published a 25-page report saying that Burford overstated the returns it earns on its investments and has questionable financial reporting and governance. The shares rose 41% in the following two days after the litigation-finance company rebutted the report and Burford’s executives purchased shares.

Gotham shorted London-listed Burford last year, though the firm doesn’t have a short position in the company at the moment, according to its statement. While Yu commended Burford for arranging a conference call in response to the Muddy Waters report, the company could still do more to improve its disclosures and governance, he said.

“Burford has explained its positions on disclosure and governance in numerous statutory reports over the years, as well as in our Muddy Waters rebuttal last week,” Burford said in the email.

The company has previously said Muddy Waters’ short-seller report published Aug. 7 contained “many factual inaccuracies, simple analytical errors and selective use of information.” Burford’s executives spent about two hours on Thursday addressing investors and analysts on a conference call, and responding to questions about the company’s cash balance, use of fair value adjustments and the potential for a share buyback, among other things.

(Adds Burford’s comments in third, fourth and seventh paragraphs.)

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, ;Andrew Davis at abdavis@bloomberg.net, John Deane, Sara Marley

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