Broker Numis Securities has likened Muddy Waters' claim that litigation financier Burford Capital is "arguably insolvent" to "comments like the Earth is arguably flat" and reiterated its 'buy' recommendation on the stock.
A note from US hedge fund Muddy Waters on 6 August announcing that it had begun shorting Burford also claimed the firm was insolvent and had misled investors in its financial reports.
The claims led to an ongoing dispute between the two parties, with Burford accusing Muddy Waters of manipulating its share price. The stock more than halved initially, but has recovered to trade at 850p at the time of writing, down 25% on its pre-note price.
But today (16 August) James Hamilton, an analyst in Numis's specialist financials team, rubbished Muddy Waters' claims of insolvency. "We believe that MW's comment that Burford is 'arguably insolvent' is up there with comments like the Earth is arguably flat," Hamilton told clients.
"[Burford] is by far the least leveraged specialist lender that we cover and its commitments are modest relative to its cashflow profile."
He also hit back over Muddy Waters' most recent suggestion that Burford should have used cash accounting methods rather than fair value when valuing its assets. Hamilton said "this would not provide investors with relevant, accurate or appropriate information".
"Every loan is fair valued by every lender; this is core to financial services valuations," added Hamilton. He said Burford's valuations of its Napo Pharmaceuticals case, which was the subject of Muddy Waters' initial report, "were cautious given the information available at the time".
In addition, Numis pointed to Burford's more recent Peterson case - where it represented a significant shareholder of YPF in a case against the Argentine energy major - as a good example of why fair value is a more relevant valuation measure.
Numis explained: "On 24 June 2019, Burford announced that the US Supreme court had denied a Petersen hearing. Even without a reference price, this is exactly the kind of tangible result that drives the Burford carrying value process, a court decision.
"Secondly, Burford announced a sale of a 10% interest in Petersen for a consideration of $100m, implying a case value of $1bn. Furthermore, the sale was to a collection of 11 fund managers and, while not a market price as far as we are concerned, it comes about as close as you can get.
"So how would you choose to value Petersen? MW would suggest the case value should be cash accounted and therefore held at the initial $17m case value, despite the very recent sale price of $1bn.
"We believe Burford holds Petersen at a substantial discount and marks up as the market price changes. This is consistent with the fair value gains reported and we believe it provides investors with a much more valuable insight into the value of Burford.
"We believe the fair value gains reported in H1 are consistent with Petersen being held at a discount valuation as we believe it is. If as MW suggest Burford already held Petersen at the sale price the realisation would have driven a fair value loss of $100m."
Numis said it had held its ‘buy' recommendation on Burford and its target price of 1,866p.
Hamilton concluded: "It is clear to us that Burford is a leader in an industry with a substantial opportunity for growth for a number of years. On balance, we feel it is appropriate that Burford seeks to grow rapidly to consolidate its market leadership position and develop new opportunities."