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Dealing with a downturn: How corporate legal departments can leverage legal finance as an alternative capital source

  • Monetization
November 16, 2022

It is widely anticipated that the world economy is headed toward a downturn, and with the possibility that high inflation rates persist even amid a recession, the result could be the first stagflation environment since the 1970s. This comes at a time when companies are already dealing with a confluence of crises and disruptions: Supply chain constraints, geopolitical tensions in key markets, labor shortages, high consumer prices and an uncertain recovery from a global pandemic.

As they work to weather the economic turbulence, companies will likely look for new and innovative ways to cut costs and increase liquidity. The legal department has an opportunity to position itself as part of the solution that allows businesses to survive and thrive during this period of upheaval. Research shows that in-house lawyers are increasingly recognizing the value-generating potential of the legal department: Over half (54%) of GCs say the legal department is understood to add value to the business by pursuing recoveries through litigation or arbitration. An even larger majority (69%) say identifying new ways to add value to the business is the most important means by which in-house lawyers can contribute to the success of the company.

There are a few ways that corporate legal departments can demonstrate the ability to solve business problems in a downturn using tools like legal finance.

With inflation at a 40 year high, legal departments need to offload expenses

With the costs of doing business soaring, legal departments will be expected to cut costs and do more with fewer resources.

In a recession, companies are even less happy to send money out of the door to pay for the ever-rising fees and expenses involved in litigating and arbitrating meritorious claims. But when times are bad, more deals go bad—so legal departments are faced with the problem of potentially more meritorious affirmative claims, but fewer dollars available to seek redress for those damages.

However, companies shouldn’t leave meritorious claims unpursued. When a company is harmed by rule breakers, litigation may be the only way to be made whole. The company may even have a fiduciary duty to its stakeholders to recover lost value through litigation.

With legal finance, legal departments can offload the costs and risk associated with pending claims and awards. Because legal finance is also usually non-recourse (meaning the finance provider is repaid only if and when the legal dispute is resolved successfully), companies can pursue meritorious litigation with beneficial outcomes for the business without adding cost or downside risk. Burford’s business was founded in the wake of the last global downturn in 2009, as demand for the financing of strong individual claims and capital facilities tied to multiple claims and defense matters increased.

As the cost of debt rises, companies seek other sources of business capital

As the cost of capital increases, companies need to look at new ways of raising capital for the business, instead of taking on more debt. Not only is the cost of debt rising, but the markets are also less likely to invest in companies that are high leveraged. Companies with levels of debt six times more than their EBITDA are more likely to suffer on the stock market, making it even harder to pay off existing debt.

For companies looking to play offense as well as defense—by selectively reinvesting capital for competitive outperformance in a down market—there could be latent value in their pending litigation and arbitration claims that could be unlocked to provide liquidity.

A significant legal finance growth area for corporates is the acceleration of expected damages tied up in a pending litigation or arbitration, or in an unenforced judgment or award, often called “monetization”. Distinct from using legal finance to pay legal fees and expenses incrementally as a matter progresses, companies can use legal finance to accelerate a portion of a pending claim, judgment or award as cash, with a legal finance provider advancing non-recourse capital that would otherwise be unavailable until that claim, judgment or award is fully adjudicated and enforced.

This provides an immediate influx of cash and helps businesses in three ways:

  1. Advances cash now that may be used for business purposes unrelated to litigation

  2. De-risks litigation and ensures a minimum recovery regardless of outcome

  3. Provides control over the timing of recoveries

Even companies with ample cash to pay lawyers’ fees and expenses often prefer immediate liquidity over waiting potentially years to unlock the captive value of claims, judgments and awards—especially given the probability of declining business revenues and the prospect of increased capital constraints.

In times of uncertainty, Burford is the institutional partner for legal finance

In a 2020 survey, 70% of lawyers said that their companies and law firms were likely to use finance to offset recession impacts. As an institutional-quality capital provider, trusted by Fortune 500 and FTSE 350 companies, Burford stands as a ready partner to companies in good times and bad. In fact, corporate clients accounted for more than half (56%) of Burford’s commitments in 2021. With the industry’s best team and most professional process, Burford has the capital and expertise to help companies of all sizes navigate the unprecedented business challenges ahead.