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The rise of legal asset monetization in Asia

  • Monetization
November 26, 2020
Quentin Pak

Legal finance remains a relatively new concept in Asia, and yet the Indian legal market already recognizes the value in monetizing legal assets: 2019 saw the widely reported transactions by Hindustan Construction Company and Patel Engineering, in which arbitration award portfolios (collectively valued at hundreds of millions of dollars) were monetized to reduce debt and enhance access to working capital. And it’s likely the practice will continue to gain traction in the current economic environment: Burford’s 2020 Legal Finance Report revealed that 70% of in-house lawyers in the US and UK expect to use monetization to generate cash in the downturn.

Monetization is a form of legal finance that enables companies to turn the future asset value of pending legal claims and awards into immediate cash. While the 2019 transactions in India showed that Asia was already at the forefront of monetization, the value of this financing technique became evident amidst the global macro-economic downturn triggered by the COVID-19 pandemic, which provided a further catalyst accelerating the growth of the market.

What is monetization?

Monetization is a form of legal finance that allows companies to convert commercial litigation and arbitration claims, judgments and awards into cash. The rights associated with these legal assets are transferred to the legal finance provider, in return for upfront payment of amounts reflecting the expected cashflows and inherent risks of the recovery.

The key benefits for companies include:

  • Timing and certainty: Companies can control the timing and certainty of cash flows back to the business

  • Upfront capital: Companies can secure immediate liquidity to invest in the business without waiting for legal processes to resolve

  • Mitigated risk: Companies reduce their exposure to the risk of loss, reduced damages or a reversal set aside of a judgment

  • Non-recourse capital: In the event of an unsuccessful resolution, the company owes nothing to the legal financier

  • Flexibility: CFOs may use the cash generated from these intangible assets for revenue-creating purposes, such as building warehouses, hiring staff or reinvesting in technology or R&D

At Burford, we have seen an influx of requests for monetization capital from large global companies. For example, we recently provided $75 million to a Fortune 100 company in exchange for an interest in a high-stakes, protracted litigation. The monetization delivered an accelerated and guaranteed financial result to the claimant ahead of the resolution of the case.

India is at the forefront of monetization

In most jurisdictions, the entry product for legal finance is single case litigation finance—where the financier provides capital for case-related fees and expenses. Indian companies, however, have already demonstrated a sophisticated understanding of the potential of legal finance by securing monetization capital.

Hindustan Construction Co Ltd

In 2019, Hindustan Construction Company entered into a transaction with BlackRock to monetize a pool of arbitration awards and claims in exchange for an upfront cash payment in excess of $200 million USD. The capital provided allowed the construction giant to deleverage its balance sheet and invest in future business growth.

Patel Engineering

Patel Engineering entered into a similar agreement. The company transferred both a pool of its actionable claims along with other real estate asset rights to a special purpose vehicle, in which an Eight Capital group entity held a 51% stake. The move improved the company’s financial liquidity for ongoing operations.

Use of legal finance will continue to increase

Dispute resolution is often time consuming and costly. Claimants that have spent years and considerable expense to obtain a favourable outcome in court or in arbitration often find themselves having to make further significant investments in time and money in the enforcement process. The situation is exacerbated when claims are pursued against parties that, whether for financial, organizational or strategic reasons, do not honor judgments or arbitral awards until all avenues of appeal are exhausted.

The monetization transactions in India and other jurisdictions demonstrate that, in markets with limited liquidity, companies are exploring new ways of raising capital—and innovative legal finance products such as monetization are on the cusp of gaining widespread popularity.

Against this background, we expect increased demand for award and claim monetization in Asia, particularly given the precedent set by Indian construction and infrastructure companies and the ongoing global economic uncertainty caused by the Covid-19 pandemic.