14 July 2020

Manolete Partners Plc

("Manolete" or the "Company")

Response to Article Published by ShareProphets

Manolete Partners Plc ("Manolete" or the "Company"), the leading listed insolvency litigation financing firm in the UK, notes that on the afternoon of Friday 10 July 2020, a group called "ShareProphets" published an article by an unnamed author concerning the Company.

This article was published without any prior communication with the Company and without any attempt to check the validity of the points with the Company.

In the opinion of the Board, the article contains a large number of false statements and is misleading.

Since the flotation of the business in 2018, the Board has been transparent in its dealings with the market, and is always prepared to engage with shareholders or commentators; it is therefore regrettable that this article was written, published, and distributed without any attempt being made to verify its contents with the Company.

The Company has addressed and responded to the points made in the article in the order they were published below:

1.   Cash Utilisation

The article claimed that "Manolete is burning cash at a rate of knots". That is untrue.

As evidenced in the Company's recently published financial statements for the year ended 31 March 2020 ("FY20") the cash generated from completed cases exceeded:

a)   All cash legal expenses on closed cases; and

b)   All cash payments to Insolvent Estates; and

c)   All Company cash overheads

Company cash overheads underwent a step-change to £4m in FY20 (from £2.7m in FY19), a 48% increase. As well as a number of one-off post-IPO costs (e.g. new website, recruitment costs), this was largely due to the increased salary costs associated with the establishment of Manolete's in-house regional network of solicitors which gives the Company proprietary coverage across the whole of the UK market. That network is now fully established and capable of managing around 275 live cases (152 live as at 31 March 2020).

The significant point here being that the cash inflows from cases started before the regional network was established more than covered the overhead base of the much-expanded Manolete in-house regional team.

The London and regional team have invested in a record 141 cases in FY20 and the cash income derived from those cases will be received in future reporting periods. As overheads will not require a further step-change for a significant time, the net cash generation prospects are attractive.

The only consumption of cash in FY20 was to finance the record 141 new case acquisitions and legal costs of other ongoing cases. Clearly the Company has not benefitted from cash generation from the large majority of those cases but has financed the cost of those investments, deploying the net proceeds of the IPO in December 2018. Shortly before the 31 March 2020 year end, as COVID-19 impacted the country, purely as a liquidity precaution the Company drew down £8m of its £20m Revolving Credit Facility with HSBC ("RCF"). As at 31 March 2020, the entirety of the £20m RCF capacity remained available to the Company.

In summary: FY20 represented a period of transformational growth in the infrastructure of Manolete. That was entirely financed out of organic internal operational cash generation. £4.1m of equity finance (IPO proceeds) was utilised to finance a record number of highly attractive UK insolvency litigation claims which the Board believe will deliver the same high levels of investment returns that have been consistently delivered over the last 8 years, within the same short duration timescale of an average of 12 months.

2.   Capital Structure

The article suggests that Manolete will need to issue new equity. There is no basis for this.

As at 31 March 2020, the Company had full availability of the entire £20m RCF capacity. The RCF facility agreement also contains a trombone feature which, while not a firm additional facility commitment, enables a fast-track application for a further £20m extension of the RCF. Based on the Board's conservative internal analysis, it believes that the Company is highly unlikely to need the full £20m RCF to fund future activity, let alone the potential trombone extension.

In summary: the Board is confident that the Company's existing £20m RCF will be more than adequate to finance the business in the foreseeable future.

3.   Fair Value Accounting

As prescribed by relevant UK and international accounting standards, the Company does Fair Value its ongoing, live cases at each reporting period end. No cases remain open from its FY16 vintage, only one remains open from the FY17 vintage and just 6 remain open from the FY18 vintage, therefore the vast majority of cases have been completed. If there had been any material adverse discrepancies between Fair Values and actual achieved values on those cases then material losses would have been already reflected in the Company's audited financial statements. No such losses have materialised.

Excluding the Cartel Cases (see further below) the average Fair Value per open case at the end of FY19 was £156k per case (on 84 live cases) and at the end of FY20 was £166k per case (on 152 live cases).

In summary: Manolete's long established history of 257 realised cases over a period of 11 years of operation has not given rise to any material adverse losses in its financial statements over that entire period.

4.   Total Addressable Market

The article draws an adverse inference from the fact that Manolete commissioned Professor Walton's updated April 2020 report on the UK Insolvency Litigation Finance market.

That report Insolvency Litigation Funding - in the best interests of creditors? was the third published by Professor Walton. As the Company has clearly disclosed on its website and in its most recent financial statements, the Company commissioned the April 2020 Report. That report was fully supported by:

a)   The Institute of Chartered Accountants of England and Wales; and

b)   The Insolvency Practitioners Association

Professor Walton's earlier reports were:

"The Likely Effect of the Jackson Reforms on Insolvency Litigation - An Empirical Investigation" Published April 2014. Supporting organisations: R3, ACCA, ICAEW, ICAS, IPA, JLT, Moon Beever, Moore Stephens

"Insolvency Litigation and the Jackson Reforms - An Update. Published April 2016." Report commissioned by R3 (with the support of ACCA, ICAEW, ICAS, ILA, IPA, IRS, JLT Specialty Ltd, Willis Towers Watson)

In summary: The Company as well as many City analysts and Manolete shareholders were keen to understand how the evolving market had developed since the 2016 Walton Report. Supported by the ICAEW and the IPA, Manolete commissioned the author of the previous two reports to update his work.

5.   Case Durations and Settlements

The article states: "Its case durations are short, but its settlements are drawn out affairs".

By this we take the author to mean that debtor collection can be longer than case duration. That is certainly true, by definition. Most Manolete cases resolve by way of a negotiated settlement with the potential Defendants (individuals or companies). Larger companies or wealthy individuals tend to be associated with the Company's larger claims. These defendants tend to be able to pay the agreed settlement sum in a short period of time (usually 21 days or up to two or three months after the settlement agreement is signed). In the last two financial years, the largest case settlement in each year was settled in cash in a few weeks for FY19 and around 4 months in FY20.

It is the larger number of smaller claims where Manolete has to sensibly accommodate the debtors' ability to pay. There is little commercial value in agreeing an unrealistic payment plan only to have to eventually force an individual into bankruptcy for breaching the settlement agreement. These smaller claims (£20k to £200k) tend to be with previous owner managers of UK SMEs. They often have a relatively modest sum to contribute to the settlement shortly after signing the settlement agreement, but Manolete will then agree to take further monthly or quarterly payments for the outstanding balance. In the large majority of these smaller cases, Manolete will register a restriction on the Defendant's property to ensure that it receives early notification of any attempt to dissipate assets before full settlement with Manolete.

In summary: Manolete's investment returns are high but smaller cases will demand that Defendants agree to manageable payment plans. Manolete has an excellent track record of collecting on those agreed plans, which have been agreed consensually with its debtors.

6.   High Case Acceptance Rate

The article states that: "It is absorbing higher risk as it increases it acceptance rate while growing".

Manolete's case acceptance rate has increased from c. 20% pre-IPO to around 30% since IPO. There are two important causal factors to this:

a)   Prior to IPO, Manolete was balance sheet and cash constrained. The Company had to voluntarily decline cases simply because of its limited access to funds. The new £14m equity and the £20m RCF raised upon IPO released Manolete's model from these shackles.

b)   Manolete's new group of regionally based in-house lawyers has given the Company unprecedented early access to cases, particularly those outside of London. Prior to IPO, Manolete was essentially a wholly London based team (the Company had only recently established its North West presence). Pre-IPO, good claims with regional Insolvency Practitioners ("IP") would normally default to the old CFA/ATE model with a locally based solicitor, in order to advance their claims. Manolete might then be approached a number of years later, once the CFA/ATE had failed to make a recovery - or the case might simply be abandoned due to lack of finance and perceived risk of taking the claim any further. Post-IPO this position has changed dramatically. Manolete's expert in-house lawyers are "on the ground" locally, well known to the local insolvency professionals and can offer full financing solutions at an early stage. Every IP who has had a case financed by Manolete has always returned with further cases, without exception. The most effective marketing of the Company has been executing the cases and delivering tangible results for the IPs and the creditors interests they represent. Almost always, HMRC will be a creditor (and often the largest creditor) of an insolvent entity. Manolete takes great pride in the fact HMRC is the single largest beneficiary on the hundreds of cases it has completed.

The quality of the cases invested post-IPO (the FY20 vintage) have led to some of Manolete's best results in its history. 33 of the 141 cases invested in FY20 have already completed in an average duration of just six months, delivering gross proceeds of £6.2m and at a Money Multiple of 4.6x.

7.   High Case Concentration

This point was difficult to comprehend. Manolete has built a highly granular portfolio of UK insolvency cases. There is a good cross section of cases ranging from many smaller SME claims all the way to larger cases - at the FY20 year-end Manolete had 35 cases with headline claim values ranging from £1m through to £40m and that excludes the City Link and Comet Cartel claims. 

8.   The Cartel Cases

Manolete has always reported separately on this sub-group of 22 claims. It has purchased and is therefore in control of all of those claims. The smaller cases were purchased on a simple £5k upfront consideration and 50/50 split of net proceeds. On the two much larger claims (City Link and Comet) £100,000 and £125,000 was paid in initial consideration (the largest Manolete has ever paid) but Manolete owns a 90/10 split of the net proceeds.

These are fundamentally Competition Law claims but all assignor companies are insolvent and in liquidation. Liability has been established in all the claims against a number of leading and large manufacturers of trucks weighing six tonnes and above for operating an illegal price fixing cartel during the years 1997 to 2011. The task for Manolete is to prove the quantum and causation of the claims. Over a two-year period Collyer Bristow Solicitors and Punter Southall Litigation Support, working in conjunction with Manolete and the Liquidators of the various companies have been assembling the evidence to tens of millions of pounds of truck purchases over the cartel period. The focus has been very much on the much larger claims and the data gathered on those has been of very high quality. The claims will be for the over-charge element of the truck purchases plus interest (which continues to run).

At every financial reporting period Collyer Bristow collate the latest data and submit a detailed legal and financial evidence report to the Board and the Auditors. The latest report included input from three independent expert cartel case valuation companies as well as a specialist Competition Law QC. For the avoidance of doubt, Punter Southall constructed a database for the truck listings for Manolete. PS's work ended last year and at no time was it involved in case valuation.

The Royal Mail Plc and the Road Haulage Association (backed by other litigation funders) are both progressing claims through the Courts in England and Wales. Many other claimant groups (again, many backed by litigation funders) are taking similar action in other European countries.

The Fair Value of the Cartel Claims in the balance sheet at the FY20 year end is £7.1m. Capitalised costs to date are £1.1m. The Company and its advisors believe that the claims will ultimately recover significantly more value for shareholders but this group of claims has a much longer duration and therefore the Board has always held the value at a highly discounted level.

9.   Specific Case Issues

The article questions certain specific cases which can be addressed as follows:

a)   Manolete Partners v Siza (Palms Palace)

The article states that even though a judgment was received in Manolete's favour for £4.2m "Manolete's claim is likely to be worth £1.5 million to £1.8 million net of legal fees and the IP's share of proceeds".

Despite the final judgment in Manolete's favour (Mr Siza has no further rights of appeal), Manolete will always restrict case values (realised and unrealised) to conservative recoverable amounts and the fact is that at all times the Company has valued this case in its accounts at below the author's worth of £1.5m.

b)   Manolete Partners v PV Solar Solutions Limited

This case was won at trial but there have been issues in recovering against the Defendants therefore large provisions were applied in Manolete's FY19 financial statements against the large majority of the debtor and costs balances and those provisions remain in place while the Trustee in Bankruptcy continues to attempt making recoveries. There is a prospect of some recovery but the net exposure to Manolete is immaterial.

c)   Manolete Partners v Hastings Borough Council

The article states that "the recoveries from the case did not even cover Manolete's legal costs of pursuing the claim". That is false.

Manolete made close to 100% cash profit from this case. 

Manolete only agreed to take an assignment of this case on unique terms: that it received 2x its costs before a 50/50 split with the Insolvent Estate. This was because there was a high risk that the case would last significantly longer than normal. That was a correct assumption. Manolete ultimately won the case in the Supreme Court (having also won in the High Court and Court of Appeal).

d)   FH Gilman Limited Loan

Manolete had excess cash shortly after the IPO and the opportunity to provide a secured loan of £500k at an interest rate of 10% in year 1 and 12% in year 2. The loan is secured on valuable substantial freehold land in the Stamford area. The land is in the process of being sold to Aldi and two other commercial operators. Professional external valuers valued the land at in excess of £1.5m which comfortably exceeds Manolete's loan exposure.

The loan enables the Administrator of FH Gilman to conclude the sale of the land parcels and thereby deliver a significantly higher return to the creditors of FH Gilman Limited.

For further information, please contact:

Manolete Partners Plc                                                                 via Instinctif Partners

Steven Cooklin (Chief Executive Officer)

Peel Hunt (NOMAD and Joint Broker)                                       +44 (0)20 7418 8900

James Britton

Rishi Shah

Duncan Littlejohns

Liberum (Joint Broker)                                                                +44 (0)20 3100 2000

Richard Crawley

James Greenwood

Instinctif Partners (Financial PR)                                             

Tim Linacre                                                                                    +44 (0)7949 939237

Lewis Hill                                                                                       +44 (0)7837 674600