Ken Griffin, financial prodigy turned industry giant
Citadel Securities deal is latest in string of successes for controversial hedge funder
Nearly four decades ago, the South Florida Sun-Sentinel profiled three precocious members of the Boca Raton Community High School’s computer club. While their classmates were shooting hoops, the “disc-drive driven trio” were prepping for a problem-solving competition with other Palm Beach geeks later that month.
It is unclear what happened with Satish Vadapalli and Wayne Wong, who worked out the challenges with pen and paper before passing on solutions for their third member to bash into a computer. But the latter would go on to leave a major mark on the financial world.
Kenneth Cordele Griffin is today one of the world’s wealthiest people, with a fortune estimated at $26.5bn by Forbes. He is mostly known for running his $40bn Chicago-based hedge fund Citadel. But in reality, his lesser-known yet arguably more important computer-powered trading firm Citadel Securities is now the biggest key to his wealth — and mounting controversy.
This week Griffin sold a $1.15bn stake in Citadel Securities to venture capital firms Sequoia Capital and Paradigm, electrifying the finance industry. The firm is the world’s biggest algorithmic “market-maker”, handling over a quarter of all US stocks bought and sold every day. Now it is eyeing cryptocurrencies, and a likely initial public offering.
The deal valued Citadel Securities at $22bn, adding $5bn to Griffin’s net worth and lifting him to 26 in the Forbes table of the richest Americans. Many fellow financiers were agog at the deal.
“What made Michael Jordan Michael Jordan is not just that he jumps higher and runs faster, he’s sui generis. Ken is similar in his field,” says Lloyd Blankfein, the former chief executive of Goldman Sachs and a friend of Griffin. “He’s a great trader, but he’s also a great businessperson, and those things don’t often go together. It’s like a runner who wins in both the 100m dash and a marathon.”
Nonetheless, Griffin has also become a magnet for ire. For some he embodies the finance industry and its supposed ills. In Chicago his political machinations raise hackles. Conspiracy-minded retail investors on internet forums such as WallStreetBets portray him as the malevolent head of an evil financial empire, even though the US financial watchdog debunked their claims.
Internally, Griffin is more respected than loved, and the culture is said to be brutally intense, even for Wall Street.
“There’s not a lot of empathy,” one former employee told the FT last year. “That can be an asset when things are going crazy, as I don’t think he feels stress the same way as everyone else. There’s just this desire to be the best at everything, and everyone is either helping him accomplish that, or not.”
In an FT interview last year, replete with the long pauses and fully-formed clipped sentences he speaks in, Griffin shrugged off such complaints: “If you’re wired to enjoy being a good competitor, you love working here,” he said.
There were a few hints of Griffin’s towering drive in the Sun-Sentinel profile. The 17-year old — captured in spectacles, a disheveled stripy shirt and classic zip-up Adidas jacket — was already a prodigy at the time.
Active in the computer club, he was also president of the maths club and a budding entrepreneur. The middle-class teenager had set up a mail-order software firm selling educational programmes to college professors out of his home, which allowed him to hide his youth from customers.
His first dalliance with finance came in 1980, when the 11-year old Griffin wrote a school paper on how he planned to study the stock market. Yet it was as a Harvard undergraduate that he first started trading aggressively, famously convincing his dormitory to let him install a satellite dish so he could get up-to-date stock prices.
The dish was installed just in time for the Black Monday crash of 1987, when Griffin was already managing $265,000. Fortunately, he was betting on stocks falling, and made a killing. Griffin’s returns attracted the attention of hedge fund pioneer Frank Meyer, who bankrolled the launch of Citadel.
By 2001, Institutional Investor declared him the “boy wonder” of his industry. “Griffin is to hedge funds what pimply faced dotcom billionaires were briefly to the Internet: the boy god, nerd made good, self-taught polymath of finance,” it wrote. A few years later, it all almost came crashing down.
Despite a reputation for avoiding mistakes, Citadel lost an astonishing $8bn in the financial crisis. It was eventually forced to freeze investor withdrawals, often a death knell.
Instead, Griffin resurrected Citadel as one of the hedge fund world’s undisputed giants, spun out its high-frequency trading arm as Citadel Securities and built it into a formidable company in its own right. In 2020 Citadel sat fourth on the list of the highest-grossing funds of all time, with cumulative gains for investors of about $42bn, while Citadel Securities churns out profits from the retail trading boom.
There are few signs that Griffin is particularly concerned by the opprobrium of internet forums. When thousands of cryptocurrency enthusiasts collected over $40m to buy a rare first-edition copy of the US Constitution last year, he outbid them on a whim, causing outrage. The winning bid of $43.2m amounted to less than three days of Citadel Securities’ trading revenues.
“2008 nearly brought him down, and he’s rebuilt like a magician. It’s phenomenal,” said one hedge fund executive. “He’s kind of like the Elon Musk of money.”
Hydrogen power forecast to bring new dimension to energy geopolitics
Adoption of manufactured gas as viable alternative could be hastened by Europe’s energy crisis
Europe’s gas crisis could speed the transition to clean energy and the adoption of green hydrogen as a viable alternative to oil and gas, according to the International Renewable Energy Agency (Irena).
“Price volatility has been a feature of the oil and gas system,” Francesco La Camera, director-general of Irena, told the Financial Times. “Moving to the new energy system, where hydrogen plays a significant role, brings us less volatility.”
The development of green hydrogen, made from water and using renewable electricity, has become a policy priority for many countries as they prepare to cut emissions to “net zero” by 2050.
An Irena report published on Saturday forecast that the geopolitics of oil and gas, in which producer countries have the power to influence prices, would wane as new fuels including hydrogen become more dominant.
It concluded a “new cartography of energy geopolitics” and a revamped “hydrogen diplomacy” would emerge as production ramped up around the world.
“Hopefully the geopolitics of energy in 2050 will be less important than they are now, because people will have less dependency on small markets that can really influence global energy markets in an unpredictable way that we have today,” said Elizabeth Press, Irena’s director of planning.
La Camera said the green hydrogen market was already growing “a bit faster than we had foreseen a couple of months ago”, pointing to recent deals in Germany, Uruguay and Brazil.
Irena estimates that hydrogen could provide 12 per cent of the world’s energy needs by 2050 if global emissions were cut significantly to limit warming to 1.5C.
But the market would develop in a “more regional than global” direction, La Camera predicted, noting that many countries would be able to produce the manufactured gas. As a result, profits were unlikely to reach the levels that are traditionally enjoyed by oil and gas producers, he added.
Big energy consumers, including the US, China, EU, Japan, India and South Korea, have already made hydrogen a major component of their energy plans.
About $65bn has been earmarked for hydrogen production in the next decade, with Germany, France and Japan set to be the biggest investors.
Although the gas is difficult to transport, it can be converted into ammonia for long-distance shipping, or transported through existing natural gas pipelines. A handful of hydrogen-derived ammonia shipments were sold to Japan last year from Saudi Arabia and the United Arab Emirates.
Irena, an Abu Dhabi-based group with more than 160 member counties, conducted a survey that found Australia, Chile, Saudi Arabia, Morocco and the US were best placed to become leading hydrogen producers, due to supportive policies and the availability of renewable power.
Fossil fuel producers could also switch to manufacturing hydrogen as an alternative to oil and gas. Saudi Arabia, which is seeking to diversify away from its reliance on oil and gas, said this week it aimed to become the world’s cheapest green hydrogen producer.
There are two main methods of hydrogen manufacture: green hydrogen is produced using renewable electricity, and blue hydrogen is made from natural gas.
To reach climate goals, blue hydrogen must be combined with carbon capture to limit the impact of the associated carbon dioxide and methane emissions.
The recent surge in gas prices has made the economics of green hydrogen look relatively attractive compared with blue hydrogen, which requires natural gas to produce.
The Irena report expects green hydrogen will reach price parity with blue hydrogen by 2030 in many countries, although other studies suggest nearer 2040. At present, the cost of electrolysers, the machines needed to produce green hydrogen, makes it expensive to produce.
“What is happening right now really emphasises the need for a faster transition,” said Press. It shows that we need a different energy mix that will make it safer, secure and more diverse.”
A DirecTV-Dish Merger Won’t Save Satellite TV. Here’s Why.
For 20 years now, Dish Network and rival DirecTV have been playing a game of footsie. On the surface, the logic of merging the satellite TV services has long been obvious, even more so in recent years as both services shed subscribers.
The companies are in dire straits—at least outside of rural markets where cable isn’t an option—and teaming up may offer a better chance of survival. Sure enough, speculation about a deal resurfaced this past week when the New York Post reported that the two sides were holding merger talks.
The companies declined to comment on the report. I’m doubtful the merger ever happens. My skepticism goes back to 2002, when the Federal Communications Commission killed an effort to merge the two satellite TV services on the grounds that it would substantially reduce competition, particularly in more rural areas.
“At best, this merger would create a duopoly in areas served by cable; at worst it would create a merger to monopoly in unserved areas,” then-FCC Chairman Michael Powell said. He called it “the antithesis of what the public interest demands.”
To be sure, plenty has happened in the last two decades that changes the calculus of a deal, including AT&T (ticker: T) paying $67 billion for DirecTV in 2015, before selling a 30% stake last year to private equity firm TPG (TPG). That deal valued DirecTV some 75% below AT&T’s purchase price.
What hasn’t really changed is that there are still parts of the country unreached by conventional broadband. While the Biden Administration’s recently signed $1 trillion infrastructure bill is targeted in part at expanding rural broadband access, Dish (DISH) and DirecTV remain the only pay-TV options in some parts of the country. That’s likely enough to keep regulators from approving any deal.
And while sharing satellites might reduce costs, Craig Moffett, telecom analyst and founder of the boutique research firm MoffettNathanson, notes that the two systems are incompatible, meaning both companies would need to keep their satellite constellations in place. Neither service has added satellites in the last five years, Moffett says, and three to four years from now, Dish will have just one satellite within its expected useful lifespan. Moffett thinks both services will eventually fade away as their satellites fail. “No one thinks there is any economic sense in launching new satellites,” he says.
“We have a fleet of satellites and part of our business is managing their life cycle,” Dish told me this past week.
The satellites may already be a moot point for investors. Moffett says that Dish “hasn’t really been a satellite TV stock for years,” with the market focused on the company’s nascent wireless business and the value of its underlying spectrum.
Dish has agreed to build out the wireless service by 2025, but it will initially operate as an AT&T reseller. Moffett, who has a Neutral rating on Dish shares, says the stock will trade on sentiment rather than fundamentals until the wireless service goes live, which makes it a “tough stock to call.” What’s not a tough call is this: A Dish/DirecTV deal still seems like wishful thinking.
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Given the ongoing chip shortage, it’s surprising that Taiwan Semiconductor (TSM), the world’s largest contract chip manufacturer, dramatically underperformed the broad market in 2021. The stock was up a modest 12%, versus a 27% gain for the S&P 500. (My colleague Reshma Kapadia wrote an insightful profile of the company last June predicting the stock’s weakness.)
Several factors have weighed on the stock, including the threat of increased competition from Intel (INTC), which plans to build out a contract chip making business of its own. TSMC also faces geopolitical risks, with growing fears that mainland China could assert more authority over Taiwan—both sides have been conducting military exercises in recent months.
But sentiment may be turning. TSMC shares have rallied 17% since the end of December. That includes a 5% gain on Thursday after the company posted better-than-expected fourth-quarter results. Revenue jumped 24.1% in the quarter to $15.7 billion, driven by strong demand from smartphones, PCs, servers, and cars. The company sees strong trends in the current quarter and also lifted its long-term targets for revenue and gross margins.
One sign of TSMC’s optimism is that it expects $40 billion to $44 billion in capital spending in 2022, up from $30 billion in 2021, and above Wall Street estimates. That’s good news for the semiconductor equipment sector—and great news for companies like Apple (AAPL) and Qualcomm (QCOM) that rely on TSMC to produce key chips.
New Street Research analyst Pierre Ferragu recently named TSMC one of his top picks for 2022. He thinks the company will eventually top $100 billion in revenue, up from $54.8 billion in 2021.
Citi analyst Ronald Shu, another bull, thinks the stock has upside of 50% from current levels.
TSMC recently surpassed Nvidia (NVDA) as the world’s most valuable chip company, with a market cap of about $700 billion. If I had to pick the next company to join the $1 trillion club, I’d go with Taiwan Semi, which controls 60% of the global chip manufacturing market. It might just be the world’s most important technology company.
Shell’s Buybacks and Low-Carbon Energy Shift Make This a Buying Opportunity
Royal Dutch Shell is returning proceeds to shareholders and shifting to a low-carbon energy business.
Activist shareholder Third Point argues that Royal Dutch Shell is worth more if the European oil company were broken up.
But if the business remains whole, two key factors could enhance its value—the promise to return 20% to 30% of its cash flow from operations to shareholders in dividends and buybacks to 2025, and its shift to low-carbon energy.
This is in addition to Shell ’s (ticker: RDSA.UK) plans for $7 billion of the $9.5 billion in proceeds from the sale of its Permian basin oil field to ConocoPhillips (COP) to be returned to shareholders.
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Jason Kenney, an analyst at Santander, tells Barron’s that investors recognize Shell’s “concerted efforts to restore its reputation as a cash provider, and its energy transformation.” He has a Buy rating on the stock. Shell yields 3.9%, after a sharp dividend cut in 2020.
Shell’s transition to investing in low-carbon solutions is key to its future growth. In October, it set a target of halving the carbon emissions it produces by 2030 compared with its 2016 levels.
“The next strategic challenge is about scaling up transition energy (low- and no-carbon) value chains—and driving strategy to deliver cash from less oil/gas and more low- and no-carbon energy with customer service supports too,” Kenney wrote in an email.
Shell’s shares, along with many of its peers, have been more than halved since the beginning of the pandemic in January 2020. The stock is at a recent 17.18 pounds sterling ($23.36), a 24% climb in the past 12 months, just behind Exxon Mobil (XOM), up 54% over the same time period, and BP (BP.UK), up 30%.
Now could be a buying opportunity. Royal Dutch is one of Barron’s top stock picks for 2022, in part because the energy company will benefit as supplies are tight and prices remain high for some time.
Shell is unique in having three separate franchise businesses—and each are market-leading, Biraj Borkhataria, an analyst at RBC Capital Markets, wrote in a note. It has the world’s biggest network of service stations—46,000, and is expanding to 55,000 by 2025. Its exploration arm, which extracts oil and gas in deep waters, accounts for 30% of Shell’s upstream volumes, which Borkhataria estimates is worth more than $68 billion. He also places a $80 billion price tag on Shell’s liquid-natural-gas operations.
Borkhataria estimates the stock to rise 46% to £25. Shell generates high free cash flow yet trades at a substantial discount to its peers, he says.
In October, Third Point disclosed a large stake and said in a letter that the company should consider separating, with one business focused on oil-and-gas, and the other delving into renewables.
Shell has a market value of £132 billion, and is one of Europe’s largest businesses, employing 87,000 workers. It fetches 7.5 times this year’s expected earnings and is valued in line with its peers.
Late last year, the company said it plans to collapse its dual-share structure in favor of a single class of shares, and shift its tax residence from the Netherlands to the U.K., where it is incorporated. It will also change its name to Shell in the week beginning Jan. 24. Shares will remain listed in London, Amsterdam, and New York.
At a third-quarter earnings press conference in October, CEO Ben van Beurden said Shell’s strategy is “very well understood by the large majority of our shareholders.” The company posted a pre-tax loss of $27 billion for 2020 on sales of $180 billion, compared with a $25 billion pre-tax profit in 2019 on $344 billion in revenue.
In a fourth-quarter update on Jan. 7, Shell said trading from its integrated gas business is likely to be “significantly higher” compared with the previous quarter.
Expect a Tough Year for Stocks but Lots of Opportunities for Bargain Hunters, Barron’s Experts Say
Closing Stock Market SummaryThe S&P 500 gained 0.1% on Friday after being down 1.0% intraday, as the market overcame mixed bank earnings, downbeat economic data, and a sharp rise in interest rates. The Nasdaq Composite (+0.6%) and Russell 2000 (+0.1%) also closed higher, while the Dow Jones Industrial Average fell 0.6%.
Starting with earnings, JPMorgan Chase (JPM 157.89, -10.34, -6.2%) was an eye sore with a 6% decline after missing revenue estimates, while Wells Fargo (WFC 58.06, +2.06, +3.7%) rallied about 4% on upbeat results. Citigroup (C 66.93, -0.85, -1.3%) and BlackRock (BLK 848.60, -18.98, -2.2%) also underwhelmed investors with their results.
The financials sector (-1.0%) was the second-weakest performer in the S&P 500 behind the real estate sector (-1.2%). The materials sector (-0.8%) was restrained by a Q4 EPS warning from Sherwin-Williams (SHW 308.46, -8.93, -2.8%), which cited raw-material availability and labor headwinds in December.
Conversely, the energy sector (+2.4%) was impressive, rising 2.4% amid another increase in WTI crude futures ($83.87, +1.91, +2.3%). The information technology (+0.9%) and communication services (+0.5%) sectors were instrumental in the comeback amid relative strength in the mega-caps.
The Vanguard Mega Cap Growth ETF (MGK 246.35, +0.73, +0.3%) rose 0.3% in an opportunistic trade after entering the session down 5.8% for the year. For comparison, the Invesco S&P 500 Equal Weight ETF (RSP 161.58, -0.28, -0.2%) declined 0.2% today.
The sharp increase in 10-yr yield, which rose six basis points to 1.77%, did not deter the intraday rebound effort. The 2-yr yield rose seven basis points to 0.96% on expectations for a more assertive Fed. The U.S. Dollar Index advanced 0.4% to 95.16.
Interest rates rose despite retail sales for December, industrial production and capacity utilization for December, and preliminary consumer sentiment for January decreasing on a month-over-month basis. The catalyst was perhaps the inflation component of the consumer sentiment report, which showed 5-year inflation expectations rose to 3.1% -- its highest level since 2011.
Separately, casino stocks outperformed after Bloomberg reported that Macau authorities will issue up to six casino licenses as part of regulatory changes in the city. Las Vegas Sands (LVS 42.99, +5.33, +14.2%) rallied 14% on the news.
Reviewing Friday's economic data:
- Total retail sales were down 1.9% month-over-month in December (consensus 0.0%) while retail sales, excluding autos, decreased 2.3% (consensus 0.2%). On a year-over-year basis, total retail sales were up 16.9% and up 18.8% excluding autos.
- The key takeaway from the report is that total retail sales, which are not adjusted for inflation, contracted at their fastest pace since last February in the face of broadly higher prices. This suggests that inflation is weighing down consumer spending.
- Total industrial production decreased 0.1% in December (consensus 0.3%) following an upwardly revised 0.7% increase (from 0.5%) in November. The capacity utilization rate dipped to 76.5% (consensus 77.1%) from a revised 76.6% (from 76.8%) in November.
- The key takeaway from the report is that the December dip was owed to a pullback in manufacturing production after two months of solid growth.
- The preliminary January reading for the University of Michigan Index of Consumer Sentiment came in at 68.8 ( consensus 68.5) versus the final December reading of 70.6.
- The key takeaway from the report is that inflation expectations are becoming more entrenched, as the 5-year inflation expectations rose to 3.1%, representing the first increase above the 3.0% mark since 2011.
- Import prices fell 0.2% in December after increasing 0.7% in November. Excluding oil, import prices increased 0.5% after increasing 0.5% in November. Export prices fell 1.8% after increasing 0.8% in November. Excluding agriculture, export prices fell 2.1% after increasing 0.6% in November.
- Business inventories increased 1.3% m/m in November ( consensus 1.0%) following a revised 1.3% increase (from 1.2%) in October.
Looking ahead, investors will receive the Empire State Manufacturing Index for January, the NAHB Housing Market Index for January, and Net Long-Term TIC Flows for November on Tuesday. As a reminder, the market will be closed on Monday in observance of Martin Luther King, Jr. Day.
- Dow Jones Industrial Average -1.2% YTD
- S&P 500 -2.2% YTD
- Russell 2000 -3.7% YTD
- Nasdaq Composite -4.8% YTD
US accuses Russia of planning ‘false-flag operation’ in eastern Ukraine
Claim follows cyber attack on government websites and faltering diplomatic efforts to defuse crisis
The US has accused Russia of planning a “false-flag operation” in eastern Ukraine as part of its efforts to create a “pretext for invasion”, after diplomatic efforts to defuse the crisis faltered and government websites were hit by a “massive cyber attack”.
A US official said on Friday: “We have information that indicates Russia has already prepositioned a group of operatives to conduct a false-flag operation in eastern Ukraine. The operatives are trained in urban warfare and in using explosives to carry out acts of sabotage against Russia’s own proxy-forces.”
The official said such “sabotage activities” and “information operations” would serve to accuse “Ukraine of preparing an imminent attack against Russian forces in eastern Ukraine”, adding that this could be a precursor to a military invasion starting “between mid-January and mid-February”.
Earlier on Friday Ukraine said it was the target of a “massive cyber attack” after about 70 government websites ceased functioning. Targets included websites of the ministerial cabinet, the foreign, education, agriculture, emergency, energy, veterans affairs and environment ministries, as well as the websites of the state treasury and the Diia electronic public services platform, where vaccination certificates and electronic passports are stored.
“Ukrainians! All your personal data has been uploaded to the public network,” read a message temporarily posted on the foreign ministry’s website. “All data on your computer is being erased and won’t be recoverable. All information about you has become public, fear and expect the worst.”
Ukraine’s Centre for Strategic Communications, a government agency set up to counter Russia’s aggression, accused Moscow of being behind Friday’s cyber attacks while noting that official investigators have yet to formally draw such a conclusion.
“This is not the first or even the second time that Ukrainian internet resources have been attacked since the beginning of Russia’s military aggression . . . Some cyber attacks were so widespread that they became part of the world’s textbooks for cyber experts,” it said.
“We assume that the current one is connected with the recent defeat of Russia in the negotiations on the future co-operation of Ukraine with Nato,” the agency added.
The attack follows tense negotiations this week between the US, Nato and western allies and Russia, aimed at deterring Russian president Vladimir Putin from opting for a deeper invasion of Ukraine. Moscow annexed the Ukrainian peninsula of Crimea in 2014.
Ukrainian officials recently warned that cyber attacks and other efforts to destabilise the country would be a prelude to further aggression.
The message left by hackers, posted in Ukrainian, Russian and Polish, added: “This is for your past, present and future. For Volyn, for the OUN UPA [Organization of Ukrainian Nationalists/Ukrainian Insurgent Army], for Halychyna, for Polissya and for historical lands.”
Comments at the end of the message referred to Ukrainian insurgent fighters during the second world war and appeared to chastise Ukraine for ethnic clashes and atrocities. Poland and Ukraine accuse each other of committing atrocities during the period in the region, which the countries have jostled over for centuries.
The hackers’ post also included defaced images of Ukraine’s national symbols, with a line across the flag, coat of arms and a map of the country.
It was not immediately clear if the hackers were Polish or if this was an attempt to incite divisions between Ukraine and Poland, one of Kyiv’s strongest European allies in the face of Russian aggression.
Julianne Smith, the US ambassador to Nato, said the US would wait “to see what we find out today”. She added that proof of a Russian cyber attack “certainly” would be classed as an example of renewed aggression against Ukraine, which could trigger western sanctions against Moscow.
“We are monitoring everything that Russia is going to be doing towards Ukraine,” she said. “We are attuned to some of the efforts to destabilise Ukraine from within. We all understand that there’s an array of scenarios that could unfold as it relates to what happens between Russia and Ukraine.”
Jens Stoltenberg, Nato’s secretary-general, said he “strongly” condemned the cyber attacks.
“Nato cyber experts in Brussels have been exchanging information with their Ukrainian counterparts on the current malicious cyber activities. Allied experts in country are also supporting the Ukrainian authorities on the ground,” he said.
Josep Borrell, Brussels’ top diplomat, said the EU’s political and security committee and cyber units will convene to see how to help Kyiv.
“We are going to mobilise all our resources to help Ukraine to tackle this cyber attack. Sadly, we knew it could happen,” Borrell was quoted as saying by Reuters at an EU foreign ministers’ meeting in Brest, western France. “It’s difficult to say [who is behind it]. I can’t blame anybody as I have no proof, but we can imagine.”
Ukraine’s SBU state security service said in a statement that “provocative messages were posted on the main page of these sites”.
“The content of the sites was not changed, and the leakage of personal data, according to preliminary information, did not occur,” the SBU added.
Oleksiy Danilov, Ukraine’s national security chief, late last year told the Financial Times that Ukraine faced “continuous” Russian cyber attacks and other attempts to destabilise the country since Moscow annexed Crimea and orchestrated a proxy separatist war in its eastern regions.
“Domestic destabilisation is the immediate objective” of Russia prior to unleashing a potential deeper military incursion, he said, “firstly through cyber warfare, triggering an energy crisis and information warfare”.
H2O writes down Windhorst bonds further after bankruptcy near-miss
Asset manager warns investors that estimated value of frozen funds has fallen as much as 44%
H2O Asset Management has incurred more steep writedowns on its holdings of bonds linked to Lars Windhorst, after agreeing to help the German financier avert a bankruptcy.
Once a star of European asset management, H2O was plunged into crisis in 2019 when the Financial Times revealed it had substantial exposure to illiquid securities tied to Windhorst, a flamboyant entrepreneur with a history of legal trouble.
H2O’s funds allowed ordinary investors to withdraw their money on a daily basis but the asset manager temporarily froze several of them in 2020 after France’s financial regulator raised concerns about their Windhorst-linked investments. H2O subsequently split these funds, setting up closed “side pockets” to house these hard-to-sell bonds and shares, trapping more than €1bn of investor money.
These investors were expecting to access their money within weeks, but H2O has now informed them it had written down their investments further, after cutting a deal that allows Windhorst to delay repaying his debt for six months.
In a letter to investors on Wednesday, H2O disclosed that the “estimated valuation” of the side pockets had tumbled as much as 44 per cent in some instances, due to “the absence of reimbursement” since striking a restructuring deal with Windhorst last year.
Under that May 2021 agreement, H2O said it had consolidated its disparate investments into a single bond at Windhorst’s main investment company Tennor Holding, due for repayment in “early 2022”. The German financier then told the FT in August that Tennor expected to “pay down a major part of the H2O debt before the end of the year [2021]”.
The latest delay in repayment is likely to intensify regulatory scrutiny of H2O, which still manages €16bn in assets even after substantial withdrawals from investors. In accounts published last month, H2O confirmed that it is “currently under investigation” by multiple regulators, including for “alleged non-compliance with a number of principles established by the FCA [the UK’s Financial Conduct Authority]”. The firm says it is co-operating with the investigations.
H2O declined to comment. Tennor told the FT it has “made substantial repayments to all of its creditors including H2O”.
“Tennor will continue its normal course of business and is scheduled to pay down its debts in the coming weeks and months on a timely and regular basis,” Windhorst’s company added.
H2O’s letter to investors cited a recent Dutch court ruling, in which Windhorst’s lawyers successfully overturned a previous judgment that declared Tennor to be insolvent. To reverse the bankruptcy, Windhorst negotiated a six-month standstill agreement with major creditors including H2O, according to the December 21 court ruling, meaning they cannot demand repayment of their debts during this time.
Dominique Stucki, a lawyer representing a group of aggrieved investors that have taken legal action against H2O, expressed surprise at the agreement.
“We believe that if the debt was senior secured and guaranteed as strongly as H2O claimed, I don’t understand why they would have to waive their rights and agree to a six-month standstill,” he said.
The insolvency claim against Tennor was brought by Panamanian investment company Corvallis Navigation, which is linked to the billionaire heiress Athina Onassis, over an alleged debt of more than €36m. The professional showjumper inherited a fortune stemming from her grandfather, Greek shipping magnate Aristotle Onassis.
A lawyer acting for the company told the FT that neither “Corvallis nor Miss Onassis wish to make a statement or comment at this stage”.
Aside from Corvallis and H2O, other major creditors that signed the standstill include Heritage Travel and Tourism, a Bahamian investment vehicle linked to Monegasque billionaire cruise magnate Manfredi Lefebvre d’Ovidio.
Heritage won a substantial judgment against Windhorst in London’s High Court last year, which ordered the financier to pay €172m to honour a series of disputed investment deals, which related to shares in companies including lingerie maker La Perla.
French bank Natixis is still H2O’s majority shareholder, despite announcing over a year ago that it planned to dispose of its stake. Natixis announced last month that the sale was still in progress and it would make a further announcement “in due course and in line with the regulatory process”.
Before it became mired in controversy, H2O proved a lucrative investment for Natixis, often paying out hundreds of millions of euros in dividends a year.
H2O’s auditor Mazars issued a qualified opinion for its 2020 accounts, while also indicating that there was “material uncertainty” that may cast “significant doubt” on the firm’s ability to continue as a going concern.