H2O: hot water
Some of the small brokerages investment group traded its unwanted illiquid exposure with have ties to Lars Windhorst
H2O: reverse repo men
H2O Asset Management has found itself in some hot water once again thanks to its links to Lars Windhorst (pictured), the controversial German financier with a history of legal woes.
DD readers may remember H2O for its bad hand of illiquid assets — last June, DD’s Rob Smith and the FT’s Cynthia O’Murchu revealed that the London-based company’s funds had built up more than a €1bn exposure to illiquid bonds.
Many of those were tied to various enterprises connected to Windhorst at a time when several of his investment vehicles were short on funding.
Among the illiquid bond purchases was the debt of a lossmaking lingerie maker and an Abu Dhabi brokerage, both curious investments for the macro-based fund manager backed by French bank Natixis.
Investors were quick to distance themselves from H2O’s portfolio of hard-to-sell bonds, yanking more than €8bn from some of its funds, outflows the company blamed on “deeply unfair” media coverage.
H2O chief Bruno Crastes (below), emphatically reassured investors as his company bled assets, vowing “never” to gate the fund.
Its parent company Natixis also felt the brunt of its connections to Windhorst — losing €2bn off its market cap when the influential fund rating group Morningstar decided to suspend its rating on one of H2O’s funds.
And it didn’t stop there. The company took a 60 per cent writedown on the value of the illiquid securities, while the French regulator AMF stepped in to shutter a number of its funds this August.
The fact the funds still had such large illiquid holdings may have surprised people who followed the saga closely last year: then H2O sprung up to assure clients it had managed to sell off some of the troublesome bond exposure.
But as our colleagues Rob and Cynthia revealed this week, that’s not the whole story.
In the latest twist, it emerged that the sale never actually closed, so instead H2O employed a tricky strategy to shuffle its troublesome debt exposure through a loose network of minor brokerages, a process known as “buy and sell back” or “reverse repo”.
It’s slightly confusing stuff — Rob lays it out in English on Twitter here. Essentially, the company traded hundreds of millions of euros in illiquid bonds right up to before the French regulator hit pause on its funds.
In doing this H2O could reclassify some of the outfits’ bad bonds outside its main portfolio holdings. The one problem: despite this creative solution, H2O’s funds ended up staying stuck with as much as 35 per cent exposure to these assets — far larger than it previously admitted and well above levels open-ended funds are expected to have, given a 10 per cent cap on unlisted investments.
Oops. And interestingly enough, some of those small brokerages H2O traded its unwanted illiquid exposure with also have ties to Windhorst.
Go deeper into the saga by reading Rob and Cynthia’s latest instalment.