H2O Asset Management: Lars, liquidity and lingerie

So that escalated quickly.

On Tuesday, FT Alphaville took readers on a deep dive into the portfolios of bond fund manager H2O Asset Management, a London-based subsidiary of French investment bank Natixis that managed around €30bn of assets.

Alphaville revealed that H2O’s latest semi-annual filings collectively listed investments in more than €1.4bn of illiquid bonds linked to Lars Windhorst, a flamboyant German entrepreneur with a history of legal troubles, across six funds that allow retail investors to withdraw their money on a daily basis.

We got some great feedback — and a fair few tips — from the good readers of Alphaville that day. Then we found out that the analysts at fund rating agency Morningstar read Alphaville as well.

The agency, whose assessments are used as a key guide for investors, suspended its bronze rating on H2O’s Allegro Fund on Wednesday, citing concerns over “the liquidity of certain bonds”. Morningstar specifically flagged exposures to entities “controlled by the German financier Lars Windhorst”.

The following day, the shareholders of Natixis became better acquainted with the work of FT Alphaville. The French bank's shares fell nearly 12 per cent on Thursday. A further fall on Friday meant that close to €2bn had been shaved off the bank’s market value.

By the end of Thursday, the six funds we flagged in our first piece had collectively seen a €1.4bn fall in assets (although we didn't find that out until the weekend).

On Friday afternoon, H2O’s chief executive Bruno Crastes appeared in a video from French website H24 Finance in which he addressed “an article in the Financial Times”, in which he defended his relationship with Lars Windhorst. Translation below:

"The journalist in the UK is saying he is rather a sulphurous character, but we know him quite well now,” said Mr Crastes. “He is extremely talented."
Screenshot courtesy of H24 Finance.

By this Monday, however, H2O announced it had cut its exposure to what it calls “private bonds”, it also marked down the valuation of its remaining holding. In a bid to stem investor outflows, the asset manager also imposed discounts as large as 7 per cent on investors that want their money back.

On Friday, the head of Natixis’ fund management arm Jean Raby gave investors an up-to-date number on H2O's present exposure to Windhorst-related bonds: “a little above €1bn”. he said. H2O then said Monday that after the sales these assets make up 2 per cent of its AUM, which stood at around €30bn last week, but will be lower after the recent outflows.

H2O has also given more detail on how they value different securities.

In our original analysis, we noted that other holders classed some Windhorst bonds as Level 3 assets — financial assets that are not traded frequently, making it difficult to find a reliable market price. In contrast, H2O's filings suggested they used mostly market inputs, as we could not find any additional disclosure on valuations beyond one specific bond. Indeed, the term “Level 3" does not appear in the most recent report from H2O's Adagio fund, dated March 2019.

However, on Thursday, H2O explained that five of the nine bonds are classed as Level 3 assets:

While the bonds may be unlisted and therefore harder to value than more widely traded securities, both H2O and Natixis have defended the quality of this portfolio.

So what are those investments with the talented Mr Windhorst?

Well, as Alphaville had reported previously, H2O supported a series of bonds that essentially acted as rescue financing for Mr Windhorst. Luca Casiraghi at Bloomberg has some good context on the 2016 funding crisis that triggered this. Indeed H2O last week still listed an investment in Chain Finance, which the German businessman used to settle both outstanding lawsuits and existing debts in late 2017.

The rest of the bonds are businesses in which Mr Windhorst holds a stake, with the exception of Abu Dhabi-based broker ADS Securities. This Abu Dhabi-based financial group at one time had particularly close ties to Anoa Capital, the now defunct London brokerage in which Mr Windhorst held a stake. As we have previously reported, ADS was even considering providing a loan to Anoa in 2016, before the senior executive in charge of the decision passed away.

Natixis's Mr Raby described H2O's range of holdings as “quite diversified” adding that the portfolio included “even a luxury goods company in Italy”, in reference to La Perla — the Italian lingerie maker Mr Windhorst purchased in 2018 after settling a legal dispute with its previous owner, Italian entrepreneur Silvio Scaglia.

H2O also specifically flagged its due diligence around the La Perla investment, which included a visit to its headquarters in Bologna:

Alphaville is not a specialist in financial valuation or portfolio management. Nor have we have visited Bologna for longer than a weekend break.

So Alphaville might not be best positioned to judge the prudence of H2O's more than €300m investment (according to our methodology) in La Perla's €500m, 7.25% coupon bond which matures in 2023.

Luckily, we do have the documents for the April 2018 bond sale. And Alphaville can share an interesting fact with readers: La Perla reported negative €90m Ebitda the previous year.

From the document:

It'd been a while since Alphaville looked at the deal, so we thought it was worth familiarising ourselves with the bond's structure, particularly as H2O said last week that it “is totally involved in the negotiation of the covenants and of the level of collateralisation of the bond issues”.

The chart shows that while the bond is secured on the shares of La Perla Dutch's holding company, it is structurally subordinate to both bank facilities and a shareholder loan at its UK entity. In other words, a loan from Mr Windhorst's Tenor Holding is closer to La Perla's assets and operating companies than the bond H2O owns:

We also took a look at the latest accounts on Companies House for the UK entity. They show La Perla booked total losses of €180m in 2017, with accumulated losses surpassing €400m:

We'll leave the last word to H2O on this though:

Lars Windhorst has over the past four years referred valuable investment opportunities to us.

More to come from Alphaville.

Related Links:
H2O cuts exposure to ‘private bonds’ after heavy outflows — FT
H2O’s predicament should ring alarm bells on global liquidity
— FT
H2O suffers €1.4bn outflows across six funds
— FT
H2O hit by outflows as scale of Windhorst links revealed
— FT
Natixis shares tumble as concern grows about H2O illiquid bonds
— FT
H2O Asset Management: illiquid love
— FT Alphaville

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