H2O Asset Management has revealed for the first time just how radically it marked down its holdings of illiquid bonds connected to Lars Windhorst, after the Financial Times drew attention to its heavy exposure to the controversial German financier.
The London-based fund manager saw clients withdraw €8bn from its funds after the FT revealed the scale of its holdings of bonds related to the entrepreneur in June. Mr Windhorst has a history of legal troubles and financing from H2O previously helped him settle litigation linked to the former Russian energy minister.
After selling a €300m portion of its more than €1bn exposure to Windhorst-linked bonds in the week that the outflows began, H2O told investors that it had revalued the rest of these thinly-traded positions at “a very significant discount” to their previous marks.
In a semi-annual report from the asset manager’s flagship Multibonds fund, published on Wednesday, H2O disclosed just how steep the revaluations were. The asset manager had previously marked its holdings of bonds from lingerie maker La Perla above their face value, for example. By June 28, the debt position was revalued at just a quarter of par value.
H2O and its parent company Natixis, the French bank, had previously singled out the investment in La Perla’s bonds to defend its portfolio of investments linked to Mr Windhorst. H2O cited a trip made by a staff member to La Perla’s headquarters in Bologna, as evidence of the due diligence it carried out before making an investment.
“Given the severity of the markdowns taken on Windhorst exposures, the veracity of the original and subsequent marks likely remains a key outstanding issue,” said Matthew Clark, an equity analyst at Mediobanca, who has an “underperform” rating on the shares of Natixis.
H2O declined to comment.
Morningstar, the influential fund rating firm, questioned the “robustness” of H2O’s valuations of its Windhorst-linked bonds in June, in a critical report on what it saw as the fund’s “loose risk controls”. H2O’s chief executive Bruno Crastes described that report as a “significant vote of confidence”, noting that Morningstar had suspended its coverage a week earlier.
H2O’s new filing does not contain an opinion from KPMG, the fund’s auditor, which is required only for its funds’ annual reports. PwC, which previously audited some of H2O’s other funds, raised concerns around the valuations of its Windhorst-linked position in 2016, including an audit qualification relating to its holding in the financier’s Sapinda Invest bonds.
Multibonds is one of six H2O funds that the FT flagged as having substantial exposure to bonds linked to Mr Windhorst. The funds report at different times, so it is not yet possible to gain a full picture of how the firm’s overall exposure has shifted.
Multibonds had the most concentrated bets on Mr Windhorst’s businesses, with more than 15 per cent of its holdings at the end of 2018 linked to the German financier. This dropped to around 5 per cent after the revaluations in June.
The new filing has also revealed a fresh investment H2O made in a Windhorst-linked instrument at the end of June. The report lists a €100m investment in the bonds of Tennor Finance, a key financing vehicle for Mr Windhorst, which issued €1.5bn of debt at face value on June 17. H2O marked the bonds at just 23 cents on the euro by the end of the month.
Mr Windhorst pitched the deal as an opportunity to buy bonds backed by the value of his investment company Tennor’s stakes in other businesses, according to people familiar with the matter.
Mr Clark said that the revelation of the fresh investment was “remarkable”, adding that it was “not immediately clear” why H2O did not include the bond in a list of exposures linked to the German financier it disclosed on June 20.