H2O AM fights back against holdings concerns

On the 06/20/19 at 7:27PM


Adrien Paredes-Vanheule

In a rare exercise of transparency, H2O Asset Management has released a five-page detailed note on 20 June 2019 in which it tackles all points raised by FT Alphaville's investigation and Morningstar's research team.
Bruno Crastes, CEO, H2O AM

Illiquidity of certain private bonds holdings, ties with controversial German financier Lars Windhorst and possible conflict of interest issue, H2O Asset Management has addressed all concerns in a quite exhaustive note released on 20 June. 

All started two days before when an FT Alphaville's investigation sparked controversy over a few positions held in H2O funds, including H2O Allegro, as it raised concerns around the illiquidity of certain private bonds held and the fact they were issued by structures owned by Windhorst.

Following the publication, Morningstar suspended H2O Allegro's bronze rating on 19 June, stating that this decision was based on "questions raised by the research team about the appropriate features and the liquidity of certain corporate bonds held in one of the fund's pockets.”

As a consequence on 20 June, Natixis' shares value slumped by more than 11.5%, trading at less than €3.50, a level not seen since July 2016, prompting a detailed response from H2O AM.

“For absolute clarity, our aggregate exposures to illiquid assets are strictly limited to between 5% and 10% of each of these three fund’s net assets. We would emphasize to our investors that liquidity is not an issue in these funds. Significant cash remains on hand. We continue to be committed to providing investors with fully-transparent updates as to our funds’ holdings”, states Bruno Crastes, co-founder and chief executive officer of H2O.

In its letter aimed at calming markets, H2O recalls current exposures of the H2O Adagio, H2O Allegro, and H2O MultiBonds funds to non-rated corporate bonds amount to 4.3%, 9.7%, and 8.3% of these funds’ net assets respectively as at 20 June 2019. 

The London-headquartered boutique emphasises on the fact that its positions are mostly financed through futures contracts and currency forwards, which makes a lot of cash available in the funds (e.g. cash & money market placements at 56% in H2O Adagio).

Says H2O, exposures are "marginal" compared to those generated by the manager's global macro views on sovereign bonds and currency markets. The unrated corporate debt exposure spreads across nine issues ranging from 0.2% to 2.7% of net assets per fund.

"These include:
a. Chain Finance 7.75% 2020 collateralised by Sapinda Group portfolio companies including Smashcast (the world´s largest independent E-Sports internet broadcasting platform outside of Asia), Avatera Medical (a German medical equipment manufacturing company specialising in robot-assisted surgery devices), and Fyber N.V. (a mobile-phone advertising technology company);

b. Civitas Properties Finance 4% 2022, backed by German residential real estate;

c. DeGros Holding 6.5% 2023, issued by a logistics services cy. operating in Germany;

d. ADS Securities Funding 6.5% 2023, a Abu-Dhabi-based financial services company;

e. La Perla Fashion Finance 7.25% 2023, the renowned Italian luxury-lingerie maker ;

f. Trent Petroleum Finance 8.5% 2023, an energy cy. operating oil fields in the North Sea;

g. Everest MedTech B.V. 5% 2024, backed by Avatera Medical (see above);

h. Voltaire 7% 2023, Wild Bunch, a French film distribution company;

i. Rubin Robotics B.V. 5% 2024, a convertible bond collateralized by Avatera Medical."

H2O recalls that these exposures have been systematically and fully disclosed in the fund's monthly factsheets as well as in the fund’s semi-annual & annual reports and regularly appeared in H2O's notes.

"They have from time to time been discussed in client meetings. It was never H2O’s intention to hide these investments away from our clients’ knowledge and scrutiny", it points out.

Profitable private placements
H2O confirms the private bond offerings have been referred to it by Lars Windhorst whose holding company, Tennor Holding (previously known as Sapinda Holdings), owns the issuing corporations equity wise, at the exception of ADS Securities.

Though it argues that the private bond placements follow strict rules and that they are issued independently from each other.

 “These private placement securities offer a similar profile as that of collateralized securities where cash flows are distributed regularly and bonds repaid at maturity. In case of a credit event, these bonds may deliver lower coupons or have their maturities extended.

"H2O’s private placements relate to totally independent European companies ranging from a German medical equipment manufacturer to an Italian luxury lingerie maker, and include film distribution, oil field operations, real estate and e-commerce among other sectors. As a consequence, they expose the funds to a portfolio of diversified high-yielding short-dated bonds that can be either traded later or held to maturity, even though we rely for the time being upon one single referral agent", H2O states, emphasising on the diversification provided by these securities.

In its note, Natixis' affiliate also shares the contribution of these non-rated corporate bonds since 2015 to the performance of H2O Adagio (between 0.17% and 0.97%), H2O Allegro (between 0.13% and 1.34%) and H2O MultiBonds (between 0.17% and 1.70%). 

Windhorst, a 'reliable business partner'
About ties with Windhorst, H2O explains the German financier has "over the past four years referred valuable investment opportunities" to the firm, and "has proven to be a reliable business partner."

"In addition, the constructive collaboration that we have built over time has enabled us to enter into transactions on terms which we would consider favourable for our funds. In line with our investment process, we like to calibrate our strong convictions on few but fairly sized positions", the manager says.

It adds: "H2O has been offered to subscribe for short-dated (maximum 5 years) bonds issued by these different European corporations. In this respect, Tennor’s and H2O’s interests are fully aligned. There is no financial remuneration/compensation between the two companies in any shape or form at a personal or corporate level."

Lastly, adressing concerns around an eventual conflict of interest issue, Natixis' affiliate says earlier this year Crastes requested the establishment of an advisory (non-executive) board at Tennor Holding on which he is now sitting.

The firm adds this move was justified as it needed to monitor its investments in the companies previously cited in terms of governance. It specifies Crastes carries no personal interest in this position. "No remuneration, no contract, and no intervention in the running of the companies. On this advisory board, no confidential information is shared."

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