“Valuation uncertainties.” And the trail of the Windhorst bonds.
By Nick Corbishley, for WOLF STREET:
H2O Asset Management — a UK-based hedge fund, majority-owned by French investment bank Natixis — just gated a series of its funds due to illiquidity of its holdings. On Friday evening, France’s chief market regulator, Autorité des marchés financiers (AMF), instructed the firm to close three of its funds due to “valuation uncertainties” resulting from their exposure to unlisted securities linked to the controversial German financier Lars Windhorst.
Besides the three funds indicated by AMF, H2O closed another five funds containing holdings of similarly illiquid assets, with the result that roughly half of the asset management firm’s entire portfolio of assets — €21.7 billion, according to the company’s website — is now under wraps. Trapped investors cannot access their funds, and will be unable to do so for at least the next four weeks, during which time the company will try to sell off the illiquid assets.
Natixis — itself owned by Groupe BPCE, France’s second largest banking group — insists that whatever happens at H2O will have “no financial impact” on its own balance sheet or income statement. Natixis has enough problems of its own to deal with, having suffered significant trading losses in the second quarter as stocks derivatives bets went awry.
In 2015, H20 began purchasing non-rated corporate private placements. They included bonds issued by companies backed by the German entrepreneur Lars Windhorst, who in 2009 had received a suspended prison sentence for breach of trust. After leaving a trail of bankrupt companies, stiffed investors, and unpaid debts, Windhorst was accused by the German financial daily Handelsblatt of “greed, boundlessness and immoral behavior.”
But H2O couldn’t get enough of Windhorst’s bonds and other illiquid assets. By June 2019, the fund’s unlisted holdings accounted for almost 10% of total assets under management. As FT Alphaville reported at the time, they included a €500 million bond issued by Chain Finance, a vehicle that Mr Windhorst used in 2017 to settle outstanding lawsuits and repay existing debts. Nonetheless, €383 million of the €500 million issued ended up in six of H20’s funds, all of which offered investors the prospect of daily withdrawals.
When the true nature of these private securities was revealed, Morning Star decided to downgrade its rating of the fund. And many of the fund’s investors rushed for the exits. In the space of just over a week, €8 billion — around 30% of the total money parked in the fund — fled the fund.
A sudden surge in outflows can be fatal for an open-end mutual fund with large holdings of illiquid assets. When investors take their money out, the fund has to use up its remaining cash and then has to sell assets in the portfolio to raise money to meet the redemptions. If the assets in question are thinly traded bonds, they can take months or even longer to sell, particularly in a downturn. This gives rise to a “mismatch in liquidity” between what the fund offers to its investors (daily liquidity) and what the fund holds (largely illiquid assets).
But even as billions of euros fled H2O, new money was apparently coming in, said the firm’s CEO Bruno Crastes, who vowed not to shut the fund’s doors, as Neil Woodford had done months earlier with his Woodford Equity Income fund. H2O, Crastes said, would “never” take action to prevent investors from redeeming their assets. But that is precisely what it did on Friday, albeit at the regulator’s request.
According to H2O’s own account, the gating of the eight funds was necessary in order to sift out the privately listed assets and place them in what it calls “side pockets,” while creating new funds to house the other assets, which will be apportioned to existing investors. H2O will then try to complete the sale of the privately listed assets — at a sharp discount — to a Luxembourg-based consortium of investors called Evergreen Funding, which was assembled by none other than Lars Windhorst himself.
These dealings have a strong whiff of fish about them. France’s financial regulator has already flagged “valuation uncertainties” at H2O because of the significant exposure of three of its funds to Windhorst’s securities.
To buy back his portfolio of bonds from H2O, Windhorst managed to persuade two German business magnates — the fashion retailer Friedrich Knapp and the health care entrepreneur Ulrich Marseille — to pony up around €500 million for a €1.25 billion high-yield bond issued by a Windhorst vehicle, reports Bloomberg. With the newly raised funds, Windhorst, who himself apparently invested about €400 million in the bond, will buy back his own bonds at sharply reduced prices and H2O — or more specifically, its investors — will eat the losses.
Once Windhurst’s bonds have been sold back to Windhorst, the remaining liquid assets placed into new UCITS that comply with the EU’s liquidity rules (Undertakings for the Collective Investment in Transferable Securities are mutual funds that can be sold across the EU). These UCITS will then be reopened and everything will be hunky dory, investors are being told.
But big questions still remain about the state of H2O’s financial health. And there are also concerns that the four-week gating period could be extended, as happened with UK open-end property funds that were gated in March and remain shuttered to this day.
During the massive market sell-off in March, as the virus crisis battered financial markets, two of H2O’s flagship funds — the H2O Multibonds and H2O Allegro funds, housing €4.9 billion and €1.5 billion of assets respectively — slumped 50% in just four weeks, according to Morningstar, which placed the fund under review for the second time in less than a year over concerns about what it called “extreme losses” and “rampant risk taking”. According to the French daily Les Echos, one fund had collapsed by 80%.
“The extent of the recent derailment is alarming,” said Matias Möttölä, associate director for multi-asset and alternatives manager research at Morningstar, during the crash. “These risks come on top of the issues raised in 2019 regarding the fund’s exposure to illiquid bonds that were revealed by the Financial Times.”
H20 responded to the allegations by squarely rejecting them while issuing an apology to investors on the fund’s outsized losses:
“On behalf of the whole H2O team, we would first like to extend to you and to your clients our sincere apologies for our risk-adjusted losses, which have been particularly significant since early last week… If 2008 was a liquidity crisis, 2011, a volatility crisis and 2016, a convexity crisis, 2020 is a combination of the three previous shocks.”
In its apology, the fund also admitted that during the sell-off in March many of its hedges had not worked out as planned. To compound matters, Blackstone Group dropped H2O as advisor of one of the investment giant’s major funds.
Yet even as the value of its holdings plunged, its hedges went awry and one of its major clients cancelled its contract, H2O still clung to one hope: that central banks would step in and save the day by re-pumping the prices of the high-risk asset classes it likes to hold, such as junk bonds. “Even though the end of the tunnel is not visible yet, the lights have been turned on by central banks and governments,” H2O said in March.
Six months on, central banks and governments have more than delivered. Many asset classes have regained their previous value, in spite of the damage in the real economy. But even this unprecedented bailout still wasn’t enough to solve H2O’s problems, given the gating of the funds on Friday evening. By Nick Corbishley, for WOLF STREET.
As so often, this started well before Covid, but Covid is speeding up the process. Read... Office Towers in Hong Kong Battered from All Directions: Big Haircuts for Investors amid Falling Rents and Rising Vacancies
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Given the German connection, could it be that Deutsche Bank is bankrolling Lars Windhorst on the other side?
Where do these fast talking con men find people willing to loan them money? Are there really that many stupid rich people out there (and if so where do I find them)? ;)
It’s not stupid rich people, it’s guys using other peoples money to gamble and justify their salaries. Joe Snuffy has no say whatsoever in how his pension funds are invested, but he’s the one who always comes up taking the loss.
When asked, “What is business?”, Alexander Dumas replied, “Business? It’s simple. It’s other people’s money”.
I will never forgive that bitch Thatcher (or her idiot counterpart here) for stealing, distorting, and acting upon Dumas’ words.
Well, one of these days, some hedgefunder will rake the wrong Joe Snuffyolini .. then as all a sudden- Bang! .. said ‘funder’ gets a long awaited dirt nap!
I see rough-justice people commin around the bend….
Look, the way it works is an asset manager is only as good as the return he can get. The percentage return is a hard fact, but the risk is not. So arbitrage risk. Invest at high percentage return (visible) and high risk (hidden) and you look like a hero for the short time you need to move on to a new position before the risk bites.
Honestly what schmuck looks at his retirement account beyond percent return?
Return x risk x inflation was forgotten about years ago.
Desperate pension funds?
michael earussi:
Many years ago while researching the crashes of 2000, Enron, etc……I discovered testimonies from Eastern US brokers stating that the really dumb investors were in the middle American rural areas. They would start their days very early and hit the phones, cold calling or calling clients. They were always amazed at what they could sell them even those who had lost their shirts and wanted to play again. Yes, there are multitudes of “dumb” people (uneducated as to how the American Dream works) out there who are very willing to be parted with their har earned monies hoping to keep the dragon from their doors.
I don’t have any problem with weapons-grade, stupid/greedy rich master of the universe going off and doing, well, weapons-grade, stupid/greedy things AS LONG AS THE ACTIVITY IF FULLY DISCLOSED AND PEOPLE ONLY PLAY WITH THEIR MONEY (ie: no pension fund investments).
Yet time, after time, after time, after time, after time, after time these guy get bailed out at taxpayer expense. EU regulators seem especially stupid & gullible. The recent Spanish king had to resign (adbicate, whatever) and was run to of Europe (he now lives in the lush, plush & luxurious Dominican Republic).
The UK will probably have some “uncomfortable” moments with BREXIT, but they’re damn lucky to be getting out of the EU (as well as never having joined the Euro area).
The UK is toast itself. Poor ignorant post that doesn’t get it.
Bobby Dents
I always appreciate educated & well articulated feedback; what the heck, I’m just a retired CFO.
However, since you didn’t provide any of that, I suspect the BREXIT story will be better told over the next 5 years. If I were a betting man, I’d certainly expect UK to outperform the EU
Why will the UK perform better? Like a serious question. For the life of me, I can’t remember any specific British brand with the exception of perhaps Rolls Royce? But they make aircraft engines right, like the kinds that won’t sell well for a while.
Ok, another one I know because of the Barclays Center is Barclays, which I think will perform badly in the next recession/depression.
I mean like what does Britain have really that will make it perform better? And even if it’s separate from Europe, doesn’t mean that there’s going to be any special treatment from the US either. The later already says so.
Uk is firmly on the road to a collapse . Await October when the freebies run out and the ”furloughed” are counted as ”unemployed ” . That will be followed by a failed Brexit and devolution in Scotland . Where will this show up ? In the currency markets where the GBP will be thrashed . No it will not go to zero,but to refresh your memory it was a 20 % fall that made Soros a billion, cost Lamont his job and Brexit from the ERM . Britain is in overshoot with 65 million population . It imports 65% of its food and 80 % of its energy . One word ”Unsustainable ” . Just in case you are thinking of North Sea oil,let me inform you at $ 50 it is a money loosing proposition . They keep pumping even at a loss because to dismantle the oil structures costs $ 100 billion and the pvt operators will declare bankruptcies if they are pushed that means let 10 Downing street pick up the tab , but Downing Street is bankrupt . Standard operating procedure in the mining and extraction industry . The operators get the minerals and the taxpayers pays for the cleanup .
I very much doubt that GB will perform better than the EU going forward but it’s just a gut feeling I live on the coast in Turkey and have interactions with lots of heavy drinking, tattooed Brits unfortunately
Frederik,
Ah, the British abroad…
Luckily these walking stereotypes you have the misfortune to interact with aren’t wholly representative of the population in its entirety, however they are probably representative of a large part of that part of the population that were variously flummoxed, cajoled and outraged into voting for Brexit (whilst obviously not being representative of all leave voters).
Having been given their chance to have a say in deciding the country’s future, it’s probably safe to say that they won’t be allowed as much say in what happens next; what little trust there may have been in the intelligence of the voter has been destroyed, with all political sides seeing only the worst in each other’s intentions.
Everyon’e going to try and keep as much decision making power for themselves as they can from now on.
MonkeyBusiness
Serious question deserves 2 serious answers:
It’s all a matter of relativity (UK relative to EU); remember, I don’t claim UK has a guaranteed golden future, I just said UK will do better than EU.
1) Call me an optiomist, but I firmly believe a free people (electing their own governments, establishing their own national rules, managing their own currency) will generally outperform an unelected government (no EU citizen votes for any of the EU’s multiple presidents) with unresponsive institutions (EU courts, immigration, etc) implementing one-size-fits-all rules. Fortunately, the UK avoided the euro, which is impoverishing most of the “euro area”.
2) With UK BREXIT, The EU has lost 13% of it’s population and 15% of it’s GDP (on average, UK was richer than rest of EU).Germany & France will now control even more of EU decisions.
(Extended pandemics & major wars excluded) unlike several on this thread, I don’t claim powers of seeing the future. However, I do think over the next 5 years, UK will outperform the EU. It all comes down to which society is the most flexible & responsive at providing what citizens and markets want.
Can’t see the UK doing at all well in the next few years. They were a free people in the EU, too. The EU does have a democratic deficit, but so does the UK, and with Johnson at the helm, I expect this democratic deficit to increase. It also has a hostile relationship with it’s nearest neighbour – the EU – and the USA, ain’t gonna ride to its rescue this time, imo.
UK sterling is toast.
The UK has done well from 300 odd years of industrialization, and empire (who wouldn’t), but empire is over, and it’s starting to look like industrialization might be on the way out – definitely the petroleum era looks like it’s ending.
Think the world is going to go the way of the Maya city empires and back to small subsistance agricultural settlements, with a corresponding decrease in the world population.
It was fun while it lasted.
@JavierChip, thanks for answering.
1. This is more idealism than fact. Let’s just take Japan, from the outside it looks like a democratic country, but the fact of the matter is the bylaws allow the current reigning party, the LDP to rule the country even if it loses the majority vote. I never recall the UK outperforming Japan in the last 50 years ? And of course there’s India, supposedly the world’s biggest democracy.
2. With Brexit, the UK also loses access to the single market. I guess the question here is who needs who more.
Monkey Business
We’re now at the point in our discussion where it’s important to understand why they run horse races….
This has echoes of the GAM / Greensill ARBF fund scandal- outsize loans to a dubious set of private companies, conflicts of interest, fund managers not “doing what it says on the tin”, fears of fraud or corruption etc.
Where is the British FCA in this?
Why has the AMF intervened so quickly, while the FCA allowed Link to give away Woodford positions at a massive undervalue?
Anyone who lives in the UK knows the British FCA is as much use as a chocolate teapot.
News Flash. Nobody is looking out for you. Educate yourself or die.
There was news yesterday that the building that houses Chanel in London was up for sale. The building is owned by some pension fund in Sweden. They must really need the money to unload a property on Bond St. They say its the third most valuable retail street in the world. After the goings on in NYC and LA, it’s probably number one now.
Getting out early is smart.
I’m guessing you don’t live in a city? Because this fearfulness about the “goings-on” in cities is by and large not shared by those who actually live in them.
OP hates liberals and loves perpetuating anything ZeroHedge has to say.
Mar,
I guess you missed all the boarded up stores on Fifth Ave and elsewhere or on Rodeo Drive too. It looked pretty scary to me all the way in flyover country. Didn’t see any of the ladies who lunch walking around either.
I’m not trying to “gotcha” here, but you’ve made my point exactly. To you, thousands of miles away, it looks scary. Meanwhile the actual residents are, by and large, not scared.
In general the fear of violent crime, in the cities and elsewhere, is a media creation. Crime is much lower than it was 40 years ago, but the perception of it is much higher.
I don’t understand why these funds maintain such a large liquidity mismatch. Why not say right up front, we’ll need a month or six months or whatever to redeem your shares? As an investor I’d like that sort of policy to keep the fund from churning from the spastic actions of skittish investors.
“If 2008 was a liquidity crisis, 2011, a volatility crisis and 2016, a convexity crisis, 2020 is a combination of the three previous shocks.”
Translation: we suck at what we do.
As for the liquidity terms, you’re absolutely correct, seasoned investors understand the risks and usually have a side letter with the manager getting better liquidity terms and rates. It’s all a hustle.
How fascinating! EU has been going down to the brinks for quite a while now. God knows where we would have zero coupon perpetual bonds in Europe. Sadly like always, the investors lose the money.
That’s an awful large percentage of “Investments” in Lars Windhorst’s various endeavors.
I’m sure there weren’t any kickbacks or other inducements involved…
Absolutely not, that would never occur to anyone.
Hmm. I just found out today what an “accredited investor” is in the US. Evidently “Sellers of unregistered securities are only allowed to sell to accredited investors, who are deemed financially sophisticated enough to bear the risks. ”
And I guess the US the SEC loosened the qualifications to be an accredited investor on August 26th. Why???
I found this referenced on a private forum of residential real estate investors. Most of them were salivating at the news.
WHY? Did someone have to be an “accredited investor” in order to buy any of the bulk foreclosed property packages in the last recession? You know, when corporations bought our housing stock in bulk for pennies on the dollar?
Lynn
Previously, the SEC had what I considered to be what was the appropriate policy: Protect unsophisticated small investors from highly complex & risky investments that appear to generate higher returns. Said another way: the SEC deliberately discriminated against smaller, stupid investors to keep them from earning higher returns.
Unfortunately, enough smaller, stupid investors have now complaied they are being discriminated against, that the SEC is loosening the protections (ie lambs to the slaughter stories will increase).
Personal opinion: I not only agree the SEC should protect unsophisticated smaller individual investors, but their pension investments should also enjoy protection from certain classes of very high risk investments. MANAGERS OF OTHER PEOPLE’S MONEY will, of course, violently disagree with my personal opinion.
at the rate thing are deteriorating in the financial system where countries are all connected via their banks and where only the central banks are backstoping and buying every bad debt, one day they may freeze everything you want to get rid off or short.
you are captive and your cannot pretend you can do what you want with your bank or broker accounts
“If 2008 was a liquidity crisis, 2011, a volatility crisis and 2016, a convexity crisis, 2020 is a combination of the three previous shocks.”
Nick, thanks for bringing in that picture. I’ll try to remember it as a freshly original point of view.
Could you explain what a “convexity crisis” is?
Engin-ear,
Nick was quoting H2O’s excuse for the mess it created. So you need to ask H2O. This is what Nick wrote — the part in quotation marks is the quote from H2O:
Of course I saw that Nick quoted a third party, but I hoped to benefit from Nick’s wisdom… or anybody else’s from Wolf’s think-tank (I mean readers’ community).
I had no hope to have any intelligible H2O comment (they are not independent enough to enter the details of their difficulties, so I don’t expect them.to bring clarity by going beyond corporate talk).
Engin-ear,
Imho, H2O was bullshitting. They were on the wrong side of a bunch of big leveraged bets including with illiquid bonds, and those trades went sour, and they came up with this intelligent-sounding gobbledygook to explain why it wasn’t there fault. That’s how I see it.
While your funds and retirement are buzzing around the electronic playgrounds in the sky, go ahead and buy a gold or silver coin, hide it, or keep it in your pocket or purse. Then you can be sure you will have one solid asset. If you get burgled, at least you can have the satisfaction of knowing it will help the local economy.
What would the Fed do if this were a US fund?
Nothing. Not big enough for a bailout.
More importantly, what would the SEC and the Dept of Justice do if these were US funds?
Would Windhorst and Crastes end up wearing orange suits and working on a chaingang with other lowlife criminals?
Thank god, this has to do with the deeds of a single individual, and has nothing to do with market volatility, or a fund chasing meagre opportunities.
Maybe a lot of things are on very suspect footing and this whole mess is very fragile?
More unproductive people, less GDP + less future value doesn’t equal anything much at all!
https://fred.stlouisfed.org/graph/?g=v4HB
The chart you linked has nothing to do with what you said, or with the article. The chart shows US Treasury yields divided by real GDP per capita growth. The lines are a function of Treasury yields having dropped sharply over the past 30 years to near-zero now. Over the same period, real GDP growth per capita has been at around 2.5%, on average, except during recessions.
I hope that strong French whiff does not come from fish caught in UK waters…………