FCA probes H2O over Windhorst bonds


The UK’s financial regulator is probing H2O Asset Management’s sale of illiquid bonds and stocks back to controversial German financier Lars Windhorst, adding to the heightened scrutiny of transactions in obscure securities at a former star of the European investment industry.

The Financial Conduct Authority last week confirmed that it was “in active discussions” with H2O over the asset sales, in a letter to Paul Myners, the former City minister. The letter, which came in response to a parliamentary question that Lord Myners lodged earlier this month, also said the FCA continued to engage with other EU regulators “where necessary”.

H2O is a subsidiary of French bank Natixis. It struck the deal to dispose of the hard-to-sell assets in late April, after its flagship bond and foreign exchange funds lost more than half of their value in March when the coronavirus outbreak knocked financial markets.

A Financial Times investigation last year revealed that H2O’s open-ended funds held more than €1bn of hard-to-sell bonds linked to Lars Windhorst, a flamboyant financier with a history of legal troubles. These funds, which are open to retail investors, have regulatory caps on the amount of illiquid assets they can hold.

H2O, which managed about €30bn of assets before its recent run of heavy losses, signed the agreement to sell back these illiquid assets to a new investment vehicle set up by Mr Windhorst. While the FT previously reported that H2O will dispose of the bonds and stock at a discount, the terms of the deal have not been made public.

KPMG, which audits most of H2O’s investment vehicles, has over the past nine months flagged multiple breaches of rules governing open-ended funds linked to these illiquid securities. The ‘Big Four’ audit firm also said last month that it was not able to issue its 2019 audit report for one of H2O’s flagship funds “within the regulatory deadlines”, because it received key information “late”.

Lord Myners previously told the FT that he had concerns about whether the transactions delivered fair value for investors and queried whether H2O may have engaged in cross-trades — transactions which move investments from one client portfolio to another.

“I am pleased that the FCA is reviewing these transactions,” Lord Myners said. “I hope this reflects an intention to put more resources into scrutinising related-party transactions and cross trades in the fund management sector.”

Clients withdrew nearly €8bn from H2O’s funds after the FT published its investigation last June, leaving the fund manager scrambling to reduce its funds’ exposure to the illiquid assets.

The Natixis-backed asset manager told clients it had sold €300m of the bonds by the end of June last year, before being forced to significantly write down the value of the remaining securities. The writedowns included a €1.5bn bond backing Mr Windhorst’s principal investment company, Tennor Holdings, which last summer acquired a minority stake in lossmaking German football club Hertha Berlin.

At the time, H2O co-founder Vincent Chailley told clients that the asset manager was planning to set up a new fund specialising in what he called “deep value” securities — assets that are perceived to be underpriced compared to their true value — and considered placing the controversial bonds in it.

Public records show that in July 2019, the firm registered a new fund called “H2O Deep Value” with €300m assets under management. The fund is not listed on H2O’s website, however, and the firm’s public documentation makes no reference to any asset transfers to the investment vehicle. Bloomberg data show that it held €338m in assets this month.

The French markets regulator, which oversees a number of H2O’s open-ended funds, declined to comment. The FCA, H2O and Mr Windhorst all declined to comment.

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