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Regulator Tells H2O to Freeze Funds on Valuation Uncertainty

Eyk Henning and Luca Casiraghi

(Bloomberg) --

H2O Asset Management froze several funds at the request of the French financial regulator, which cited uncertainties over the valuation of illiquid assets the firm is selling back to German financier Lars Windhorst at a steep discount.

Bloomberg reported on Friday that H2O is selling the assets -- for the most part, thinly traded bonds in companies tied to Windhorst such as La Perla Holding NV and oil explorer Trent Petroleum -- at about half their nominal value, in a process scheduled to be completed by late September. The fund suspension will last four weeks.

France’s Autorite des Marches Financiers said on Friday that it requested the freeze to protect the interests of fund investors in the process, the latest twist in a saga that began more than a year ago after revelations about H2O’s exposure to Windhorst. Concerns that the rarely traded securities were not suited for funds that allowed investors to make daily withdrawals triggered about 8 billion euros of outflows at the time.

Windhorst, who sold the assets to H2O in the first place, has secured financing from two investors to buy them back through a new vehicle called Evergreen Funding. Evergreen in June issued a 1.25 billion euro one-year bond paying a yield of 12.5% to buy back securities with a nominal value of over 2 billion euros at a 50% discount. The deal is expected to yield a profit of more than 1 billion euros for Windhorst’s Evergreen, people familiar with the matter said.

“Our regulators are aware of the Evergreen transaction and share our opinion that it is in the interest of our investors to execute it,” H2O’s Chief Executive Officer Bruno Crastes told Bloomberg in an emailed statement. “They asked us to halt redemptions and subscriptions on three funds over valuation uncertainties.”

‘Valuation Uncertainties’

He added that the transactions with Evergreen have already started and should be completed by late September. “We are in constant communication” with Evergreen and Lars Windhorst to make sure the deal concludes on time, he said.

France’s AMF flagged “valuation uncertainties” because of the significant exposure of three H2O funds to “private securities.” In total, H2O decided to freeze eight funds, including the Allegro, MultiBonds, MultiStrategies and Adagio strategies. The firm’s remaining 16 funds will stay open. During the freeze, H2O will create side pockets for the illiquid assets, while the other holdings will be put into new funds structures.

Windhorst declined to comment. A representative for the French regulator said AMF had nothing more to add beyond Friday’s statement.

H2O’s fund investments included debt and stock issued by companies tied to Windhorst. Many of the assets suffered a battering when the coronavirus pandemic took hold in March, with bets on oil and Italian bonds suffering some of the steepest losses. In May, H2O agreed to sell the illiquid securities back to Windhorst. The transaction is taking place in several tranches.

Read more: Natixis’ H2O Agrees to Sell Stocks, Bonds to Windhorst’s Vehicle

Windhorst tapped German fashion retail magnate Friedrich Knapp and health care entrepreneur Ulrich Marseille for about 500 million euros ($595 million) in funding to help him repurchase the assets. The two took up about 40% of the Evergreen bond, according to people familiar with the matter and a presentation seen by Bloomberg News. Windhorst himself invested about 400 million euros in his own bonds. He has also held talks with other potential investors about taking part.

Knapp, 67, owns German fashion retail chain New Yorker which boasts more than 1,100 stores and 18,000 employees. Marseille made a fortune in sanatoriums, rehab and other specialized clinics.

H2O, which manages more than $25 billion in assets, is led by Bruno Crastes and Vincent Chailley. The investment firm is one of the top money makers for Natixis’s asset management arm.

“Natixis supports these measures, which are aimed at protecting investors’ interests,” Natixis said in a separate statement following the funds’ suspension. “The suspension of these funds has no financial impact on Natixis, either on the balance sheet or on the income statement.”

(Recasts throughout.)

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