H2O Asset Management has faced serious payment issues on illiquid bond investments this year, including an unpaid interest bill from an Italian lingerie maker that appeared to constitute a default.
The €22bn investment firm, which is a London-based subsidiary of French bank Natixis, froze a series of its funds at the end of August after France’s financial regulator raised concerns about the valuations of its sizeable investments in hard-to-sell bonds.
The rare regulatory intervention came more than a year after the Financial Times first revealed that H2O had substantial investments in private bonds linked to Lars Windhorst, a flamboyant German financier with a history of legal trouble.
H2O’s funds have been the largest holder of this €500m bond, with its flagship MultiBonds fund alone owning €162m at the end of 2019. The investment firm is also a main shareholder of the underwear maker, while using both La Perla’s bonds and shares as collateral backing a complicated series of trades with small brokerages.
La Perla has struggled financially for years and the auditors of the group’s holding company La Perla Fashion Holding issued a warning over the company’s ability to continue as a going concern for 2019. La Perla’s core business lost €89m in 2019, according to annual results published in May.
H20 has consistently cited the substantial interest it earned on private bonds such as La Perla, describing their “high yield” in a letter to investors last month. Bruno Crastes, the asset manager’s chief executive, said in June 2019 that their relationship with Mr Windhorst gave his firm “access to very innovative companies that pay extremely high returns and have very high chances of success”.
H2O’s fund filings and other recent public communications to investors do not appear to make any reference to the missed payment, however. In contrast, another asset manager holding a much smaller €2m position in the bonds — Belgium’s Merit Capital Global Investment Fund — disclosed the payment failure by La Perla in its recently filed semi-annual report.
This document said that the La Perla bond had still not paid interest at the time of this June 2020 report, which under the terms of the bond “would give rise to immediate repayment of capital and interest”. Terms and conditions of the La Perla bond separately seen by the FT outline that “non-payment of interest” is an “event of default”, if not remedied within 30 days.
A spokesman for Merit Capital, which manages the fund, said that its position in La Perla has now been sold with “accrued interest including the coupon in full”.
H2O declined to comment on the status of its coupon payment, citing “confidentiality reasons”. “H2O always acts in the best interest of its investors and will seek to protect their rights with any appropriate action,” the asset manager said. “H2O will continue to keep its investors informed.”
Another Windhorst-related bond in H2O’s portfolio — Latitude Finance — has failed to meet its redemption deadline this year. The debt was scheduled to be repaid in full in August, but filings show there has now been a 90-day maturity extension until November.
Formerly known as Chain Finance, H2O was the largest investor in this €500m bond that Lars Windhorst raised in 2017. It provided vital funding at a time when the financier was trying to settle a number of disputes, which included a lawsuit linked to the former energy minister of Russia.
Merit Capital is separately embroiled in a dispute with H2O over its alleged role in a series of complicated trades involving illiquid bonds. The semi-annual report from its fund notes that the Belgian regulator considered its own investments in Windhorst-linked bonds as “ineligible”.
A spokesman for Lars Windhorst said his firm had already redeemed the “majority” of both sets of bonds, with the remainder to be repaid in the “coming weeks”. “We expect the remaining Latitude bonds to be redeemed by November 11,” he added. “We are not aware of any bondholder whose coupon has not been paid.”