Natixis’s H2O Marks Down Bond Assets to Avoid Woodford Fate

(Bloomberg) -- Natixis SA went into crisis-fighting mode to stem a wave of outflows from its H2O Asset Management unit, selling about 300 million euros ($342 million) of its unrated private bonds and marking down the balance to remove incentives for investors to pull even more.

The move cuts the aggregate market value of the bonds, which were issued by companies linked to financier Lars Windhorst, to less than 2% of assets under management, H2O said in a statement on Monday. H2O’s funds, whose assets doubled since 2017 to $37.6 billion before last week’s tumult, will be priced at a discount between 3% and 7%, and the company will remove all entry fees across its funds, it said.

The measures aim to reverse outflows from a group of H2O funds that saw their assets drop by 1.1 billion euros on Thursday as analysts questioned their holdings. By moving swiftly and having fund investors take valuation losses now, H2O is seeking to avoid the fate of famed U.K. stock picker Neil Woodford and Swiss asset manager GAM Holding AG, which both froze funds over the past year amid concerns about whether they’d circumvented investment restrictions.

Morningstar questioned the “liquidity and appropriateness” of some of H2O’s corporate-bond holdings as well as potential conflicts of interest, while research firm Autonomous said the notes are akin to loans, which aren’t permitted. The rating company suspended its recommendation on Wednesday, following a report in the FT about the fund’s holdings of rarely traded bonds.

Read more: How Natixis’s H2O Funds Are Linked to German Financier Windhorst

Natixis, which has a network of more than 20 independent asset managers, brought forward a periodic audit of the unit to start June 21. Its shares rose slightly on Monday, halting the two-day slump that followed Morningstar’s move. The bank lost almost 12% last week, falling to the lowest level in nearly three years on Friday.

H2O told investors it sold about 300 million euros worth of private placements on Friday, according to a letter seen by Bloomberg. The money manager also said it planned to appoint an independent auditor to reassure investors about its investment process and valuation policy regarding non-rated private bonds in their funds, according to the note.

The fund said it depreciates all portfolio assets in line with market prices and that it started marking down net asset values as of Wednesday. This is why “our funds have overall posted daily negative performances, despite the good showing of our main investment strategies,” H2O said in the letter. An H2O spokesman declined to comment on the letter.

Tthe aggregated value of the non-corporate bond holdings across H2O’s range of funds was 500 million euros as of Monday, a spokeswoman for the money manager said by email.

Defiant Tone

The reduction of Windhorst-linked bonds on Monday comes in stark contrast to the defiant tone struck by Bruno Crastes, chief executive officer of H2O, in an interview published on French media website H24 Finance last week. Crastes, who was asked by Natixis last week to leave the board of Windhorst’s investment company, will be replaced by H2O’s Chief Investment Officer Vincent Chailley, according to a spokesman for the firm.

“The liquidity of the securities is ensured and will allow it to face potential additional withdrawals,” Natixis said in statement on Monday. “The long-term performance drivers of H2O funds, which have been proven over numerous years to the benefit of our clients, remain unaffected as they are not related to this type of investment.”

The notes in question are so-called private placements linked to closely-held companies from lingerie to robotics in sales arranged by Windhorst. Unlike traditional bonds, they resemble loans, according to Autonomous. The distinction matters because H20’s Allegro, Adagio and Multibonds funds aren’t permitted to hold loans, which are harder to trade and generally lack the serial codes known as ISINs that debt securities are assigned.

A spokesman for H2O told Bloomberg on Friday that it rejects Autonomous’s analysis that the notes resemble loans.

Other U.K. fund managers including Woodford have faced questions over whether they’ve circumvented liquidity restrictions by re-packaging assets. The question now is whether the illiquid investments that have caused trouble for H20, GAM and Woodford represent a wider trend in the fund-management industry. Jacob Schmidt, CEO of Schmidt Research Partners, a global investment firm, argues that they are “isolated incidents.”

What Our Analysts Say

“Outflows of more than $680 million so far this quarter were confirmed by Natixis on a call, but this figure will increase hugely by the quarter’s end, we believe.” -- Jonathan Tyce, Georgi Gunche, industry analysts

--With assistance from Fabio Benedetti-Valentini, Ross Larsen and Suzy Waite.

To contact the reporters on this story: Lucca de Paoli in London at gdepaoli1@bloomberg.net;Nishant Kumar in London at nkumar173@bloomberg.net;Thomas Beardsworth in London at tbeardsworth@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, ;Vivianne Rodrigues at vrodrigues3@bloomberg.net, Abigail Moses

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