Duet-Backed Fund’s Bond Trades With H2O Probed by Watchdog

Belgium’s top financial watchdog is investigating a batch of controversial trades linking a local investment fund to H2O Asset Management LLP and bonds sold by financier Lars Windhorst.

The National Bank of Belgium is probing a number of bond repurchase trades that took place between Duet Group’s Merit Capital NV and H2O, a 22-billion euro ($26 billion) asset manager majority-owned by Natixis SA, according to people with knowledge of the matter, who asked not to be named because the details are private.

The probe marks an escalation of regulatory scrutiny over these disputed deals. Merit’s Chief Executive Officer Jan de Coninck has denied to clients that these deals ever happened, although H2O’s public filings record trades worth hundreds of million of euros in the last year, the people said.

Duet Group’s representatives on the board of Antwerp-based Merit, including Duet’s founder Henry Gabay, resigned this month amid the investigation, the people said.

Gabay, Windhorst and spokespeople for the National Bank and H2O declined to comment. De Coninck and representatives for Merit didn’t respond to requests for comment.

H2O Counterparty

While H2O’s links to Windhorst became one of the biggest financial stories of 2019, the smaller role played by Merit Capital has received less attention. Yet the Belgian firm has invested in the H2O funds that bought the financier’s bonds in addition to investing in the underlying debt itself, according to data compiled by Bloomberg.

Gabay, a Swiss businessman and an associate of Windhorst’s, bought Merit in 2018 and targeted to triple the fund’s 1.5 billion euros of assets under management.

In 2019, a Financial Times report detailing H2O’s holdings of illiquid bonds linked to Windhorst’s companies triggered Morningstar to review the rating of some of the funds. Investors pulled 8 billion euros from H2O in the following weeks.

French and U.K. regulators started looking into the case this year after the financier agreed to buy back these notes at a discount.

Several H2O funds were frozen for more than a month until last week to allow for the completion of the transaction. Investors withdrew 429 million euros after those funds reopened on Oct. 13, H2O said in a letter sent to clients last week.

According to H2O’s filings, Merit was a counterparty in H2O’s deals that helped it reduce the holdings of illiquid bonds issued by companies owned by the German financier.

The Belgian regulator’s examination of the firm was first reported by Belgian newspaper De Tijd.

©2020 Bloomberg L.P.

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