Collectif Porteurs H2O decides to file for interlocutory ruling against H2O AM LLP and H2O AM Europe SAS
The association “Collectif Porteurs H2O” has decided file for an interlocutory ruling against management companies H2O AM LLP and H2O AM Europe SAS (société par actions simplifiée [simplified joint-stock company]) (hereinafter “H2O”), which are controlled by the BPCE Group, in order to have a court-ordered assessment carried out.
The aim is to clarify the liabilities incurred in the management of various publicly-traded UCITS (H2O Allegro, H2O MultiStrategies and H2O MultiBonds, H2O Adagio, H2O Moderato, H2O MultiEquities, H2O Vivace) that have sustained considerable losses on investments made between 2015 and 2019 in notoriously illiquid assets.
According to estimates, €2 to €3 billion has been sunk in private debt issued by the Tennor Group (Trent Petroleum, La Perla, Civitas Properties, etc.) controlled by Lars Windhorst. This German financier of ill repute has gone through several high-profile bankruptcies in the past, including the purchase of a professional football club in recent years with capital raised by Tennor Holding, a company currently backed by H2O.
In addition to the losses recorded on the Tennor debt, H2O funds have been the target of an exceptional and virtually unprecedented redemption freeze for more than a year at the initiative of the French Financial Markets Authority (Autorité des Marchés Financiers), making it impossible for investors to recover a portion of their assets since August 2020. This affair is a devastating blow to the image of the Paris financial market and a full investigation must be conducted into the actions of H2O and the other parties involved in overseeing their operations, in particular Natixis IM, the company in charge of risk control for the funds. With this in mind, Collectif Porteurs H2O filed for interlocutory proceedings in futurum to obtain a court-appointed independent expert and asked the law firm Cornet Vincent Ségurel to assist it. “The association’s action is part of a constructive search for liability in a case that has wronged a great many professionals and individuals, both in France and abroad”, commented Dominique Stucki, a lawyer and partner at Cornet Vincent Ségurel, who is representing the association. “H2O AM is a company created by French managers and has been actively supported by Natixis IM’s management and teams for a very long time. A lot of asset managers are concerned about the reputational implications of a case that was revealed in the British press in 2019. We advise asset management professionals on a daily basis and are well aware of the challenges facing the market. We also assist investors in their desire to clarify the workings of a system that has remained opaque for over five years”.
Collectif Porteurs H2O Chair Gérard Maurin added: “The refusal of audit firm KPMG to certify H2O’s accounts at the end of August 2021 is a first step in exposing H2O AM’s misconduct. This decision supports our belief that the infractions committed in the course of its obligations are particularly serious. We are therefore asking the court to urgently appoint an expert to analyse, in full independence, the transactions and data that have not been disclosed to the funds holders”.
Review of the background of the H2O case.
Founded in 2010 by Vincent Chailley and Bruno Castres, H2O AM LLP is a UK-based asset management company managing a number of funds, some of which are French UCITS approved by the French Financial Markets Authority (AMF) and distributed by marketing platforms, banks, independent asset managers and insurance companies. A significant portion of these funds were underwritten in the form of life insurance policies.
The funds were a tremendous success and the manager received various professional awards for its performance (BFM TV special award in 2015, and Investment Week Specialist award for Best Absolute Return Bond Fund in 2015, etc.). From 2010 to 2019, the outstanding assets under management of H2O AM thus increased from €3 to €30 billion.
However, from August 2015 up until 2019, H2O AM suddenly changed its investment strategy and, for no apparent reason or consistency with the Global Macro approach of its funds, started underwriting/purchasing private corporate debt through various UCITS it managed. The approach was all the more surprising as the investments focused on a single group of companies. However, not only were the bonds subscribed by H2O issued by entities whose solvency was particularly dubious, their resale prospects in the event of problems were all the more illusory as these bonds are – for many of them – not listed and the H2O funds are often their primary holders.
Suspended funds and debt restructuring attempts.
In 2019, an article published in the Financial Times blog raised doubts about the H2O funds by revealing this strategy along with the fact that Bruno Crastes was appointed to the Tennor Board of Directors in 2019. While disputing the existence of a liquidity risk and questioning the claims put forward by the press, H2O secretly sought out buyers for its Tennor securities. Despite previous write-downs of up to 60% of their face value, these bonds failed to attract takers and H2O then resorted to highly sophisticated (repo) transactions to artificially deflate the illiquid pockets and reduce the size of the regulatory overruns. In June 2020, it secretly negotiated a buyout of the Tennor shares with Mr Windhorst himself (the latter is, moreover, under investigation by the German financial authority, BaFin, regarding the conditions under which the “Evergreen Funding” buyout vehicle was set up). Confronted with this ultimate failure, the AMF had no option but to require, on 28 August 2020, the suspension of subscriptions and redemptions on three funds (H2O Allegro, H2O MultiStrategies and H2O MultiBonds) due to “valuation uncertainties in connection with their significant exposure”. H2O AM then stepped in and suspended redemptions on four other publicly-traded UCITS (H2O Adagio, H2O Moderato, H2O MultiEquities and H2O Vivace). In October 2020, these funds were split, with the illiquid part of the fund hived off into dedicated UCITS called “side-pockets”. In January 2021, Natixis announced its intention to sell its stake in H2O. But the management company’s capital outflow was denied in June 2021 by the British financial authority, the FCA (Financial Conduct Authority), which is awaiting prior clarification of the stakeholders’ liabilities. Under pressure from the regulator, Tennor announced in May 2021 that it had reached a new arrangement with its creditors to restructure its debt. According to the scant, very incomplete and ambiguous data published by H2O AM and Tennor, the agreement provided, “under certain conditions”, for the subscription of €1.45 billion in new debt securities issued by Tennor Holding against the cancellation of the old bonds held in particular by the side-pockets in the subsidiaries of this company and the transfer of certain shares in its subsidiaries. However, as KPMG Audit, the auditor of the side-pockets, has pointed out, H2O decided to suspend the publication of the estimated value of the assets that could not be audited.
Court-appointed expert assessment to shed light on many grey areas
There is no longer any oversight of the composition and value of the side-pocket assets and an objective and up-to-date estimate of the new Tennor bonds must be conducted. It is also important to quantify the final losses sustained by the unitholders in respect of past write-downs and irrevocable waivers of claims by the H2O funds. Lastly, a full and independent expert assessment will shed light on the abnormal nature of the repo transactions entered into on behalf of these funds through certain brokers close to Tennor and will show how these transactions have been detrimental to the unitholders’ interests.
Collectif Porteurs H2O is convinced that the clarifications that will be provided by the expert will contribute to strengthening investor confidence in regulatory compliance and good practice by French asset managers and will thus serve the interests of the French financial market as a whole.
About Collectif Porteurs H2O
Collectif Porteurs H2O is an association governed by the French law of 1901 that brings together individual and professional investors and insurers. Created after the suspension of the funds managed by H2O AM due to their exceptional illiquidity, it aims to preserve the reputation of the Paris financial market and to promote and defend the general interests of investors and professionals in the financial products distribution sector by encouraging compliance with regulations and good industry practice by asset managers.
For more information: http://www.collectifporteursh2o.test/
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