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H2O sells off bonds following illiquidity reports

Sale_signH2O Asset Management has sold off non-rated private bonds in a bid to stem substantial outflows following reports regarding liquidity issues in its corporate bond funds.

The firm has also cut the aggregate market value of bonds to below 2% of its assets under management, as well as marking down the balance in a bid to prevent further redemptions.

“Following this mark down, triggered by press reports which dried up market liquidity and widened bid-ask spreads, H2O’s funds will be priced at a discount between 3% and 7%,” the Natixis Investment Manager (Natixis IM) subsidiary said in a statement.

Entry fees across all of its funds have also been removed “until further notice”.

These measures come after liquidity issues in H2O funds were flagged by financial services firm Morningstar. Outflows from six of the firm’s funds hit €1.4 billion as of Thursday June 20, 2019, it has been reported.

The aggregated value of H2O’s non-rated corporate bonds now stands at €500 million, according to the London-based asset manager.

Parent company Natixis IM said in a statement that certain information circulated by the press regarding its affiliate is “not proven”.

“This information, which is also transparent in H2O's communication, has resulted in Morningstar's suspension of one of the H2O funds, highlighting the risk of a potential conflict of interest that is not proven. These elements in no way call into question the liquidity and performance of H2O's funds,” Natixis IM said.

H2O Allegro, one of the funds in question, had its bronze rating suspended by Morningstar over concerns about the “liquidity and appropriateness of several holdings” in its corporate bond sleeve.

After review, the US-based research firm found various conflicts of interest within the fund. Over 4% of Allegro’s assets are invested in illiquid bonds connected to German financier, Lars Windhorst.

“While this pocket is relatively small in size, and we do not believe it poses an immediate risk to the fund's performance, the concentration of investments in a series of companies related to the same individual is a cause for concern,” said Morningstar’s director of fixed income strategies, Mara Dobrescu.

H2O’s chief executive Bruno Crastes was also appointed to the advisory board of Windhorst’s fund Tennor Holding in May this year, creating another “possible conflict of interest”, according to Morningstar.

Crastes has subsequently resigned from this post following Morningstar’s report at the end of last week.

H2O declined to comment.

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