June 20, 2019 / 2:20 PM / 6 months ago

UPDATE 2-French bank Natixis defends fund arm after Morningstar blow

(Adds details on Morningstar, background)

PARIS, June 20 (Reuters) - French investment bank Natixis defended its UK-based asset management division H2O on Thursday after fund ratings firm Morningstar put the unit under review over its holdings, causing a sharp fall in the French bank’s shares.

Morningstar, which provides analysis and ratings on funds, said H2O held “highly illiquid bonds” issued by several companies related to German entrepreneur Lars Windhorst, 42, a one-time teen entrepreneur and owner of Tennor Holding, previously known as Sapinda.

Morningstar also questioned the presence of H2O’s chief executive, Bruno Crastes, on the board of Tennor Holding, given H2O’s exposure to Windhorst’s investments.

The ratings group announced its review of H2O after a Financial Times report on the asset manager’s exposure to Windhorst’s businesses.

“These elements in no way call into question the liquidity and the performance of H2O’s funds,” Natixis said in a statement about the Morningstar decision.

H2O’s CEO Crastes denied his firm had any liquidity issue and said it had “significant” cash on hand.

Natixis, which owned 49.99% of H2O on Dec. 31, 2018, said the potential conflict of interest was not proven. A spokesman for Tennor Holdings declined to comment.

Shares of Natixis were last down 11%, having earlier dropped by as much as 13%.

The H2O issue could prove a setback for Natixis, the corporate and investment banking arm of unlisted French cooperative lender BPCE. Natixis has said asset management was an area it wanted to expand, along with insurance and payment services.

Mediobanca said described the Natixis share price drop as “a severe reaction” and Jefferies analysts said it was “overdone”.

In an emailed statement, Morningstar’s research analyst Francesco Paganelli said the private bonds in question accounted for about 5% of the portfolio, well within the 10% limit set by European regulators for the type of fund, known as UCITS.

“We placed the H2O Allegro strategy under review fund based on a variety of concerns, rather than the overall liquidity profile of the portfolio specifically,” says Paganelli.

“Under Review” is used to indicate that a rating is being re-evaluated, Morningstar said. A new rating will be published after more information is gathered and analysis completed.

The holding of illiquid assets can be a problem for fund management firms like H2O, which allow investors to withdraw funds on a daily basis.

The sharp move in Natixis share price could be partly because the news followed the gating of Neil Woodford’s flagship equity income fund due to redemptions, which also led to scrutiny of its illiquid investments. (Reporting by Inti Landauro, Josephine Mason and Thyagaraju Adinarayan; Editing by Jane Merriman and Edmund Blair)

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