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One thing to start: CaixaBank and Bankia have solidified the terms of a merger to create Spain’s biggest lender with assets totalling €650bn. The deal is the latest example of European banks turning to long-awaited consolidation.

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H2O: reverse repo men

H2O Asset Management has found itself in some hot water once again thanks to its links to Lars Windhorst (pictured), the controversial German financier with a history of legal woes.

DD readers may remember H2O for its bad hand of illiquid assets — last June, DD’s Rob Smith and the FT’s Cynthia O’Murchu revealed that the London-based company’s funds had built up more than a €1bn exposure to illiquid bonds. 

Many of those were tied to various enterprises connected to Windhorst at a time when several of his investment vehicles were short on funding.

Among the illiquid bond purchases was the debt of a lossmaking lingerie maker and an Abu Dhabi brokerage, both curious investments for the macro-based fund manager backed by French bank Natixis.

Investors were quick to distance themselves from H2O’s portfolio of hard-to-sell bonds, yanking more than €8bn from some of its funds, outflows the company blamed on “deeply unfair” media coverage.

H2O chief Bruno Crastes (below), emphatically reassured investors as his company bled assets, vowing “never” to gate the fund. 

Its parent company Natixis also felt the brunt of its connections to Windhorst — losing €2bn off its market cap when the influential fund rating group Morningstar decided to suspend its rating on one of H2O’s funds.

And it didn’t stop there. The company took a 60 per cent writedown on the value of the illiquid securities, while the French regulator AMF stepped in to shutter a number of its funds this August.

The fact the funds still had such large illiquid holdings may have surprised people who followed the saga closely last year: then H2O sprung up to assure clients it had managed to sell off some of the troublesome bond exposure.

But as our colleagues Rob and Cynthia revealed this week, that’s not the whole story.

In the latest twist, it emerged that the sale never actually closed, so instead H2O employed a tricky strategy to shuffle its troublesome debt exposure through a loose network of minor brokerages, a process known as “buy and sell back” or “reverse repo”.

The scale of H2O’s illiquid securities

It’s slightly confusing stuff — Rob lays it out in English on Twitter here. Essentially, the company traded hundreds of millions of euros in illiquid bonds right up to before the French regulator hit pause on its funds.

In doing this H2O could reclassify some of the outfits’ bad bonds outside its main portfolio holdings. The one problem: despite this creative solution, H2O’s funds ended up staying stuck with as much as 35 per cent exposure to these assets — far larger than it previously admitted and well above levels open-ended funds are expected to have, given a 10 per cent cap on unlisted investments.

Oops. And interestingly enough, some of those small brokerages H2O traded its unwanted illiquid exposure with also have ties to Windhorst.

Go deeper into the saga by reading Rob and Cynthia’s latest instalment.

More Nikola

What’s really going on at Nikola? More than just electric trucks rolling down hills, Nikola board member Steve Girsky told DD’s own Ortenca Aliaj during Thursday’s forum on all things Spacs. 

“Personally, I’ve driven those trucks four times. I’ve driven on electricity. I’ve driven on hydrogen. I think they’re awesome trucks,” he said. Watch the full discussion on-demand here.

Girsky, one of the architects of Nikola’s public debut in June, said he was comfortable with the due diligence conducted by his team at the special purpose acquisition company VectoIQ.

“We brought an army of people in here. We conducted a thorough process,” he told DD.

Nikola’s Spac listing was meant to be the perfect shortcut to a Tesla-level fortune.

Nikola's bumpy ride since its June listing

You could say there’s a certain *musk* to it all . . . its outspoken founder Trevor Milton (pictured below), shares Elon’s affinity for Twitter and admiration for the inventor, Nikola Tesla.

But Milton’s journey to challenging Tesla has been riddled with potholes ever since the short-seller Hindenburg Research accused Nikola of an “intricate fraud”, prompting investigations by the US Department of Justice and Securities and Exchange Commission.

Now the FT’s latest reporting, based on interviews with more than a dozen of the electric truckmaker’s business partners, investors, and former and current employees, has shed further light on Hindenburg’s claims that the company exaggerated its in-house technology.

As one engineer familiar with the company put it, it is “doing nothing meaningful in the world of batteries, other than maybe buying some pretty decent ones”. 

Some of Hindenburg's most eyebrow-raising accusations include the claim that Nikola faked a product video in 2018 by rolling a vehicle downhill in lieu of a working engine, and passed a third-party supplier’s inverter technology off as its own by covering the brand’s label in a separate video.

The company issued a 2,7000-word defence, calling the short-seller report “false and misleading”, which you can read in full via the link.

It’s not all smoke and mirrors, though. Nikola has developed some of its own hydrogen technology, according to several people.

But ever since its $2bn deal with General Motors, Nikola has opted to use the Detroit carmaker’s hydrogen system instead of its own. 

GM’s technology was “ready to go”, Milton told the FT prior to the release of the Hindenburg report, adding that Nikola aimed to centre its business on making “nearly $1m per vehicle” from a sale price of $300,000 and a lifetime’s hydrogen supply worth $400,000.

Waterfall chart showing Nikola's projected cash generation  for one of its FCEV trucks in thousands of dollars

Asked by the FT on what Nikola brought to the bargain, he cited over-the-air software updates, its infotainment system, and “all the stuff that is very, very delicate”, adding: “Most of the entire core of the vehicles is our IP.” 

Milton’s vagueness has done little to clear the doubt surrounding his company’s arsenal of proprietary technology.

Private equity treats itself

Since the Federal Reserve began its massive programme of corporate debt purchases in April, a division has been drawn in the corporate world between the brave and the cursed.

© FT montage

The coronavirus pandemic has brought nothing good for companies like retailer Neiman Marcus and car rental outfit Hertz. Like dozens of large companies poisoned by debts incurred before the crisis, they are now in bankruptcy; many will emerge as shadows of their former selves.

Others, while badly wounded, have managed to hang on. Boeing, Delta Air Lines and cinema operator AMC, have bravely swallowed even more debt, believing that it might keep them alive long enough that they will eventually find a cure.

Now there’s a third category of company blessed to be owned by private equity.

Blockbuster demand for corporate debt has enabled many PE-backed companies to take out fresh loans and use the cash to award themselves a bumper payday, the FT’s Joe Rennison reports.

Dearth of new loans prompts rise in dividend recapitalisations

Apax-backed cloud computing company ECi Software is set to raise $740m in new loans, while TPG’s broadband outfit, Radiate Holdco, is in the market for $500m.

In fact, so far in September, almost 24 per cent of money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4 per cent over the past two years.

For private equity groups that own these companies, it’s not so much brave as prudent: a cheap way to insulate themselves from potential trouble down the road.

But for highly leveraged companies and their management teams, that extra debt could yet become a curse.

Job moves 

  • Betting group Flutter Entertainment appointed former UK Labour party deputy leader and anti-gambling advocate Tom Watson as an adviser to its board. 

  • McGuireWoods hired Linn Mayhew as a partner in its London office. She was previously a senior finance lawyer at DLA Piper.

  • Bryan Pointon will join Norton Rose Fulbright as an M&A and private equity partner in October. He was previously a partner in PwC Legal’s financial advisory practice.

Smart reads

Right side of the tracks The west ought to take notes from Tokyo, whose sprawling railway system has led to an adjoining ecosystem of thriving businesses. (BBG)

There’s always a loophole ByteDance is trying to forge a cross-border partnership between TikTok US and Oracle to avoid an actual sale, skirting Donald Trump’s demands and potentially creating a whole new political minefield. (Reuters)

News round-up

ByteDance proposes US IPO for TikTok to woo White House (FT)

Richard Branson to raise $400m for Spac (FT + Lex)

Engie tells Veolia to increase offer for Suez stake (FT)

Unibail sets out €9bn plan to pay down debt (FT)

TikTok rival prepares for blockbuster Hong Kong listing (FT)

LG Chem to spin off world’s largest electric car battery business (FT)

LVMH, Tiffany wrangle over court dates after acquisition turns sour (Reuters)

MetLife to Buy Versant Health for $1.7 Billion (WSJ)

India commodities tycoon, Centricus team up for turnround fund (BBG)

Deloitte ordered to pay record £21m for Autonomy audit misconduct (FT)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt, Mark Vandevelde and Francesca Friday in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com


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