KKR falls prey to subprime woes

A real estate investment fund owned by KKR suffered a 31 percent fall in its share price yesterday, after the vehicle was forced to sell $5 billion of residential mortgage loans at a loss.

Kohlberg Kravis Roberts’ real estate investment vehicle saw its shares tumble by almost a third yesterday after revealing that it had become the latest victim of turmoil in the US subprime mortgage sector.

KKR Financial Holdings, the buyout giant’s real estate investment trust affiliate, saw its share price fall by 31 percent after it said it had sold $5.1 billion (€3.8 billion) of US residential mortgage loans. The sale will result in an initial loss of $40 million, plus a possible further charge of $250 million.

KKR Financial is selling out of residential mortgages as part of its conversion from a REIT – which has to take 75 percent of its gross income from real estate assets – into a limited liability company, a move it announced in May.

As a result it also plans to sell the $5.8 billion of mortgage loans, mostly residential mortgage-backed securities, still on its books. However, if it fails to reach agreement on this with the investors in its asset-backed liquidity notes, it could be left with a charge of up to $200 million, equivalent to its total equity investment in the securities, plus additional liabilities of up to $50 million.

KKR Financial blamed the loss on “the unprecedented disruption in the residential mortgage and global commercial paper markets”, which has been driven by contagion from the US subprime sector. It admitted this could make the losses even deeper: “In light of the level of disruption and volatility in commercial paper and broader credit markets, estimates of potential exposure are necessarily subject to future revision,” the statement said.

The credit turmoil has not been all bad news, however. In a conference call, KKR Financial chief financial officer Jeffrey Van Horn said the vehicle had had a successful few weeks in buying corporate debt, snapping up $500 million of debt securities at an average price of 94.5 cents on the dollar. “The disruptions in the corporate debt market continue to provide extremely attractive opportunities,” Van Horn said.

KKR Financial went public in New York in 2005, raising $849 million. Yesterday, shares in the vehicle closed at $10.52, down 31.15 percent.