KKR Financial Holdings has furthered its retreat from the residential mortgage-backed securities market with an agreement with its asset-backed commercial paper issuers, the conduits for which are KKR Atlantic Funding Trust and KKR Pacific Funding Trust, to exchange approximately $3.5 billion (€2.2 billion) in secured liquidity notes for collateral, without defaults.
The company, a NYSE-listed affiliate of buyout firm Kohlberg Kravis Roberts that invests across asset classes with a main focus on debt, had twice delayed payments to lenders due to ongoing restructuring pursuant to credit market dislocation.
In line with a restructuring change approved by shareholders in May 2007, KFN said it has agreed to sell a controlling stake in its REIT subsidiary to Rock Capital 2, a third party investment firm not associated with KKR. The deal is expected to close in the second quarter of 2008 and will transition the company from a REIT to a limited liability company. When KFN was formed, the company said it invested roughly 35 percent of its capital in residential mortgage-backed securities to satisfy REIT requirements.
KKR Financial remains focused on building enterprise value by making opportunistic investments in corporate debt.
The deal with lenders and agreed sale of the REIT “mark a constructive resolution to an issue created by the unprecedented dislocations in the credit markets,” Saturnino Fanlo, KKR Financial chief executive, said in a statement. “Reflecting these conditions, our board of directors has approved an incremental charge of approximately $5.5 million, which we believe is an appropriate amount to resolve both the refinancing issues relating to the secured liquidity notes issued by the REIT's two asset-backed conduits and complete the exit of our mortgage-related business.”
The $5.5 million charge is in addition to the $243.7 million the company wrote down in August 2007, related to mortgage-backed investments in the REIT.
The company also announced plans to sell 20 million shares, proceeds from which will be used for “general corporate purposes” including “repayment of debt, acquisitions, additions to working capital, capital expenditures and investments in the company’s subsidiaries”, KFN said.
Based on 31 December 2007 totals, and exclusive of the $3.5 billion in commercial paper to be removed from the firm’s balance sheet, KFN said its remaining exposure to residential mortgage-backed securities is approximately $337.6 million. Some $300 million of that amount is rated investment grade or higher, it said.
“KKR Financial remains focused on building enterprise value by making opportunistic investments in corporate debt and continues to execute on our core strategy of underwriting and purchasing the attractively priced assets which are in abundance in the current environment,” Fanlo said.
He said KFN’s balance sheet comprises more than $8.5 billion in investments, “more than 95 percent of which are in corporate debt investments issued by some of the largest companies in the world”.
A Bear Stearns analyst lowered its rating of KFN following today’s announcements; at press time, the company’s stock was trading at $11.55 per share, roughly an 8.9 percent drop from its opening price of $11.64. The company hit a 52-week low of $9.39 in August 2007 when it sold some $5.1 billion in residential mortgage-backed loans.