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KKR could lose $290 million on mortgage bonds

The investment firm's stock plummets 31% on the news that its debt-backed securities are declining in value.

August 16, 2007|From Bloomberg News

KKR Financial Holdings, a publicly traded debt-investment firm managed by an affiliate of private equity giant Kohlberg Kravis Roberts & Co., said Wednesday that it could lose as much as $290 million because of a decline in the value of mortgage-backed bonds it owns. The company's stock plunged 31%.

KKR Financial also said it was seeking to delay repayment of $5 billion in short-term securities. Later in the day the company, which previously said it would sell all of its mortgage-backed loans and concentrate on investing in corporate debt, expressed confidence in its financial state and new business model.

The firm said it recently sold $5.1 billion of mortgage bonds, recording a loss of $40 million. Disposing of the remaining $5.8 billion of residential mortgage-backed securities could force the company to write down the value of its portfolio by $200 million and assume liabilities of as much as $50 million, the company said.

"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 company said in the statement.

KKR Financial has about $18 billion in assets on its books.

The latest development represents a second way that buyout pioneer Kohlberg Kravis is being hurt by a widening credit crunch. The pioneering buyout firm, founded by Henry Kravis and George Roberts, has said the cost to issue high-risk, high-yield debt has "increased significantly" as debt investors have rejected loans and debt offered to fund private equity deals.

San Francisco-based KKR Financial generated $8.5 million in second-quarter management fees for New York-based Kohlberg Kravis, which filed July 3 to sell a stake in itself in an initial public offering. Kohlberg Kravis' total management fees in the first quarter were $68.8 million.

KKR Financial "should be able to navigate through the current liquidity crisis," a team of Lehman Bros. Holdings Inc. analysts led by Bruce Harting wrote in a research note.

But they added that the "outlook is, at best, uncertain until credit markets stabilize" for companies relying on short-term debt financing.

KKR Financial shares Wednesday fell $4.75 to $10.52 after trading as low as $9.39. The stock has declined 61% this year.

Kohlberg Kravis raised $800 million in June 2005 in the IPO of KKR Financial.

In a conference call after issuing its statement, KKR Financial executives said they believed the firm had sufficient liquidity to fund its core business.

The firm has as much as $1.2 billion in debt that has some margin triggers. A margin call requires the buyer of securities with borrowed money to deposit additional money in the account or sell some assets.

"We have to assume the world is different. We may have to meet some margins," KKR Financial Chief Executive Saturnino Fanlo said. "We assume we should keep some liquidity."

Also on the conference call, KKR Financial's chief financial officer, Jeffrey Van Horn, said the firm was taking advantage of the credit market turbulence to invest in corporate debt. In the last few weeks, it has bought $500 million in corporate debt at an average price of 94.5 cents on the dollar, Van Horn said.

"The disruptions in the corporate debt market," he said, "continue to provide extremely attractive opportunities."

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