Kkr Financial (NYSE:KFN)
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SAN FRANCISCO, March 2 /PRNewswire-FirstCall/ -- KKR Financial Holdings LLC (NYSE:KFN) ("KFN" or the "Company") today announced its results for the fourth quarter and year ended December 31, 2008.
Fourth Quarter and Full Year 2008 Results:
KFN reported a net loss of $1.2 billion, or ($7.85) per diluted common share for the quarter ended December 31, 2008, as compared to net income of $59.9 million, or $0.52 per diluted common share for the quarter ended December 31, 2007. In response to the continued deteriorating economic environment, the Company took several actions during the quarter related to its investment portfolio. During the quarter, the Company recorded a provision for loan losses of $471.5 million, which net of charge-offs of $25.7 million, increased the Company's allowance for loan losses to $480.8 million as of December 31, 2008, from $35.0 million at September 30, 2008.
During the quarter, the Company also recorded an impairment charge totaling $454.3 million for its securities available-for-sale portfolio which consists primarily of high yield debt securities. Of this amount, $216.5 million relates to the Company's investments in the senior and subordinated bonds of one issuer that were sold subsequent to year end. KFN's quarterly results also reflect losses totaling $156.3 million on sales of assets during the quarter and a write-down totaling $137.3 million of certain corporate loans that the Company designated as held for sale. Of the $156.3 million of realized losses on sales of assets during the quarter, $137.5 million relates to assets that were held in the Company's market value collateralized loan obligation ("CLO") transaction, Wayzata Funding LLC ("Wayzata"). The Company's results for the quarter also include approximately $72.9 million of realized and unrealized losses on derivative transactions which are primarily attributable to approximately $100.0 million in losses on total rate of return swaps that are used to finance certain investments in loans and for which the aggregate losses were partially offset by gains on credit default swaps where the Company purchased protection on both single name and index bond positions and foreign exchange forward contracts.
KFN reported a net loss of $1.1 billion, or ($7.68) per diluted common share, for the year ended December 31, 2008, as compared to a net loss for the year ended December 31, 2007 of $100.2 million, or ($1.11) per diluted common share. The net loss reported for the year ended December 31, 2008 is primarily attributable to the fourth quarter loss described above.
Wayzata
Wayzata was originally a market value CLO transaction entered into in November 2007 that was ramped up to full utilization during the second quarter of 2008. The Company's initial investment in Wayzata consisted of purchasing $320.0 million of the $400.0 million of junior notes issued. The senior notes issued by Wayzata totaled $1.6 billion and were held by a single counterparty, or lender, to the transaction. As Wayzata was structured as a market value transaction, material declines in prices of corporate loans during the fourth quarter of 2008, most notably during October 2008 when the S&P/LSTA Loan Index fell by 13%, led to the Company posting $180.0 million of additional cash collateral to the transaction through the purchase of additional junior notes. The posting of cash collateral and the sales of assets from Wazyata totaling $628.9 million of par during the fourth quarter of 2008 were both undertaken to avoid default under the transaction, which had the highest risk of occurring during December 2008 due to the historically low levels of leveraged loan prices and which could have led to the senior lender foreclosing on the assets financed in Wayzata.
On January 12, 2009, Wayzata was amended to eliminate the market value-based covenants and, consequently, the Company is no longer required to post additional cash collateral as a result of declining fair values of the underlying collateral. Nevertheless, under the amended facility, cash flow generated by the collateral will not be distributed to junior noteholders, including the Company, until all senior obligations of Wayzata are paid in full or otherwise satisfied. The Company cannot predict at this time how long the cessation of cash flows will last. Several additional changes were made to Wayzata as part of the amendment process, including, to (i) increase the coupon on the senior secured notes to three-month LIBOR plus 3.75%, which under certain circumstances may be increased to a maximum of three-month LIBOR plus 5.00%, (ii) reduce the aggregate outstanding par amount of senior secured notes to approximately $675.0 million using free cash in the structure and proceeds from the sale of certain assets designated for liquidation by the senior noteholder, (iii) significantly limit the Wayzata portfolio manager's right to reinvest principal proceeds from the collateral in new assets and (iv) give the noteholders, including the Company, the collective right to restructure Wayzata into a cash-flow CLO transaction.
Cash Flow CLO Transactions
As of December 31, 2008, the majority of the Company's investments in corporate loans and corporate debt securities were held in five cash flow CLO transactions. These transactions contain certain interest coverage and over-collateralization ("OC") tests that if not met result in cash flows that would be paid to the mezzanine and subordinated noteholders, including the Company, being used to deleverage the transactions until such time as the respective tests are in compliance. The December 2008 monthly reports for the CLO transactions showed that four out of the five cash flow CLO transactions were out of compliance with one or more of their respective OC tests. The Company believes that during 2009 each of its cash flow CLO transactions will be out of compliance with OC tests for intermittent periods and certain CLOs may be out of compliance throughout the year.
Liquidity and Cash Flows
As of December 31, 2008, the Company's unrestricted cash and cash equivalents totaled $41.4 million. The Company's free cash flows are expected to be materially reduced due to the status of Wayzata and the cash flow CLOs, both described above. Accordingly, the Company will not pay a dividend for the fourth quarter of 2008 and does not expect to make any cash dividend distributions during 2009. The Company's secured revolving credit facility executed in November 2008 includes limitations on shareholder distributions until November 2009. Specifically, prior to November 2009, distributions to shareholders are limited to the amounts estimated to be necessary for shareholders to satisfy their federal and state tax liabilities with respect to their allocable share of KFN's taxable income, provided the Company remains in compliance with certain borrowing base conditions. For 2008, the Company estimates that a shareholder who held shares during all of calendar year 2008 received cash distributions in calendar year 2008 in an amount sufficient to satisfy the shareholder's federal and state tax liabilities on their estimated allocable share of the Company's 2008 items of taxable income, gains, losses and deduction.
The Company's manager, KKR Financial Advisors LLC, has agreed to defer 50% of the monthly base management fee payable by the Company for the period from January 1, 2009 through November 30, 2009. The aggregate amount of fees otherwise payable during the deferral period will be payable to the Manager upon the earlier of (x) December 15, 2009 and (y) the date of any termination of the Management Agreement pursuant to either Section 13(a) or Section 15(b) thereof. Additionally, beginning in January 2009, KKR Financial Advisors LLC ceased waiving management fees for the CLO transactions that the Company has invested in, including Wayzata, and will rebate to the Company its proportionate share of these incremental CLO fees as a reduction of allocated general and administrative expenses from KKR Financial Advisors LLC. The Company expects that this will have a positive cash flow impact during 2009 of approximately $10.0 million.
The Company closely monitors its liquidity position and believes it has sufficient liquidity and access to liquidity to meet its financial obligations for at least the next 12 months.
Investment Portfolio
During the year ended December 31, 2008, three of the Company's corporate loan investments with an aggregate amortized cost of $312.7 million had defaulted. One of these investments, Tribune Company, filed chapter 11 bankruptcy during December 2008. As of December 31, 2008, the Company had an investment in corporate loans issued by Tribune Company with a total amortized cost of $226.0 million. These three investments are included in the Company's allowance for losses as of December 31, 2008.
As of December 31, 2008, after reflecting the impact of its allowance for loan losses, lower of cost or market adjustments for loans held for sale and impairments of corporate debt securities, the Company's investments in corporate loans and debt securities are carried at a total value of $8.1 billion.
Book Value Per Common Share
The Company's book value per common share outstanding was $4.40 and $14.27 as of December 31, 2008 and December 31, 2007, respectively.
Information for Investors: Conference Call and Webcast
The Company will host a conference call and audio webcast to review its fourth quarter and annual 2008 results on Monday, March 2, 2009, at 8:00 a.m. EST. The conference call can be accessed by dialing 877-795-3647 (Domestic) or 719-325-4773 (International); a pass code is not required. A replay will be available through Monday, March 9, 2009 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 3143812. Supplemental materials that will be discussed during the call, as well as a live webcast of the call, will be accessible on the Company's website, at http://www.kkr.com/kam/kfn_webcasts_presentations_and_important_documents.cfm via a link from the Investor Relations section. A replay of the audio webcast will be archived in the Investor Relations section of the Company's website.
About KKR Financial Holdings LLC
KKR Financial Holdings LLC is a publicly traded specialty finance company that invests in multiple asset classes. KKR Financial Holdings LLC is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, which is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. Additional information regarding KKR Financial Holdings LLC is available at http://www.kkr.com/.
Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although KKR Financial Holdings LLC believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company's expectations include completion of pending investments, continued ability to source new investments, the availability and cost of capital for future investments, competition within the specialty finance sector, economic conditions, credit loss experience, availability of financing, maintenance of sufficient liquidity, and other risks disclosed from time to time in the Company's filings with the SEC.
Schedule I
KKR Financial Holdings LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share information)
For the For the
three three For the For the
months months year year
ended ended ended ended
December December December December
31, 31, 31, 31,
2008 2007 2008 2007
Net investment (loss)
income:
Loan interest income $188,667 $234,759 $777,510 $703,042
Securities interest
income 36,761 40,140 145,865 127,801
Dividend income 363 1,103 2,629 3,825
Other interest income 2,079 17,605 22,584 37,705
Total investment income 227,870 293,607 948,588 872,373
Interest expense (121,106) (175,457) (521,313) (556,565)
Interest expense to
affiliates 23,018 (31,535) (43,301) (60,939)
Provision for loan
losses (471,488) - (481,488) (25,000)
Net investment (loss)
income (341,706) 86,615 (97,514) 229,869
Other (loss) income:
Net realized and
unrealized (loss) gain
on investments (745,500) 2,374 (804,754) 89,538
Net realized and
unrealized (loss) gain
on derivatives and
foreign exchange (72,851) 1,431 (141,319) (991)
Net realized and
unrealized loss on
residential
mortgage-backed
securities,
residential mortgage
loans, and residential
mortgage-backed
securities issued,
carried at estimated
fair value (34,248) (4,326) (48,899) (45,304)
Net realized and
unrealized gain on
securities sold, not
yet purchased 27,405 5,867 50,297 8,662
Gain on extinguishment
of debt 6,205 - 26,486 -
Other income 3,413 2,759 11,352 10,107
Total other (loss)
income (815,576) 8,105 (906,837) 62,012
Non-investment
expenses:
Related party
management
compensation 7,313 13,197 36,670 52,535
General, administrative
and directors expenses 4,943 4,199 19,038 18,294
Loan servicing 2,210 2,595 9,444 11,346
Professional services 3,835 1,212 8,098 4,706
Total non-investment
expenses 18,301 21,203 73,250 86,881
(Loss) income from
continuing operations
before equity in
income of
unconsolidated
affiliate and income
tax (benefit) expense (1,175,583) 73,517 (1,077,601) 205,000
Equity in income of
unconsolidated
affiliate - - - 12,706
(Loss) income from
continuing operations
before income tax
(benefit) expense (1,175,583) 73,517 (1,077,601) 217,706
Income tax (benefit)
expense (9) (989) 107 256
(Loss) income from
continuing operations (1,175,574) 74,506 (1,077,708) 217,450
(Loss) income from
discontinued
operations - (14,599) 2,668 (317,655)
Net (loss) income $(1,175,574) $59,907 $(1,075,040) $(100,205)
Net (loss) income per
common share:
Basic
(Loss) income per share
from continuing
operations $(7.85) $0.65 $(7.70) $2.42
(Loss) income per share
from discontinued
operations - (0.13) 0.02 (3.53)
Net (loss) income per
share $(7.85) $0.52 $(7.68) $(1.11)
Diluted
(Loss) income per share
from continuing
operations $(7.85) $0.65 $(7.70) $2.40
(Loss) income per share
from discontinued
operations - (0.13) 0.02 (3.51)
Net (loss) income per
share $(7.85) $0.52 $(7.68) $(1.11)
Weighted-average number
of common shares
outstanding:
Basic 149,708 114,466 140,027 89,953
Diluted 149,871 114,813 140,443 90,640
Schedule II
KKR Financial Holdings LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share information)
December December
31, 2008 31, 2007
Assets
Cash and cash equivalents $41,430 $524,080
Restricted cash and cash equivalents 1,233,585 1,067,797
Securities available-for-sale, $553,441
and $1,346,247 pledged as collateral as
of December 31, 2008 and December 31,
2007, respectively 555,965 1,359,541
Corporate loans, net of allowance for loan
losses of $480,775 and $25,000 as of
December 31, 2008 and December 31, 2007,
respectively 7,246,797 8,634,208
Residential mortgage-backed securities, at
estimated fair value, $102,814 and
$117,833 pledged as collateral as of
December 31, 2008 and December 31, 2007,
respectively 102,814 131,688
Residential mortgage loans, at estimated
fair value 2,620,021 3,921,323
Corporate loans held for sale 324,649 -
Derivative assets 73,869 18,737
Interest and principal receivable 116,788 162,465
Reverse repurchase agreements 88,252 69,840
Other assets 110,912 106,588
Assets of discontinued operations - 3,049,758
Total assets $12,515,082 $19,046,025
Liabilities
Repurchase agreements $- $2,808,066
Collateralized loan obligation senior
secured notes 7,487,611 5,948,610
Collateralized loan obligation junior
secured notes to affiliates 530,313 525,420
Secured revolving credit facility 275,633 167,024
Secured demand loan - 24,151
Convertible senior notes 291,500 300,000
Junior subordinated notes 288,671 329,908
Subordinated notes to affiliates 125,000 152,574
Residential mortgage-backed securities
issued, at estimated fair value 2,462,882 3,169,353
Accounts payable, accrued expenses and
other liabilities 60,124 7,390
Accrued interest payable 61,119 114,035
Accrued interest payable to affiliates 3,987 44,121
Related party payable 2,876 9,694
Securities sold, not yet purchased 90,809 100,394
Derivative liabilities 171,212 56,663
Liabilities of discontinued operations - 3,644,083
Total liabilities 11,851,737 17,401,486
Shareholders' Equity
Preferred shares, no par value, 50,000,000
shares authorized and none issued and
outstanding at December 31, 2008 and
December 31, 2007 - -
Common shares, no par value, 250,000,000
shares authorized, and 150,881,500 and
115,248,990 shares issued and outstanding
at December 31, 2008 and December 31,
2007, respectively - -
Paid-in-capital 2,550,849 2,167,156
Accumulated other comprehensive loss (268,782) (157,245)
Accumulated deficit (1,618,722) (365,372)
Total shareholders' equity 663,345 1,644,539
Total liabilities and shareholders' equity $12,515,082 $19,046,025
Investor Contact
Laurie Poggi
Kohlberg Kravis Roberts & Co. L.P.
415-315-3718
Media Contact
Roanne Kulakoff and Joseph Kuo
Kekst and Company
212-521-4837 and 212-521-4863
DATASOURCE: KKR Financial Holdings LLC
CONTACT: Investors: Laurie Poggi, Kohlberg Kravis Roberts & Co. L.P.,
+1-415-315-3718; Media: Roanne Kulakoff, +1-212-521-4837 and Joseph Kuo,
+1-212-521-4863, both of Kekst and Company, both for KKR Financial Holdings
LLC
Web Site: http://www.kkr.com/