KFN Kkr Financial Holdings Llc

SAN FRANCISCO, Nov. 7 /PRNewswire-FirstCall/ -- KKR Financial Holdings LLC (NYSE:KFN) ("KFN" or the "Company") today announced its results for the third quarter of 2007. Highlights of KKR Financial Holdings LLC's third quarter results include: -- Distribution of $0.50 per common share declared for the third quarter. -- Net economic loss, a non-GAAP measurement, for the third quarter totaled $265.9 million, or $3.03 per diluted common share, and GAAP net loss totaled $261.5 million or $2.98 per diluted common share. A reconciliation of economic to GAAP net loss is provided in Schedule I. -- Net loss for the third quarter includes a charge for discontinued operations relating to the Company's residential mortgage investment business of $243.7 million. -- Corporate investment portfolio increased $1.0 billion during the third quarter. -- As of quarter-end, cash and cash equivalents totaled $777.5 million, consisting of $644.4 million of unrestricted cash, $71.3 million of restricted cash that can be used to purchase corporate investments, and $61.8 million of restricted cash that can be used for debt service payments. -- As of quarter-end, continuing operations net leverage totaled 3.6x. -- Sold $139.6 million of private equity investments to unaffiliated institutional investors and recognized a net gain of $51.6 million and internal rate of return of 19.3%. -- Raised $500.4 million of equity through the issuance of 34.75 million common shares at $14.40 per share to seven unaffiliated investors and a common share rights offering to existing common shareholders. -- Issued $300.0 million of 7.000% convertible senior notes due 2012. -- Subsequent to quarter-end, closed two structured finance transactions with $2.8 billion of senior secured non-recourse debt and a euro 800 million warehouse. The financings will be used to fund corporate investments. * * * KFN reported an economic net loss, a non-GAAP measurement, for the three and nine months ended September 30, 2007 of $265.9 million and $157.8 million, respectively, or $3.03 and $1.91 per diluted common share, respectively. Economic net income, a non-GAAP measurement, for the three and nine months ended September 30, 2006 totaled $42.8 million and $120.0 million, respectively, or $0.53 and $1.50 per diluted common share, respectively. GAAP net loss for the three and nine months ended September 30, 2007 totaled $261.5 million and $160.1 million, respectively, or $2.98 and $1.93 per diluted common share. GAAP net income for the three and nine months ended September 30, 2006 totaled $32.6 million and $97.9 million, respectively, or $0.40 and $1.22 per diluted common share. A reconciliation of economic to GAAP results is provided in Schedule I. During the third quarter of 2007, there were material adverse changes in the mortgage industry and the capital markets experienced significant disruptions which had a material negative impact on the Company's ability to finance its residential mortgage investments on terms and conditions which met its return on equity requirements. Most notably, the asset-backed commercial paper market was negatively impacted as investors significantly reduced and to a certain extent no longer invested in commercial paper backed by structured financial instruments, including residential mortgage investments. The disruptions in the asset-backed commercial paper market were exacerbated by the fact that commercial banks and investment banks materially curtailed or discontinued providing their customers with financing for residential mortgage investments. The secondary impact of the lack of financing and liquidity for residential mortgage investments was that market values of residential mortgage investments decreased materially because traditional buyers were unable to obtain financing. In response to the aforementioned market disruptions that occurred during the quarter, the Company took several steps to ensure that it had adequate liquidity to respond to the current market environment. Specifically, it executed the following transactions: (i) the Company sold $5.2 billion of residential mortgage loans and mortgage-backed securities and recognized a loss of approximately $65.0 million, which was reduced by gains on the termination of related interest rate hedges of approximately $28.6 million, and thereby recognized a net loss of approximately $36.4 million; (ii) the Company received gross proceeds of $230.4 million through the issuance of 16.0 million common shares at $14.40 to seven unaffiliated institutional investors; (iii) the Company completed a share rights offering which generated gross proceeds of $270.0 million ($56.6 million received in October 2007 under a backstop agreement with certain principals of Kohlberg Kravis Roberts & Co. L.P. ("KKR") through which 3.9 million shares were issued) through the issuance of 18.75 million shares at $14.40 per share; (iv) the Company sold $139.6 million of its private equity investments to unaffiliated third parties and recognized a net gain of $51.6 million; and (v) the Company made the decision to dispose of its real estate investment trust subsidiary, KKR Financial Corp. ("REIT Subsidiary"), and exit the business of investing in residential mortgage investments. Accordingly, the Company's residential mortgage investment business and REIT Subsidiary are reported as a discontinued operation for which the Company recorded charges totaling $243.7 million. Liquidity As of September 30, 2007, available cash and cash equivalents totaled $777.5 million, consisting of $644.4 million of unrestricted cash and cash equivalents, $71.3 million of restricted cash that can be used to purchase corporate investments, and $61.8 million of restricted cash that can be used for debt service payments. Leverage As of September 30, 2007, the Company's continuing operations leverage was 4.0x, or 3.6x net leverage when outstanding borrowings are reduced by unrestricted cash of $644.4 million. Book Value Per Common Share The Company's book value per common share outstanding was $15.01 and $20.91 as of September 30, 2007 and June 30, 2007, respectively. Financing Transactions On July 23, 2007, the Company issued an aggregate of $300.0 million of 7.000% convertible notes maturing on July 15, 2012 (the "Notes") to qualified institutional buyers. The Notes represent senior unsecured obligations of the Company and bear interest at the rate of 7.000% per year. Interest is payable semi-annually on January 15 and July 15 of each year, beginning January 15, 2008. The Notes are convertible into the Company's common shares, at a conversion rate of 32.2581 shares per $1,000 principal of Notes, which is equivalent to a conversion price of $31.00 per common share. The Notes are convertible prior to the maturity date at any time on or after June 15, 2012 and also under the following circumstances: (i) a holder may surrender any of its Notes for conversion during any calendar quarter beginning after September 30, 2007 (and only during such calendar quarter) if, and only if, the closing sale price of our common shares for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than 130% of the conversion price per common share in effect on the applicable trading day; (ii) a holder may surrender any of its Notes for conversion during the five consecutive trading-day period following any five consecutive trading-day period in which the trading price of the Notes was less than 98% of the product of the closing sale price of our common shares multiplied by the applicable conversion rate; (iii) a holder may surrender for conversion any of its Notes if those Notes have been called for redemption, at any time prior to the redemption date, even if the Notes are not otherwise convertible at such time; and (iv) a holder may surrender any of its Notes for conversion if we engage in certain specified transactions, as defined in the indenture covering the Notes. On October 31, 2007, the Company closed KKR Financial CLO 2007-A, Ltd. ("CLO 2007-A"), a $1.5 billion CLO transaction that provides ten-year term financing for investments in corporate loans and securities. Also on October 31, 2007, the Company closed an euro 800.0 million warehouse facility that is structured as a repurchase facility to provide financing for investments in non-U.S. dollar corporate loans and securities. On November 5, 2007, the Company closed Wayzata Funding LLC, which is a $2.0 billion CLO transaction that provides five-year term financing for investments in corporate loans and securities. Non-Marketable Equity Securities During the third quarter of 2007, the Company sold seven of its private equity investments totaling $139.6 million to two institutional investors. The Company recognized a net gain from the sales of $51.6 million. Information for Investors: Conference Call and Webcast The Company will host a conference call and audio webcast to review its third quarter 2007 results on Thursday, November 8, 2007, at 11:00 a.m. EST. The conference call can be accessed by dialing 888-713-3591 (Domestic) or 913- 312-0828 (International); a pass code is not required. A replay will be available through November 22, 2007 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 4632707. Supplemental materials that will be discussed during the call, as well as a live web cast of the call, will be accessible on the Company's website, at http://www.kkrkfn.com/, via a link from the Investor Relations section. A replay of the audio web cast will be archived in the Investor Relations section of the Company's website. Note Regarding Use of Non-GAAP Financial Measures The non-GAAP items referred to in this earnings release are provided as supplemental information, and should not be relied upon as alternative measures to GAAP. These non-GAAP measures consist of items calculated by the Company on an "economic" basis, which includes the following: (i) the Company's proportionate share of certain structured finance vehicles where the Company holds a majority ownership interest and consolidates such vehicles in accordance with GAAP; (ii) presentation of assets financed through total rate of return swaps on a non-derivative basis; and (iii) excludes share-based compensation in the calculation of net economic income or loss. The Company believes that the non-GAAP measures presented in this earnings release provide useful information to investors by providing an understanding of the Company's financial condition and operational performance through which liquidity and periodic results for purposes of evaluating the income available for distributions to shareholders can be assessed. About KKR Financial Holdings LLC KKR Financial Holdings LLC is a specialty finance company that uses leverage with the objective of generating competitive risk-adjusted returns. The Company seeks to achieve its investment objective by investing in (i) corporate loans and debt securities, (ii) marketable equity securities and (iii) non-marketable equity securities. The Company also makes opportunistic investments in other asset classes from time to time. The Company invests in both cash and derivative instruments. KKR Financial Holdings LLC is a Delaware limited liability company which was organized on January 17, 2007. KKR Financial Holdings LLC is the successor to KKR Financial Corp., a Maryland corporation. KKR Financial Corp. was originally incorporated in the State of Maryland on July 7, 2004 and elected to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes. On May 4, 2007, KKR Financial Holdings LLC completed a restructuring transaction, pursuant to which KKR Financial Corp. became a subsidiary of KKR Financial Holdings LLC and each outstanding share of KKR Financial Corp.'s common stock was converted into one of KKR Financial Holdings LLC's common shares, which are publicly traded on the New York Stock Exchange. KKR Financial Holdings LLC has not elected to be treated as a REIT for U.S. federal income tax purposes; however, KKR Financial Holdings LLC intends to be treated as a partnership, and not as an association or publicly traded partnership that is taxable as a corporation, for U.S. federal income tax purposes. KKR Financial Advisors LLC, a wholly-owned subsidiary of KKR Financial LLC, manages the Company pursuant to a management agreement. KKR Financial Holdings LLC, KKR Financial LLC, and KKR Financial Advisors LLC are affiliates of Kohlberg Kravis Roberts & Co. L.P. 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 and Section 21E of the Securities Exchange Act of 1934. 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 originate new investments, the mix of originations and prepayment levels, 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) For the three months For the nine months ended ended September 30, 2007 September 30, 2007 (amounts in thousands, except per share information) Reconcil- Reconcil- Economic iation Economic iation Measure Adjust- Reported Measure Adjust- Reported ments ments (1) (1) Net investment income: Securities interest income $26,487 $8,867 $35,354 $68,372 $11,762 $80,134 Loan interest income 110,356 21,019 131,375 266,564 16,597 283,161 Dividend income 782 -- 782 2,722 -- 2,722 Other interest income 11,200 650 11,850 18,678 1,423 20,101 Total investment income 148,825 30,536 179,361 356,336 29,782 386,118 Interest expense (94,147) (12,880) (107,027)(220,462) (11,686)(232,148) Interest expense to affiliates -- (21,148) (21,148) -- (29,404) (29,404) Provision for loan losses (25,000) -- (25,000) (25,000) -- (25,000) Net investment income 29,678 (3,492) 26,186 110,874 (11,308) 99,566 Other income: Net realized and unrealized loss on derivatives and foreign exchange (19,104) 3,063 (16,041) (11,235) 8,813 (2,422) Net realized gain on investments 53,249 151 53,400 84,979 2,185 87,164 Net realized and unrealized gain on securities sold, not yet purchased 2,220 -- 2,220 2,795 -- 2,795 Other income 2,400 359 2,759 6,952 395 7,347 Total other income 38,765 3,573 42,338 83,491 11,393 94,884 Non-investment expenses: Related party management compensation 9,507 (4,582) 4,925 37,441 1,897 39,338 General, administrative and directors expenses 3,581 261 3,842 13,617 477 14,094 Professional services 2,195 -- 2,195 3,495 -- 3,495 Total non-investment expenses 15,283 (4,321) 10,962 54,553 2,374 56,927 Income from continuing operations before equity in income of unconsolidated affiliate and income tax expense 53,160 4,402 57,562 139,812 (2,289) 137,523 Equity in income of unconsolidated affiliate -- -- -- 12,706 -- 12,706 Income from continuing operations before income tax expense 53,160 4,402 57,562 152,518 (2,289) 150,229 Income tax expense 386 -- 386 1,245 -- 1,245 Income from continuing operations 52,774 4,402 57,176 151,273 (2,289) 148,984 Loss from discontinued operations (318,683) -- (318,683) (309,096) -- (309,096) Net loss $(265,909) $4,402 $(261,507)$(157,823)$(2,289) $(160,112) Net loss per common share: Basic $(3.04) $(2.99) $(1.93) $(1.96) Diluted $(3.03) $(2.98) $(1.91) $(1.93) Weighted-average number of common shares outstanding: Basic 87,443 87,443 81,692 81,692 Diluted 87,696 87,696 82,747 82,747 Distributions declared per common share $0.56 $0.56 $1.66 $1.66 (1) These adjustments reconcile the Company's GAAP statement of operations presentation to an economic, non-GAAP presentation. The nature of these adjustments is described under "Note Regarding Use of Non-GAAP Financial Measures" in this earnings release. Schedule II KKR Financial Holdings LLC CONSOLIDATED BALANCE SHEET (UNAUDITED) September 30, 2007 (amounts in thousands, except share information) Economic Reconciliation Measure Adjustments(1) Reported Assets Cash and cash equivalents $644,403 $-- $644,403 Restricted cash and cash equivalents 510,686 60,363 571,049 Securities available-for-sale 1,104,902 348,660 1,453,562 Loans, net of allowance for loan losses of $25,000 5,771,048 1,303,683 7,074,731 Derivative assets 26,840 (16,142) 10,698 Interest and principal receivable 100,385 23,811 124,196 Receivable for securities sold 168,506 -- 168,506 Non-marketable equity securities 20,084 -- 20,084 Reverse repurchase agreements 34,660 -- 34,660 Other assets 64,826 7,045 71,871 Assets of discontinued operations 119,547 8,651,267 8,770,814 Total assets $8,565,887 $10,378,687 $18,944,574 Liabilities Repurchase agreements $2,059,239 $259,665 $2,318,904 Collateralized loan obligation senior secured notes 3,802,933 876,345 4,679,278 Collateralized loan obligation junior secured notes to affiliates -- 431,293 431,293 Secured revolving credit facility 168,000 -- 168,000 Secured demand loan 29,577 -- 29,577 Convertible senior notes 300,000 -- 300,000 Junior subordinated notes 329,908 -- 329,908 Subordinated notes to affiliates -- 131,417 131,417 Accounts payable, accrued expenses and other liabilities 15,559 (236) 15,323 Accrued interest payable 72,719 19,738 92,457 Accrued interest payable to affiliates -- 29,404 29,404 Related party payable 4,974 -- 4,974 Securities sold, not yet purchased 69,704 -- 69,704 Derivative liabilities 22,731 (311) 22,420 Liabilities of discontinued operations -- 8,651,267 8,651,267 Total liabilities 6,875,344 10,398,582 17,273,926 Shareholders' Equity Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding -- -- -- Common shares, no par value, 250,000,000 shares authorized and 111,316,698 shares issued and outstanding -- -- -- Paid-in-capital 2,108,810 2,289 2,111,099 Accumulated other comprehensive loss (52,902) (19,895) (72,797) Accumulated deficit (365,365) (2,289) (367,654) Total shareholders' equity 1,690,543 (19,895) 1,670,648 Total liabilities and shareholders' equity $8,565,887 $10,378,687 $18,944,574 (1) These adjustments reconcile the Company's GAAP balance sheet presentation to an economic, non-GAAP presentation. The nature of these adjustments is described under "Note Regarding Use of Non-GAAP Financial Measures" in this earnings release. Schedule III KKR Financial Holdings LLC ECONOMIC INVESTMENT PORTFOLIO AS OF SEPTEMBER 30, 2007 (UNAUDITED) (amounts in thousands)(1) Amortized Estimated Portfolio Mix% Cost Fair Value by Fair Value Loans $5,771,048 $5,667,327 84.3% Debt Securities 1,108,845 1,063,587 15.8 Common and Preferred Stock 45,821 41,315 0.6 Non-Marketable Equity Securities 20,084 20,084 0.3 Securities Sold, not yet Purchased (67,198) (69,704) (1.0) Total Investment Portfolio $6,878,600 $6,722,609 100.0% (1) Estimated fair values set forth in the schedule are based on dealer quotes and/or nationally recognized pricing services and management estimates for investment positions for which dealer quotes and/or nationally recognized pricing data are not available. Investor Contact Laurie Poggi KKR Financial LLC 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 of KKR Financial LLC, 1-415-315-3718; or Media, Roanne Kulakoff and Joseph Kuo, both of Kekst and ompany, +1-212-521-4837 and +1-212-521-4863, for KKR Financial Holdings LLC Web site: http://www.kkrkfn.com/

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