KFN Kkr Financial Holdings Llc

SAN FRANCISCO, Nov. 10 /PRNewswire-FirstCall/ -- KKR Financial Holdings LLC (NYSE:KFN) ("KFN" or the "Company") today announced its results for the third quarter ended September 30, 2008, as well as several important steps to enhance its flexibility in dealing with the current level of unprecedented market volatility. Actions to Enhance Flexibility: -- The Company has entered into a $300.0 million senior secured asset-based revolving credit facility that matures in November 2010. The new $300.0 million credit facility is being provided by Bank of America, N.A. and Citicorp North America, Inc. The proceeds from the new facility and existing liquidity will be used to retire the Company's existing revolving credit facility due June 2009, which currently has $368.3 million in borrowings outstanding. The new facility extends the Company's revolving credit maturity and provides for less restrictive financial covenants that will enhance the Company's flexibility to make appropriate portfolio management decisions on behalf of its shareholders. -- The Company has also arranged a $100.0 million standby unsecured revolving credit facility that matures in December 2010. The new $100.0 million credit facility is being provided by the Company's external manager, KKR Financial Advisors LLC, and Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, the parent of the Company's external manager. The Company entered into the $100.0 million credit facility in order to enhance the Company's flexibility, as and if needed, in bridging the difference between the $368.3 million in borrowings outstanding under the existing credit facility with the $300.0 million borrowing capacity under the new facility. -- The Company has elected to retain capital and not pay a dividend for the third quarter of 2008. Third Quarter Results -- For the third quarter ended September 30, 2008, GAAP net income totaled $49.0 million, or $0.33 per diluted common share and economic net income, a non-GAAP financial measurement, totaled $48.9 million, or $0.33 per diluted common share. Economic net income is the Company's GAAP net income adjusted to exclude share-based compensation expense. For the three and nine months ended September 30, 2008, the Company reported GAAP net income totaling $49.0 million, or $0.33 per diluted common share, and $100.5 million, or $0.73 per diluted common share, respectively. GAAP net loss for the three and nine months ended September 30, 2007 totaled $261.5 million, or $(2.98) per diluted common share, and $160.1 million, or $(1.93) per diluted common share, respectively. For the three and nine months ended September 30, 2008, economic net income, a non-GAAP financial measurement, totaled $48.9 million, or $0.33 per diluted common share, and $101.5 million, or $0.74 per diluted common share, respectively. Economic net loss, a non-GAAP financial measurement, for the three and nine months ended September 30, 2007 totaled $265.9 million, or $(3.03) per diluted common share, and $157.8 million, or $(1.91) per diluted common share, respectively. Economic net income is the Company's net income adjusted to exclude share-based compensation. A reconciliation of GAAP net income to economic net income is provided in Schedule IV. In addition, during the quarter ended September 30, 2008, the Company retired $5.0 million of trust preferred securities at a weighted-average dollar price of 38.0 and recorded a gain from the transactions of $3.1 million. Senior Secured Asset-Based Revolving Credit Facility On November 10, 2008, the Company entered into an agreement to replace its existing revolving credit facility with a new $300.0 million senior secured asset-based revolving credit facility. The new facility matures on November 10, 2010. The facility bears interest at a rate of 30-day London interbank offered rate ("LIBOR") plus 3.00% per annum and the commitment of the initial lenders in the facility is reduced to $150.0 million on the one-year anniversary of the facility. The Company can satisfy the $150.0 million commitment reduction by either paying down the facility or syndicating the facility to other lenders prior to November 10, 2009. Under the terms of the credit agreement, the Company will be restricted from making cash distributions to its shareholders in excess of the amount estimated by the Company to be necessary for its shareholders to satisfy their federal and state tax liabilities with respect to their allocable share of the Company's taxable income. This restriction will terminate as of November 10, 2009 as long as the Company satisfies certain borrowing base conditions contained in the credit agreement. The Company currently has $368.3 million outstanding under its existing revolving credit facility. As described under "Standby Revolving Credit Facility," the Company has entered into a $100.0 million unsecured revolving credit agreement in order to enhance the Company's flexibility in bridging the difference in the balance outstanding under its current credit facility with the borrowing capacity under the new facility. Standby Revolving Credit Facility On November 10, 2008, the Company entered into an agreement for a two-year $100.0 million standby unsecured revolving credit agreement with the Company's external manager, KKR Financial Advisors LLC, and Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, the parent of the Company's external manager. The borrowing facility matures in December 2010 and bears interest at a rate equal to LIBOR for an interest period of 1, 2 or 3 months (at the Company's option) plus 15.00% per annum. Under the terms of the agreement, the Company can elect to capitalize a portion of accrued interest on any loan under the agreement by adding up to 80% of the interest due and payable at a particular time in respect of such loan to the outstanding principal amount of the loan. Election Not to Pay a Third Quarter Dividend The Company has elected to retain capital and not pay a dividend for the third quarter of 2008. The Company's decision to suspend its dividend to shareholders stems from the unprecedented level of illiquidity in the global financial markets and the Company's determination that maintaining maximum flexibility through retaining capital is prudent given the current environment. Leverage As of September 30, 2008, net economic leverage, a non-GAAP financial measurement, was 3.1x. The computation of net economic leverage is included in Schedule IV. Book Value Per Common Share The Company's GAAP book value per common share outstanding was $11.47 and $14.27 as of September 30, 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 third quarter 2008 results on Monday, November 10, 2008, at 5:00 p.m. EST. The conference call can be accessed by dialing 800-390-5705 (Domestic) or 719-457- 2080 (International); a pass code is not required. A replay will be available through Monday, November 17, 2008 by dialing 888-203-1112 (Domestic) and 719- 457-0820 (International) / pass code 4264254. 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/, 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. Note Regarding Use of Non-GAAP Financial Measurements The non-GAAP financial measurements 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 financial measurements consist of items calculated by the Company on an "economic" basis, which includes the following: (i) presentation of the Company's proportionate share of certain structured finance vehicles where the Company holds a majority ownership interest (the "Joint CLOs") and consolidates such vehicles in accordance with GAAP and (ii) exclusion of share-based compensation in the calculation of economic net income or loss. The Company believes that the non-GAAP financial measurements presented in this earnings release provide useful information to investors by providing an understanding of the Company's financial condition and operating performance by which liquidity and periodic results, for purposes of evaluating the net income available for distribution to shareholders, can be assessed. 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 three For the three For the nine For the nine months ended months ended months ended months ended September 30, September 30, September 30, September 30, 2008 2007 2008 2007 Net investment income: Securities interest income $34,507 $37,725 $109,104 $87,661 Loan interest income 187,756 190,471 588,843 468,283 Dividend income 358 782 2,266 2,722 Other interest income 4,431 11,850 20,505 20,100 Total investment income 227,052 240,828 720,718 578,766 Interest expense (118,105) (145,058) (400,207) (381,107) Interest expense to affiliates (18,794) (21,148) (66,319) (29,404) Provision for loan losses - (25,000) (10,000) (25,000) Net investment income 90,153 49,622 244,192 143,255 Other (loss) income: Net realized and unrealized loss on derivatives and foreign exchange (15,534) (16,042) (68,468) (2,422) Net realized and unrealized (loss) gain on investments (28,278) 53,400 (59,254) 87,164 Net realized and unrealized gain (loss) on residential mortgage-backed securities, residential mortgage loans, and residential mortgage-backed securities issued, carried at estimated fair value 121 (39,286) (14,651) (40,978) Net realized and unrealized gain on securities sold, not yet purchased 14,242 2,220 22,892 2,795 Gain on extinguishment of debt 3,056 - 20,281 - Other income 2,470 2,760 7,939 7,347 Total other (loss) income (23,923) 3,052 (91,261) 53,906 Non-investment expenses: Related party management compensation 9,811 4,925 29,357 39,338 General, administrative and directors expenses 3,820 3,842 14,094 14,095 Professional services 1,335 2,194 4,263 3,495 Loan servicing 2,274 2,729 7,234 8,751 Total non-investment expenses 17,240 13,690 54,948 65,679 Income from continuing operations before equity in income of unconsolidated affiliate and income tax expense 48,990 38,984 97,983 131,482 Equity in income of unconsolidated affiliate - - - 12,706 Income from continuing operations before income tax expense 48,990 38,984 97,983 144,188 Income tax expense - (386) (116) (1,245) Income from continuing operations 48,990 38,598 97,867 142,943 Income (loss) from discontinued operations - (300,105) 2,668 (303,055) Net income (loss) $48,990 $(261,507) $100,535 $(160,112) Net income per common share: Basic Income per share from continuing operations $0.33 $0.44 $0.72 $1.75 Income (loss) per share from discontinued operations - (3.43) 0.02 (3.71) Net income (loss) per share $0.33 $(2.99) $0.74 $(1.96) Diluted Income per share from continuing operations $0.33 $0.44 $0.71 $1.73 Income (loss) per share from discontinued operations - (3.42) 0.02 (3.66) Net income (loss) per share $0.33 $(2.98) $0.73 $(1.93) Weighted-average number of common shares outstanding: Basic 149,612 87,443 136,777 81,692 Diluted 149,883 87,696 137,319 82,747 Distributions declared per common share $0.40 $0.56 $1.30 $1.66 Schedule II KKR Financial Holdings LLC CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Amounts in thousands, except share information) As of As of September 30, December 31, 2008 2007 Assets Cash and cash equivalents $196,526 $524,080 Restricted cash and cash equivalents 855,791 1,067,797 Securities available-for-sale, $1,008,104 and $1,346,247 pledged as collateral as of September 30, 2008 and December 31, 2007, respectively 1,023,276 1,359,541 Corporate loans, net of allowance for loan losses of $35,000 and $25,000 as of September 30, 2008 and December 31, 2007, respectively 8,458,531 8,634,208 Residential mortgage-backed securities, at estimated fair value, $71,509 and $117,833 pledged as collateral as of September 30, 2008 and December 31, 2007, respectively 112,980 131,688 Residential mortgage loans, at estimated fair value 3,054,756 3,921,323 Corporate loans held for sale 28,201 - Derivative assets 51,235 18,737 Interest and principal receivable 115,005 162,465 Non-marketable equity securities 17,505 20,084 Reverse repurchase agreements 27,645 69,840 Other assets 75,998 86,504 Assets of discontinued operations - 3,049,758 Total assets $14,017,449 $19,046,025 Liabilities Repurchase agreements $- $2,808,066 Collateralized loan obligation senior secured notes 7,549,672 5,948,610 Collateralized loan obligation junior secured notes to affiliates 525,420 525,420 Secured revolving credit facility 378,306 167,024 Secured demand loan - 24,151 Convertible senior notes 300,000 300,000 Junior subordinated notes 288,671 329,908 Subordinated notes to affiliates 84,000 152,574 Residential mortgage-backed securities issued, at estimated fair value 2,868,232 3,169,353 Accounts payable, accrued expenses and other liabilities 27,821 7,390 Accrued interest payable 56,901 114,035 Accrued interest payable to affiliates 36,317 44,121 Related party payable 5,071 9,694 Securities sold, not yet purchased 83,507 100,394 Derivative liabilities 82,968 56,663 Liabilities of discontinued operations - 3,644,083 Total liabilities 12,286,886 17,401,486 Shareholders' Equity Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at September 30, 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 September 30, 2008 and December 31, 2007, respectively - - Paid-in-capital 2,551,634 2,167,156 Accumulated other comprehensive loss (377,924) (157,245) Accumulated deficit (443,147) (365,372) Total shareholders' equity 1,730,563 1,644,539 Total liabilities and shareholders' equity $14,017,449 $19,046,025 Schedule III KKR Financial Holdings LLC ECONOMIC INVESTMENT PORTFOLIO AS OF SEPTEMBER 30, 2008 (UNAUDITED) (amounts in thousands) (1) Estimated Portfolio Mix Amortized Cost Fair Value % by Fair Value Corporate loans (2)(3) $6,675,992 $5,684,674 83.3% Corporate debt securities (3) 1,063,673 805,029 11.8 Residential mortgage-backed securities (4) 361,755 310,361 4.5 Marketable equity securities 17,322 5,577 0.1 Non-marketable equity securities 17,505 17,505 0.3 Total $8,136,247 $6,823,146 100.0% (1) The table excludes securities sold, not yet purchased with a cost of $101.3 million and an estimated fair value of $83.5 million. (2) Total corporate loans exclude the allowance for loan losses of $35.0 million and include corporate loans held for sale with an estimated fair value of $23.0 million. (3) Represents corporate loans and debt securities adjusted to reflect the Company's proportionate share of its investment of the Joint CLOs as further described above in the note regarding use of non-GAAP financial measurements. GAAP corporate loans and debt securities have an amortized cost of $8.5 billion and $1.4 billion, respectively, and estimated fair value of $7.2 billion and $1.0 billion, respectively. (4) Represents residential mortgage-backed securities with a cost of $130.8 million and an estimated fair value of $113.0 million, plus the net difference between residential mortgage loans (cost of $3.5 billion and estimated fair value of $3.1 billion) and residential mortgage-backed securities issued (cost of $3.3 billion and estimated fair value of $2.9 billion) plus $10.9 million of real estate owned, which is included in other assets on the consolidated balance sheet. Schedule IV KKR Financial Holdings LLC RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASUREMENTS (UNAUDITED) Economic Net Income The reconciliation of economic net income to GAAP net income for the three and nine months ended September 30, 2008 and 2007 is as follows: (amounts in For the three For the three For the nine For the nine thousands) months ended months ended months ended months ended September 30, September 30, September 30, September 30, 2008 2007 2008 2007 Economic net income $48,937 $(265,910) $101,494 $(157,823) Share-based compensation 53 4,403 (959) (2,289) GAAP net income $48,990 $(261,507) $100,535 $(160,112) Net Economic Leverage The computation of net economic leverage as of September 30, 2008 is as follows: (amounts in thousands) Economic borrowings: Collateralized loan obligation senior secured notes $5,977,278 Secured revolving credit facility 378,306 Convertible senior notes 300,000 Total economic borrowings excluding junior subordinated notes 6,655,584 Less: Economic unrestricted cash (196,526) Total economic debt excluding junior subordinated notes and economic unrestricted cash (A) $6,459,058 Total economic shareholders' equity $1,818,853 Economic junior subordinated notes 288,671 Total economic shareholders' equity including economic junior subordinated notes (B) $2,107,524 Net economic leverage (A)/(B) 3.1x 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 of Kohlberg Kravis Roberts & Co. L.P., +1-415-315-3718; or Media, Roanne Kulakoff, +1-212-521-4837, or Joseph Kuo, +1-212-521-4863, both of Kekst and Company, all for KKR Financial Holdings LLC Web site: http://www.kkrkfn.com/

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