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/
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