ORGANIZATION	12 Months Ended
Dec. 31, 2013
ORGANIZATION
ORGANIZATION	NOTE 1. ORGANIZATION KKR Financial Holdings LLC together with its subsidiaries (the "Company" or "KFN") is a specialty finance company with expertise in a range of asset classes. The Company's core business strategy is to leverage the proprietary resources of KKR Financial Advisors LLC (the "Manager") with the objective of generating both current income and capital appreciation by deploying capital to its strategies, which include bank loans and high yield securities, natural resources, special situations, mezzanine, commercial real estate and private equity with a focus on specialty lending. The Company's holdings across these strategies primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities, private equity, interests in joint ventures and partnerships, and working and royalty interests in oil and gas properties. The corporate loans that the Company holds are typically purchased via assignment or participation in the primary or secondary market. The majority of the Company's holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation ("CLO") transactions that are structured as on-balance sheet securitizations and are used as long term financing for the Company's investments in corporate debt. The senior secured debt issued by the CLO transactions is generally owned by unaffiliated third party investors and the Company owns the majority of the subordinated notes in the CLO transactions. The Company executes its core business strategy through its majority-owned subsidiaries, including CLOs. The Manager, a wholly-owned subsidiary of KKR Asset Management LLC, manages the Company pursuant to a management agreement (the "Management Agreement"). KKR Asset Management LLC is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. ("KKR"). Proposed Merger with KKR & Co. On December 16, 2013, the Company announced the signing of a definitive merger agreement pursuant to which KKR & Co. L.P. ("KKR & Co.") has agreed to acquire all of KFN's outstanding common shares through an exchange of equity through which the Company's shareholders will receive 0.51 common units representing the limited partnership interests of KKR & Co. for each common share of KFN. The transaction is subject to approval by the Company's common shareholders, customary regulatory approvals and other customary closing conditions, as well as the satisfaction of other certain conditions specified in the merger agreement. The merger agreement contains certain termination rights for both KFN and KKR & Co., and provides that under certain circumstances, KFN will be required to pay a termination fee of $26.25 million to KKR & Co. or will be required to reimburse KKR & Co. for its expenses up to $7.5 million. Subject to certain exceptions, KFN's board of directors has agreed not to withhold, modify or qualify in a manner adverse to KKR & Co. the recommendation of the board that KFN's shareholders approve the merger agreement. Upon closing of the transaction, which is expected to occur in the first half of 2014, the Company will become a subsidiary of KKR & Co. The Company's 7.375% Series A LLC Preferred Shares ("Series A LLC Preferred Shares"), senior notes and junior subordinated notes will remain outstanding following the merger. Accordingly, the Company will remain a registered filer under the Securities Exchange Act of 1934. Pursuant to the merger agreement, upon the effective time of the merger, (i) each outstanding option to purchase a KFN common share will be cancelled and converted into the right to receive an amount in cash equal to the excess of the cash value of the number of KKR & Co. common units that a holder of one KFN common share would be entitled to in the merger over the exercise price per KFN common share subject to such option, (ii) each outstanding restricted KFN common share will be converted into 0.51 KKR & Co. common units having the same terms and conditions as applied immediately prior to the effective time, and (iii) each phantom share under KFN's Non-Employee Directors' Deferred Compensation and Share Award Plan will be converted into a phantom share in respect of 0.51 KKR & Co. common units and otherwise remain subject to the terms of the plan. Under the terms of the merger agreement, the Company has agreed to conduct its business in the ordinary course and in a manner consistent in all material respects with past practice, subject to certain conditions and restrictions including, but not limited to the entry into certain material contracts or the incurrence of certain indebtedness. In addition, the Company is restricted in the amount of distributions that it can pay to its common shareholders without the prior consent of KKR & Co. In particular, the Company may not declare a quarterly distribution in excess of $0.22 per common share without KKR & Co.'s prior consent. The merger agreement also requires that the Company and KKR & Co. coordinate the timing of the declaration of distributions on its respective common equity prior to the closing of the merger so that, in any quarter, a holder of its common shares will not receive distributions in respect of both KFN common shares and in respect of the KKR & Co. common units that such holder will receive in the merger.

NOTE 1. ORGANIZATION

KKR Financial Holdings LLC together with its subsidiaries (the "Company" or "KFN") is a specialty finance company with expertise in a range of asset classes. The Company's core business strategy is to leverage the proprietary resources of KKR Financial Advisors LLC (the "Manager") with the objective of generating both current income and capital appreciation by deploying capital to its strategies, which include bank loans and high yield securities, natural resources, special situations, mezzanine, commercial real estate and private equity with a focus on specialty lending. The Company's holdings across these strategies primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities, private equity, interests in joint ventures and partnerships, and working and royalty interests in oil and gas properties. The corporate loans that the Company holds are typically purchased via assignment or participation in the primary or secondary market.

The majority of the Company's holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation ("CLO") transactions that are structured as on-balance sheet securitizations and are used as long term financing for the Company's investments in corporate debt. The senior secured debt issued by the CLO transactions is generally owned by unaffiliated third party investors and the Company owns the majority of the subordinated notes in the CLO transactions. The Company executes its core business strategy through its majority-owned subsidiaries, including CLOs.

The Manager, a wholly-owned subsidiary of KKR Asset Management LLC, manages the Company pursuant to a management agreement (the "Management Agreement"). KKR Asset Management LLC is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. ("KKR").

Proposed Merger with KKR & Co.

On December 16, 2013, the Company announced the signing of a definitive merger agreement pursuant to which KKR & Co. L.P. ("KKR & Co.") has agreed to acquire all of KFN's outstanding common shares through an exchange of equity through which the Company's shareholders will receive 0.51 common units representing the limited partnership interests of KKR & Co. for each common share of KFN. The transaction is subject to approval by the Company's common shareholders, customary regulatory approvals and other customary closing conditions, as well as the satisfaction of other certain conditions specified in the merger agreement. The merger agreement contains certain termination rights for both KFN and KKR & Co., and provides that under certain circumstances, KFN will be required to pay a termination fee of $26.25 million to KKR & Co. or will be required to reimburse KKR & Co. for its expenses up to $7.5 million. Subject to certain exceptions, KFN's board of directors has agreed not to withhold, modify or qualify in a manner adverse to KKR & Co. the recommendation of the board that KFN's shareholders approve the merger agreement.

Upon closing of the transaction, which is expected to occur in the first half of 2014, the Company will become a subsidiary of KKR & Co. The Company's 7.375% Series A LLC Preferred Shares ("Series A LLC Preferred Shares"), senior notes and junior subordinated notes will remain outstanding following the merger. Accordingly, the Company will remain a registered filer under the Securities Exchange Act of 1934.

Pursuant to the merger agreement, upon the effective time of the merger, (i) each outstanding option to purchase a KFN common share will be cancelled and converted into the right to receive an amount in cash equal to the excess of the cash value of the number of KKR & Co. common units that a holder of one KFN common share would be entitled to in the merger over the exercise price per KFN common share subject to such option, (ii) each outstanding restricted KFN common share will be converted into 0.51 KKR & Co. common units having the same terms and conditions as applied immediately prior to the effective time, and (iii) each phantom share under KFN's Non-Employee Directors' Deferred Compensation and Share Award Plan will be converted into a phantom share in respect of 0.51 KKR & Co. common units and otherwise remain subject to the terms of the plan.

Under the terms of the merger agreement, the Company has agreed to conduct its business in the ordinary course and in a manner consistent in all material respects with past practice, subject to certain conditions and restrictions including, but not limited to the entry into certain material contracts or the incurrence of certain indebtedness. In addition, the Company is restricted in the amount of distributions that it can pay to its common shareholders without the prior consent of KKR & Co. In particular, the Company may not declare a quarterly distribution in excess of $0.22 per common share without KKR & Co.'s prior consent. The merger agreement also requires that the Company and KKR & Co. coordinate the timing of the declaration of distributions on its respective common equity prior to the closing of the merger so that, in any quarter, a holder of its common shares will not receive distributions in respect of both KFN common shares and in respect of the KKR & Co. common units that such holder will receive in the merger.