EX-99.1 2 a08-28027_1ex99d1.htm EX-99.1

Exhibit 99.1

 

Investor Contact

 

Media Contact

Laurie Poggi

 

Roanne Kulakoff and Joseph Kuo

Kohlberg Kravis Roberts & Co. L.P.

 

Kekst and Company

415-315-3718

 

212-521-4837 and 212-521-4863

 

KKR Financial Holdings LLC Announces Third Quarter 2008 Financial Results

 

SAN FRANCISCO, CA, November 10, 2008—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 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, 2008

 

September 
30, 2007

 

September 
30, 2008

 

September 
30, 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 
September 30, 2008

 

As of 
December 31, 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)

 

Amortized Cost

 

Estimated 
Fair Value

 

Portfolio Mix 
% 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 thousands)

 

For the three months
 ended September 30,
 2008

 

For the three months
 ended September 30,
 2007

 

For the nine months
 ended September 30,
 2008

 

For the nine months 
ended September 30,
 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